Bush’s S&L; Rescue Faces Big Challenge on Floor of House : Many Republican Defections May Spell Defeat for President

President Bush’s plan for rescuing the savings and loan industry faces its toughest challenge this week on the House floor, where Republicans may desert the Administration in large numbers to vote for less stringent financial standards at savings institutions.

Unless the President does some personal lobbying, he could suffer an embarrassing setback in his efforts to ensure that an S&L; crisis never happens again, the experts warn.

The big struggle will come when the full House debates capital standards--the amount of cash an S&L;’s owners must provide to the business. The House Banking Committee approved a bill requiring the owners to provide $3 in cash for every $100 in loans granted by the institution, a strengthening of the Administration’s original proposal.

The 3% standard, which would take full effect in 1995, cannot include “goodwill,” the amorphous, intangible value of a business beyond its actual cash and physical assets. Goodwill can include such things as a respected business name, good customer relations and high employee morale.

More than 700 S&Ls; carry on their books goodwill that was acquired when they bought failing institutions in the mid-1980s. The goodwill should be counted toward the 3% cash standards, they say.

“They made a deal with us, and the government should stick with the deal,” said James Grohl, vice president of the U.S. League of Savings Institutions. Many of the S&Ls; received goodwill certificates when they agreed to help the government by acquiring damaged thrifts, he said.

Could Repeat Mistakes

The federal insurance fund lacked the money to close crippled S&Ls; and pay off depositors, whose accounts are protected up to $100,000. Thus, federal authorities provided packages that included some cash and some goodwill to get healthy S&Ls; to buy sick ones.

However, the Administration and many members of Congress fear that S&L; executives, unless they are forced to risk real cash of their own, will make the same dangerous investments that got the industry into trouble in the early 1980s.

“We should not back off one inch from the requirement that there be some real money” invested by S&L; owners, said Rep. Richard H. Lehman (D-Sanger), a member of the House Banking Committee. “Unfortunately,” said Lehman, “it’s too easy for a congressman to say yes to the friendly local S&L; executive.”

But most Democrats will support the strict House Banking Committee standards, he predicted. “It’s up to the White House to deliver the Republicans.”

However, the Republicans have been defecting, and their support enabled the industry to come within one vote recently of overturning the standards at the House Government Operations Committee, one of several committees handling the legislation.

The full House will debate the S&L; legislation, including the capital standards, beginning Wednesday. The Administration proclaims that the capital standard is a vital part of the bill but has not used its full political muscle to bring wavering Republicans into line.

“The President has not done much at all,” said Clifford L. Brody, a Washington banking analyst. “He has brilliant people on the substantive side who have defined a Ssolution to the S&L; problem. But he hasn’t yet asked his political people like (White House Chief of Staff John) Sununu to get knee deep in the action.”

The issue has split the S&L; industry itself, with many of the biggest, financially strongest S&Ls; from California backing tough standards.

Full-Page Ad

“Let’s not make the same mistake again,” Great Western Bank in Beverly Hills said in a full-page ad in the Washington Post aimed at members of the House. “We cannot stand silently by while some members of our industry call for weaker capital standards which could make this problem larger and more expensive in the future.”

Oakland-based World Savings, a particularly outspoken advocate of strict financial rules, also made a full-page appeal in the Post, proclaiming that “only strong capital requirements will avert another savings and loan disaster.” “Do not be seduced by the pleadings of the weak and the noisy,” said the message from World Savings Chairman Herbert M. Sandler and President Marion O. Sandler.

On the other hand, some influential S&Ls; in Illinois, Florida and Pennsylvania have been particularly active in pushing for eased capital standards. They have been succeeding with the argument that “a deal is a deal,” suggesting that the government would be acting in bad faith to wipe out goodwill when it was promoting the concept a few years ago.

“The federal government has a responsibility to live up to the contractual arrangements,” said Rep. Henry J. Hyde (R-Ill.), who has proposed an amendment calling for hearings before an S&L; can be prevented from counting goodwill toward the 3% capital rule.

By contrast, the House Banking Committee bill has immediate penalties for S&Ls; unable to meet the standards. Such institutions would be barred from raising interest rates to attract large volumes of new deposits. And they would have to submit a detailed business plan for federal approval. Executives regard this as a virtual government takeover.

Failures Expected

The committee’s version of the bill says S&Ls; must have cash capital of 1.5% by next year, en route to 3% by 1995. The Senate version of the legislation requires 1.5% in cash by 1991 and excludes goodwill.

For some S&Ls;, it will be impossible to meet the rules, because virtually all their capital consists of goodwill, rather than actual cash.

Of the 720 S&Ls; with goodwill, about 220 are expected to fail the first capital test in 1990. These 220 have capital of $15.3 billion, of which a hefty $12.8 billion is composed of intangibles such as goodwill.

The House Banking Committee leadership is trying to preserve the standards in the face of a strong appeal by beleaguered S&Ls.; Acknowledging the restiveness in Congress, 14 Banking Committee members have signed an appeal to their House colleagues.

“We urge you to reject any amendment which attempts to allow intangibles such as goodwill to be counted as core capital indefinitely,” said the letter, signed by 10 Democrats and four Republicans, including Chairman Henry B. Gonzalez (D-Tex.) and Chalmers P. Wylie (R-Ohio), the ranking minority member. “Goodwill is nothing more than thin air and cannot substitute for hard cash.”