S&L; Bailout Battle Begins as Congress, Thrifts Square Off : Industry Faces Serious Threat of Tougher New Regulations
The savings and loan industry’s power in Congress these days appears to be “all hat and no cattle,” a derisive Texas term for a drugstore cowboy with an image but no substance.
As Senate and House conferees begin discussion today of the massive S&L; rescue package, the battered industry faces an uphill fight against tough new regulations.
Big majorities of both parties in Congress and President Bush, energized by public anger over the multibillion-dollar cost of the bailout, are determined to adopt legislation that will bite deeply into the industry’s profits and its independence.
“This organization can testify that George Bush is no wimp,” said Frederick L. Webber, president of the U.S. League of Savings Institutions, recalling the President’s pivotal role in the industry’s lopsided loss in the House when it tried to have proposed financial standards eased.
The S&Ls; will plead their case again before the congressional conference, arguing that they need time to raise billions of dollars in new capital demanded by Congress. But they expect a hostile reception.
“I can understand why Congress is in this mood; but they may throw out the baby with the bath water,” Webber said.
A ‘Squeeze Play’
Both House and Senate bills require the Federal Home Loan Banks, which are owned by the industry, to contribute $2 billion in retained earnings toward the cost of the bailout. The Senate bill calls for an additional $300 million a year in the future, while the House version mandates up to $600 million annually.
The result, Webber claims, will be a “serious squeeze play” that will ravage industry earnings.
For individual S&Ls;, the loss of dividends from the home loan banks will cut into income just when Congress wants the industry to strengthen its capital base.
Nevertheless, the tougher House standards for finances will prevail, predicts M. Danny Wall, the chairman of the Federal Home Loan Bank Board.
Both the Senate and House bills require S&L; owners to provide their businesses with $3 in cash as the financial underpinning for every $100 worth of loans they generate. Currently, S&Ls; include as capital billions of dollars worth of “goodwill”--the intangible value of a business beyond its actual financial holdings and physical assets.
The House bill, backed by the Administration, would force the industry to write off the goodwill completely over five years. The Senate bill offers a much more lenient 25 years in which S&Ls; could dispose of the goodwill on their books and replace it with cash.
A 10-year writeoff for goodwill was contained in the original Bush Administration legislative package, and the S&Ls; will argue for 10 years as a compromise. “Adding five years to the House plan can be the solution,” Webber said, “but it’s anybody’s guess how this will come out.”
Risks Less Likely
Capital has become an important symbolic issue in the S&L; debate. Speaker after speaker in the Senate and House debates talked about the risky investments that helped bring down dozens of S&Ls;: raw land, horse breeding farms, restaurants and windmill power farms.
If S&L; owners are forced to put more of their own cash into their businesses, many legislators said, they are less likely to make dubious investments.
The enthusiasm spread to the Bush Administration, which embraced the House bill’s 3% standard. The rule is tough enough that it theoretically could force the sale or merger of more than 240 institutions that will not qualify next year under the first stage of the progress toward a 3% standard.
“I think the conference is stacked,” said Douglas Faucette, a Washington lawyer who led a coalition of S&Ls; that campaigned in vain for the House to allow retention of goodwill as part of capital. “The battle is over for this bill. But we think it’s a terrible mistake.”
“Congress wants to demonstrate its toughness on the industry,” he said. “Congress will give the Administration what it wants,” on the capital issue, he predicted.
A confident note for the Administration was sounded Monday by Treasury Secretary Nicholas F. Brady, who said, “we’re extremely optimistic” that the conference will accept the House’s more stringent version of capital standards. Brady said the legislators should be “commended for standing up to significant S&L; industry lobbying and adopting capital standards that will require all thrift owners to put their own money at risk ahead of the taxpayers’. “
However, the anticipated smooth cooperation on capital standards between Congress and the White House does not extend to the method of financing the S&L; legislation.
The Senate--and the President--favor creation of a new private agency, the Resolution Funding Corp., which would issue bonds to raise $50 billion to close crippled S&Ls; and pay the depositors, whose accounts are insured up to $100,000.
Would Provide Waiver
The House version of the S&L; legislation provides for the $50 billion to be borrowed directly by the Treasury (the so-called on-budget plan). Advocates of the House plan say it would save the taxpayers money because Treasury bonds--the safest securities investment--carry a lower interest rate than that on the bonds of a new agency.
The extra $50 billion in direct Treasury outlays would breach the spending limits under the Gramm-Rudman-Hollings federal law, which requires reductions in the deficit until the budget is balanced in 1993. The House bill would provide a waiver to Gramm-Rudman to permit the extra spending.
“Once it becomes clear to the financial markets that we’re no longer going to observe Gramm-Rudman-Hollings budget discipline, we are likely to see interest rates respond,” Brady told reporters at a news conference. “And an increase of just one-100th of 1% would more than wipe out the House plan’s anticipated savings.”
The Treasury secretary said a Gramm-Rudman-Hollings spending waiver to deal with the S&L; crisis would set a bad precedent that could be applied to other issues. Legislation dealing with nuclear waste, drugs, housing programs and other important issues could generate pressures for additional spending outside the budget limits, Brady said.
Gramm-Rudman would be “gutted” if the conference adopts the House financing plan, Brady said. “We are nuts to lose it,” he said.
The conferees hope to complete their work and send a bill to Bush before Congress begins a monthlong summer recess in early August.
The legislation will be the biggest financial rescue in history, with an estimated price tag of nearly $300 billion over 30 years. The money will be used to close hundreds of insolvent S&Ls;, pay their depositors and rebuild the federal insurance fund that protects thrift deposits of up to $100,000.
The insurance fund does not have sufficient cash to dispose of crippled S&Ls;, forcing the government to keep the institutions open even while they continue to lose money.
S&L; LEGISLATION: COMPARING THE BILLS
ISSUE: Capital standards SENATE BILL S&Ls; must have capital equal to 3% of assets. Goodwill can be included, must be written off over 25 years. HOUSE BILL S&Ls; must have capital equal to 3% of assets. Goodwill must be eliminated over five years.ISSUE: Insurance premiums SENATE BILL S&Ls; must pay $2.08 per $1,000 in deposits next year, then $2.30 through 1993, $1.80 until 1998, then $1.50. Banks will pay $1.20 per $1,000, $1.50 in 1991 and beyond. S&Ls; and banks pay same fee after 1998. HOUSE BILL S&Ls; pay $2.08, then $2.30 in 1991, $1.80 in 1994 and beyond.Banks pay $1.20 per $1,000 and then $1.50.S&Ls; pay more than banks.ISSUE: Costs of rescue SENATE BILL Home Loan Bank system gives $2.1 billion in retained earnings and $300 million a year in future income. HOUSE BILL Home Loan Bank gives $2.1 billion and up to $600 million a year. SENATE BILL ISSUE: Low-income housing No provision. HOUSE BILL $75 million from Home Loan Banks in 1990, rising to $150 million a year in 1995. ISSUE: Qualified thrift lender SENATE BILL S&Ls;’ portfolios must have 60% of assets in home mortgage and home repair, mortgage-backed securities. HOUSE BILL S&Ls;’ portfolios must have 80% of assets in loans and securities on domestic real estate, consumer, small business and education loans. ISSUE: Junk bond investments SENATE BILL Limited to 11% of assets. HOUSE BILL Banned. Those with junk bonds must sell them within two years. ISSUE: Buying S&Ls; SENATE BILL Banks may buy financially weak S&Ls; now, healthy ones in two years. HOUSE BILL Banks may buy healthy S&Ls; immediately. Multiple S&L; holding companies may buy banks in two years. ISSUE: Budget SENATE BILL S&L; bailout not included in federal budget deficit. HOUSE BILL Bailout counted as part of deficit; Gramm-Rudman spending limits waived.
