Conferees Agree to $166-Billion Bailout of S

Congressional negotiators reached agreement Thursday on an unprecedented $166-billion cleanup of America’s savings and loan industry, clearing a final roadblock by deciding to add almost $50 billion in upfront costs to federal budget deficits over the next three years.

The agreement to close or merge hundreds of insolvent S&Ls;, however, faces a potential impasse in the Senate, where a substantial group of lawmakers has warned that it would block the bill if it contained the on-budget financing plan opposed by the White House.

It was also unclear whether the Bush Administration, which made the costly S&L; bailout one of its top legislative priorities, would follow through on its threat to veto the legislation over the controversial financing scheme that requires a special exemption from the Gramm-Rudman deficit reduction law.

The Administration, which favors keeping the initial cash outlays off-budget by recording the interest charges over many years, fears that ignoring the Gramm-Rudman deficit ceilings would encourage lawmakers to abandon fiscal discipline in the future.

No matter what decision is reached on the financing plan, the S&L; cleanup marks a major turning point in the crazy-quilt system that encouraged the creation of thousands of separate financial institutions governed by both state and federal regulators.

Ultimately, the legislation could spell the end of a separate thrift industry devoted largely to financing home mortgages.

Under the complex S&L; legislation, the government would spend about $50 billion over the next three years to shut down failed institutions and put thrift regulators under the supervision of the Treasury Department.

The $50 billion would be raised by selling 30-year Treasury bonds. The ultimate cost could reach as high as $300 billion, including interest payments over the 30 years, with taxpayers being required to pay about three-fourths of the bill.

The White House estimates that the clean-up will require $166 billion in spending over the next 10 years, with depositors in banks and S&Ls; paying part of the cost through higher insurance fees.

The Bush Administration, which proposed the legislation six months ago, has pushed hard for its tougher S&L; accounting standards and a host of regulatory changes designed to prevent another massive failure in the thrift industry.

The bailout is necessary because industry deregulation, wild interest rate swings and insider fraud have led to the failure of hundreds of savings and loans, bankrupting the federal government’s deposit insurance fund.

“We are pleased that the conference committee has finished work on the S&L; legislation, which is generally an excellent product,” Treasury Secretary Nicholas F. Brady said. “However . . . we continue to actively oppose the House financing plan, which requires a Gramm-Rudman waiver.”

But any further delay in approving the legislation would add roughly $1 billion a month to the cost of the plan as losses at insolvent savings and loans continue to mount, so the Administration may decide to swallow its objections to begin paying off depositors and end the flow of red ink.

After decades of coddling savings and loans, many of which developed close ties to key politicians through campaign contributions and favors, Congress is on the verge of imposing a number of tough new rules expected to cause a major industry shakeout over the next few years.

House Banking, Finance and Urban Affairs Committee Chairman Henry B. Gonzalez (D-Tex.) and Senate Banking, Housing and Urban Affairs Committee Chairman Donald W. Riegle Jr. (D-Mich.)--although new to their posts this year--surprised observers by taking control of the bargaining to prevent industry lobbying from weakening the bill.

The bill establishes a new agency known as the Resolution Trust Corp. to manage billions of dollars in assets owned by failed thrifts. The RTC plans to dispose of the assets, mostly empty office buildings, condominiums and raw land, over the next several years.

Civil Penalties

The legislation also increases civil penalties for S&L; or bank fraud and directs thrifts to devote more attention to financing of home mortgages.

The bill requires S&Ls; to maintain at least 3% of their assets as capital available to protect depositors against losses, prohibits thrift owners from investing insured depositors’ funds in high-risk junk bonds and sets aside funds to help pay for low- and moderate-income housing.

The new restrictions on junk bonds, which will hit particularly hard at a handful of California S&Ls;, would give thrifts five years to get rid of the junk bonds they now hold.

While the bill appears to push thrifts back toward their traditional role as home lenders, one provision would allow banks to begin buying healthy S&Ls; and merge them with their own operations. That measure, analysts said, could ultimately end the distinction between banks and thrifts.

“This is the real sleeper in the bill,” said Robert Litan, a banking specialist at the Brookings Institution. “Fundamental economic forces are breaking down the barriers between banks and S&Ls.; What you will see is a massive shakeout in the thrift industry.”

The last big issue to be resolved Thursday was whether to keep the cost of the bailout off the federal budget, as Bush and the Senate had sought, or to leave it on the budget and waive Gramm-Rudman deficit-reduction requirements as proposed by the House.

Supporters of the on-budget approach argued that it would reduce by $4.5 billion to $40 billion the cost of issuing bonds to finance the bailout. Because the Treasury would issue the bonds, they would carry a slightly lower interest rate. Under the plan favored by the Senate and the Administration, the bonds would have been issued by a quasi-governmental agency, which would have had to pay slightly higher interest rates.

Despite the danger of delaying the S&L; cleanup, White House Budget Director Richard G. Darman attacked the on-budget financing plan as “an all-time phony” because it ignored the Gramm-Rudman ceilings.

“If you can do it for this, you can do it for anything,” Darman warned. “What they are doing,” he complained, is “essentially . . . repealing Gramm-Rudman.”

Long Deadlock

The House-Senate deadlock on the funding issue dragged on through five hours. Sen. Alan Cranston (D-Calif.) broke the logjam by throwing in the towel on the Senate position.

“Otherwise, we would be facing an everlasting impasse in this conference,” a weary Cranston said. “I am still not sure what will happen in the Senate or in the White House.”

Two Republican negotiators, Sens. Jake Garn of Utah and John Heinz of Pennsylvania, warned that Thursday’s action might end up simply moving the deadlock to the Senate floor.

While House negotiators won most of the difficult battles, they acceded to the Senate by agreeing to let M. Danny Wall, current head of the Federal Home Loan Bank Board, keep his job without requiring that he be reconfirmed by the Senate.

Some House members accused Wall, a former top aide to Garn, of hiding the size of the S&L; crisis from Congress and wanted him to face another confirmation hearing.

At confirmation hearings, Wall would have been certain to face questions about his role in delaying regulatory action against Lincoln Savings & Loan Assn. of Irvine, Calif., which has been seized by regulators and will likely require millions of dollars in government assistance.

Such questions would be uncomfortable for Cranston and Riegle as well because they accepted campaign contributions from Lincoln owner Charles Keating and later intervened with regulators on Lincoln’s behalf. Riegle has since returned Keating’s contribution but Cranston has not.

The bailout bill would move the regulatory functions from the independent FHLBB to the new Office of Thrift Supervision within the Treasury Department, which Wall would lead.