The Intricacies of a Bailout

A Senate and House conference committee began the complex process of combining two disparate savings and loan industry bailout bills Tuesday with an apparent commitment to toughness, strictness and reform. That is the very least that taxpayers can hope for.

There is no way to escape the overwhelming burden of paying off deposit insurance in the failed institutions. The price tag is enormous, $300 billion over 30 years, with the industry itself and taxpayers forced to pay. But matters could be much worse if Congress, as it has so often in the past, should bow to pressure from the savings and loans and once again write the loose rules that have made a major contribution to the disaster over the last decade.

President Bush and Treasury Secretary Nicholas F. Brady offered the basic elements of the rescue plan within a month of the inauguration of the new Administration. It was a welcome shift from earlier talk of a bailout based on taxing depositors. The plan places an appropriate burden on the industry in financing the bailout and, of particular importance, it establishes new controls and higher capital requirements to minimize the risk of a repetition of the outrageous irresponsibility that produced the disaster.

There are divisions within the savings and loan industry. Those companies that have been prudent and cautious and are in strong economic condition have been generally supportive of the reform package. Those that are vulnerable have resisted and are continuing, even now as the conferees convene, to try to water down the requirements. It is a time for taxpayers to keep their eyes open.

The House bill is stronger and more responsible. The capital requirements are higher. It severely limits the use of “goodwill” as an element of measuring capital. And it has been stripped of all the special provisions for individual institutions and special interests. President Bush has indicated his support for these elements.

Unfortunately, the President remains opposed to another element of the House bill that would save taxpayers billions of dollars. Under the House language, the bailout would be kept as part of the federal budget so that the necessary funds could be raised at the lowest possible interest rate. This would require an exemption to the budget deficit ceiling imposed by the Gramm-Rudman-Hollings legislation. The President prefers to conceal the cost by paying it from a separate institution that would issue its own bonds. That would force increased costs on the taxpayers, a heavy price to pay simply to avoid the embarrassment of a direct breach of the deficit limits.

The House bill includes another innovation that also should be incorporated in the conference committee draft. It provides for subsidized lending for low- and moderate-income housing. Each of the 12 Federal Home Loan banks would be required to set aside a portion of the funds they loan to savings and loan institutions for the affordable-housing program. Priority would be given for rehabilitation or construction of rental units, for housing sponsored by nonprofit and state and local government units, and for the purchase or rehabilitation of housing owned by the federal government.

The seriousness of the conferees, and their commitment to avoiding the errors of the past, will now be tested.