Leaks in the S&L; Bailout Plan

The lingering political power of some elements of the savings and loan industry was demonstrated crudely in the House Judiciary Committee the other day when opponents of tough new capital requirements came within a single vote of wrecking President Bush’s bailout plan, and a majority supported watered-down penalties for fraud.

This served as a warning of the battle that lies ahead when the legislation reaches the floor of the House next month. It also served as a reminder of the continuing influence of the savings and loan industry over Congress, an influence effectively used over the years to extract outrageous concessions that facilitated the financial crisis now culminating in the $150-billion bailout.

The principal assault on the Bush plan was led by Rep. Henry Hyde of Illinois, a conservative Republican much respected in Congress, who proposed an appeal procedure that would have weakened the tougher capital requirements proposed by the President and already agreed to by the Senate. Hyde said technical definitions written into the law in the House would cause problems for some of the fiscally sound savings and loan institutions that have taken over failing institutions in rescue operations arranged by regulators. If that is the case, then the rescue operations were fundamentally flawed, for the concessions Hyde sought would invite a whole new cycle of financial failures and bankruptcies. A majority of the Republicans on the committee defied Bush and supported Hyde, but a Democratic majority turned back the move and saved the tough and appropriate new regulations. But not all of them. The penalties recommended by the Administration to punish the widespread fraud now evident in the savings and loan crisis were cut in half by the committee with 12 of the 14 Republicans voting to support the reduction in what the President had proposed.

Taxpayers, who will be paying for the past failures of Congress and the federal regulators to control the savings and loan industry, will be well advised to keep a watchful eye on their representatives when the floor action becomes yet another target of industry lobbying efforts. And they will want to keep an eye on the timing, also, remembering Bush’s caution that each day of delay is likely to add $10 million to the already staggering cost of the bailout.