Stiff S&L; Rules Barely Survive House Panel

The savings and loan industry, demonstrating impressive lobbying muscle, Wednesday came within one vote in the House Judiciary Committee of overturning the tough financial standards for thrift institutions contained in S&L; bailout legislation.

The Bush Administration, worried that most committee Republicans defected from its position that the financial standards should be as strict as possible, immediately began preparing for a tough fight to maintain the standards when the bill goes to the House floor next month.

“This was an example of the industry trying to weaken standards every way (it) can,” Assistant Treasury Secretary David Mullins said after the vote. “We expect to fight (it) in every setting.”

Cash Replacement

An amendment that would have eased the capital standards failed on a vote of 17 to 17, with committee Chairman Jack Brooks (D-Tex.) voting “present.” The amendment, offered by Rep. Henry J. Hyde (R-Ill.), would have required regulators to hold lengthy hearings before they could force S&L; owners collectively to provide billions of dollars in new cash to strengthen their institutions.

Current regulations require S&Ls; to maintain capital reserves equal to slightly more than 3% of outstanding loans, but it allows savings institutions to count “goodwill”--intangible value beyond actual holdings of money and property--as part of these reserves. The industry has ore than $20 billion worth of goodwill on its books.

Under the rescue bill approved by the House Banking Committee, savings institutions would be required to write off this phantom value over five years and replace it with cash.

That bill was referred to the Judiciary Committee on its way to the House floor, and it was there that Hyde proposed that complex hearings be required before the government could stop an S&L; from counting goodwill value as cash to meet the new financial requirements.

Otherwise, Hyde argued, more than 300 S&Ls; would become insolvent. He pointed out that healthy thrifts took over failing ones in recent years at the request of federal regulators, and received certificates for goodwill instead of cash. “They were encouraged, I would say seduced,” Hyde said.

Rep. Charles E. Schumer (D-N.Y.), speaking in strong opposition to Hyde’s amendment, said: “If this passes we have decimated a large part of the banking bill, we have crippled it.”

The issue cemented strange political alliances. Hyde, a conservative Republican, joined a liberal Democrat, Rep. Lawrence J. (Larry) Smith of Florida, in leading the fight for the amendment. On the final vote, six Democrats and 11 Republicans supported Hyde’s plan; 14 Democrats and three Republicans voted against the amendment.

“This is not a partisan issue,” Mullins said, acknowledging that he won only three Republican votes after strong appeals from the White House.

The capital standards issue has split the thrift industry, with many of the largest and richest institutions supporting the strict rules calling for new cash. Hundreds of smaller thrifts say they will be forced out of business if they cannot continue to count goodwill as capital.

The Judiciary Committee also voted, 17 to 14, to reduce by half the civil penalties for fraud sought by the Administration against financial institutions. An amendment by Rep. William J. Hughes (D-N.J.) would set the penalty at $500,000 for each violation and a maximum of $1.5 million. President Bush had asked for a maximum penalty of $1 million for each violation, up from the current level of $5,000.

Hughes said his measure would make the civil penalties “remedial rather than punitive,” but critics said the amendment would make it harder for the government to recover money lost through fraud. “We should worry about punishing” the S&L; operators responsible for fraud, said Rep. Romano L. Mazzoli (D-Ky.)

Now that the rescue legislation has gone through three committees--Banking, Ways and Means and Judiciary--it is ready for final action on the House floor, probably during the second week in June.

The legislation, both the version approved by the full Senate and the one ready for House consideration, would authorize spending $157 billion over 10 years to close hundreds of crippled S&Ls; and pay off their depositors, whose accounts are insured by the federal government up to $100,000.