Conferees Vote to Ban S&Ls; From Holding Junk Bonds
Congressional negotiators, hurrying to work out disagreements on a multibillion-dollar bailout of the nation’s ailing savings and loan industry, agreed Wednesday to prohibit thrift operators from investing depositor funds in high-risk junk bonds.
The proposal, offered after several days of negotiations among conferees, would give the nation’s thrifts five years to get rid of the junk bonds they now hold.
Members of the House-Senate conference committee handling the thrift industry package compromised on other key measures also, including tougher S&L; capital standards and the amount of S&L; assets that must be devoted to traditional housing activities.
The conferees have not yet resolved the sticky issue of whether to include $50 billion in S&L; bailout costs in the federal budget, which would balloon the deficit.
Sen. Donald W. Riegle Jr. (D-Mich.), chairman of the conference committee, has estimated that the total cost of the industry rescue could run as high as $275 billion over 30 years, with taxpayers picking up 75% of that amount.
The committee is working to resolve differences between separate thrift bailout bills passed by the House and the Senate so that a final version can be approved by both houses and sent to President Bush for his signature before Congress recesses on Aug. 4.
Junk bonds have become an issue in the thrift industry crisis because some troubled institutions have used federally insured deposits to purchase the high-risk, high-yield debt securities.
The House bailout bill would have prohibited such investments altogether, but the Senate measure would have allowed S&Ls; to retain up to 6% of their assets in junk bonds.
Under the compromise, thrift operators would have until Aug. 1, 1994, to either get rid of their junk bonds or transfer them to separately financed subsidiaries not covered by the federal deposit insurance program. The House had wanted to force divestiture in two years, but its negotiators agreed to allow a five-year transition.
Concession by Senate
The ban on junk bonds is a major concession by the Senate, particularly for Sen. Alan Cranston (D-Calif.). Several large California thrifts, including Columbia Savings & Loan of Beverly Hills, have invested heavily in junk bonds.
The conference committee agreed also to accept a House proposal requiring S&L; owners to put up a minimum of $1.50 in capital for every $100 in loans. But thrift regulators would not be required to limit the growth of institutions violating the tougher capital rule until June, 1991.
The capital requirement would be raised in steps to $3 per $100 in loans by 1995. S&Ls; that had purchased the right to collect mortgage payments from homeowners would be allowed to count 90% of the market value of those contracts toward their capital requirement.
The conferees adopted a House provision requiring S&Ls; to devote 55% of their assets to “core” housing investments, including residential mortgages, home construction loans, home improvement loans, mobile home loans and home equity loans. The current standard is 60%, but qualifying investments are much more loosely defined.
New Supervisory Agency
On two other issues, the Senate prevailed. The conferees agreed that state-chartered S&Ls; should be regulated by a newly created Office of Thrift Supervision within the Treasury Department. That office will assume some of the responsibilities now carried out by the Federal Home Loan Bank Board, which would be dismantled under the bill.
The House had wanted to place the new office in charge of federally chartered thrifts only and assign state-chartered institutions to the Federal Deposit Insurance Corporation.
The conference committee agreed also, at the Senate’s insistence, that FDIC Chairman L. William Seidman would continue in office unchallenged and that controversial bank board Chairman M. Danny Wall would head the new S&L; supervisory agency without Senate confirmation.
House leaders, particularly Banking Committee Chairman Henry B. Gonzalez (D-Tex.), had blamed Wall in part for the savings debacle and wanted to block his appointment.
Still unresolved was the politically explosive disagreement between the House and Senate over whether $50 billion in bailout funds to be raised through bond sales should be counted as part of the federal budget, contributing to the deficit.
The Senate narrowly voted to support the Bush Administration in keeping the funding off the budget. But the House, at the encouragement of Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), insisted that the $50 billion should be included in the deficit, although in a manner that would exclude it from the Gramm-Rudman deficit ceiling in order to avoid triggering automatic spending cuts.