Senate Passes $157-Billion Bill for S&L; Rescue

The Senate overwhelmingly approved the biggest financial bailout in history Wednesday, a $157-billion rescue of the federal insurance fund that guarantees savings and loan deposits up to $100,000.

The easy passage, on a vote of 91 to 8, was a notable victory for the Bush Administration, which had sought quick approval of the complex legislation. The House Banking Committee will consider similar legislation next week.

‘A Miserable Problem’

“We’ve got a good bill,” a tired but elated Sen. Donald W. Riegle Jr. (D-Mich.) told the Senate after final passage. “It’s a miserable problem, but it’s the best solution we can fashion,” said Riegle, who directed the bill to final passage just 73 days after President Bush announced his program.

In a show of bipartisan cooperation, Riegle and Republican Jake Garn of Utah shepherded the bill to quick approval by the Banking Committee and then to rapid floor action.

Wednesday’s passage “was a fine thing for our country,” said Sen. Alan K. Simpson (R-Wyo.). Senators and staff, he said, “worked without a single shred of partisanship.”

The rescue of the insurance fund, operated by the Federal Savings and Loan Insurance Corp., will cost billions of dollars to replace money lost by S&Ls; through bad management, the slump in Texas oil prices and real estate, and widespread fraud. Simpson, referring to the fact that the bailout is necessary but is not a popular issue with the public, said: “It’s a tough issue; it’s a loser.”

The bill proposes creation of a Resolution Funding Corp. to issue $50 billion in bonds over the next three years, with the funds to be spent for closing or selling several hundred insolvent S&Ls.;

The insurance fund is insolvent, lacking the money needed to pay off depositors when financially crippled institutions are shut. Federal regulators have been forced to keep these S&Ls; open, piling up huge additional losses estimated at $500 million to $1 billion a month. An infusion of funds would permit the liquidation of the injured S&Ls; or the use of financial incentives to attract private buyers.

In an effort to prevent a new wave of reckless speculation by S&L; managers, the legislation would establish strict capital standards equal to those imposed on banks. Capital is the money contributed by an institution’s owners and, with more of their own funds invested, they are expected to be less likely to undertake risky investments.

Some California S&Ls;, freed by a permissive state law to invest in virtually any business, have suffered big losses in ventures such as restaurants, windmill complexes to generate electricity and horse-breeding farms.

Most of the S&L; losses took place in California and Texas, where state-chartered thrifts were totally deregulated and allowed to venture into an uncertain real estate market. Under the Senate bill, state-chartered S&Ls; could be prohibited by federal regulators from engaging in activities considered risky for the deposit insurance fund.

Responsibility for regulating S&Ls; under the new legislation would be taken from the Federal Home Loan Bank Board and given to the Federal Deposit Insurance Corp., which performs the same policing role for banks.

Fast Movement in Senate

The legislation moved quickly through the Senate’s normally sluggish procedures of hearings, amendment and debate. Bush announced the plan on Feb. 6. Riegle and Garn introduced the bill Feb. 22 and their committee approved it unanimously April 12.

A House subcommittee has passed a different version of the bill, which provides for somewhat easier capital standards for S&Ls.; However, an intense debate is expected next week when the House Banking Committee considers the bill. Members will offer amendments to tighten the rules for S&L; capital and to provide housing subsidies and incentives for the poor and for first-time home buyers.

The S&L; legislation approved by the Senate depends on a mixture of funds from the thrift industry itself and from taxpayers to finance the costly revival of the deposit insurance fund.

The total cost, estimated at $157 billion over 10 years, includes the expenses of shutting down insolvent S&Ls;, payments on past deals to close or sell S&Ls; and the interest charges on bonds to finance the plan.

S&Ls; and banks would pay higher premiums for their federal deposit insurance funds, the protectors of deposits up to $100,000. The bank premium, now 83 cents for every $1,000 in deposits, would climb to $1.20 next year and $1.50 in 1991. The S&L; premium, $2.08 per $1,000, would reach $2.30 in 1991 and then drop to $1.80 in 1994.

The Senate bill also gives the Justice Department an additional $50 million to investigate and prosecute S&L; officials and others responsible for fraud in the collapse of S&Ls.; Investigators have found numerous cases of inflated land appraisals used to justify exorbitantly large loans, illegal transactions between thrift managers and real estate speculators, and other abuses.

The only senator who did not vote on the bill was Albert Gore Jr. (D-Tenn.).