Seidman Says S&L; Closure Costs May Exceed $50 Billion
L. William Seidman, the government official overseeing the rescue of the federal savings and loan insurance fund, said Wednesday that Congress may need to spend more than the $50 billion it approved in August to help close insolvent S&Ls.;
Seidman, chairman of the Federal Deposit Insurance Corp., also predicted that it will take a work force of at least 5,000 people to help manage the assets seized from failing institutions. Seidman is also chairman of the Resolution Trust Corp., the government agency created to handle defunct S&Ls.;
The government is on the verge of closing or selling five large, financially crippled S&Ls;, a step that will consume about $10 billion of the $50 billion, Seidman told the Senate Banking Committee. And hundreds of other S&Ls; may be taken over during the next three years, he said.
Asked if Congress should expect the spending total to rise, Seidman replied, “I have no way to know for sure.” He said he did not know how many assets will wind up in the Resolution Trust Corp.
Federal Reserve Board Chairman Alan Greenspan also told the committee that the rescue price tag is highly uncertain.
“We won’t know exactly whether $50 billion is, or is not adequate,” Greenspan said. “We do know the federal government is obligated to clean up this mess. (We) will do what has to be done.”
Plan Is Flexible
Treasury Secretary Nicholas F. Brady said the spending figure is not as important as Congress’ determination to restore public confidence in the savings and loan system.
“Maybe we need $52 billion, maybe we need $48 billion,” Brady told the committee. “The point is, we’ve taken a bonfire and tamped it down to the point where it is embers.”
The $50 billion, approved by Congress as part of this year’s S&L; bailout legislation, represents the cash available to help close or sell crippled institutions over the next three years. Some of the funds will be used to pay off depositors, whose accounts are insured up to $100,000.
In some cases, federal officials may decide to close ailing S&Ls; and pay off all their insured depositors. In others, it might sell troubled S&Ls; to healthy financial institutions, with the government keeping the problem assets, such as condominiums and shopping centers that were foreclosed when developers could not make payments on their loans.
The $50 billion will come from the sale of bonds. The ultimate price tag for restoring the S&L; insurance fund, including interest payments on the 30-year bonds and premiums collected from the S&L; industry, has been estimated at nearly $300 billion. It may take the government years to sell the assets of the failed S&Ls.; Meanwhile, cash will be needed to handle new S&L; failures.
The Resolution Trust Corp. may be forced to acquire $100 billion in hard-to-sell assets from failing S&Ls; before these institutions can be sold, Seidman noted. “In effect, the RTC must buy, then collect, on these illiquid assets,” he said. “This ties up the RTC’s cash very quickly.”
While waiting to sell off the foreclosed real estate and other assets, the RTC would still be responsible for handling any new failures.
Top Financial Institution
The RTC, which is operated by personnel on loan from Seidman’s Federal Deposit Insurance Corp., has seized 283 failed S&Ls; with $112 billion in assets. It has closed 24 small S&Ls; and expects to complete the sale of the five big institutions by next week. Seidman would not identify the five.
More than 300 additional failures are expected during the next three years, according to Seidman.
The Resolution Trust Corp. will become the nation’s biggest financial institution, the reluctant owner of billions of dollars of seized properties and assets of uncertain value. As a result, Seidman said, it will need at least 5,000 employees and possibly “many more” to manage and dispose of the vast portfolio of properties and investments.
The RTC decisions “will be felt in the capital markets and real estate markets throughout the country,” said Sen. Donald W. Riegle Jr. (D-Mich.), chairman of the Banking Committee.
“Homeowners and investors are worried about potential dumping that could adversely affect property values,” Riegle said. Because so much money and property is under the RTC’s control, vast potential exists for corruption and scandal, he said.
Treasury Secretary Brady, a member of the oversight board that will set policy and watch over the RTC, said the panel “is as anxious as this committee to protect against conflicts of interest, political favoritism and other improper actions by employees, agents, independent contractors and all others.”
