Another Cruel S&L; Irony
Congress has now been told that the $50-billion bailout of bankrupt savings and loan institutions that it approved only three months ago is inadequate to the need. L. William Seidman, chairman of the agency charged with trying to clean up the S&L; mess, says that the Resolution Trust Corp. needs a further $50 billion to $100 billion in working capital to take over hundreds of additional failing S&Ls;, make good on individual deposits of up to $100,000, and arrange for the orderly disposal of salable assets. Earlier projections were that the $50 billion in bonds approved for sale in August could, after interest payments are taken into account, carry a final cost over 30 years of $300 billion. The new estimate of need by the RTC makes it clear that even this incredible amount will be only a beginning.
The House subcommittee Seidman briefed was clearly disturbed, both over the magnitude of the problem it heard outlined and the RTC’s belief that it doesn’t require specific new authority to borrow more. In the end, though, it’s hard to see how Congress can avoid going along with increased borrowing to salvage collapsing lending institutions. Word that the RTC has now identified a further 223 shaky S&Ls; could eventually bring to more than 500 the number subject to federal seizure.
On paper, the assets of these institutions total about $276 billion, but it’s far from clear what their real market value might be. Ultimately, after sound mortgages are sold to other institutions, the RTC stands to become the owner of 200,000 pieces of property. In time, all this will have to be disposed of in ways that won’t disturb local real estate and financial markets.
Who pays for cleaning up this enormous man-made mess? Taxpayers, of course, who will be called on to cover about 75% of the rescue plan’s total cost. The rest would come from higher premiums on the deposit insurance that is required of banks and other savings institutions. Yet, even in the face of these costs, Congress and the Bush Administration have shown little interest in imposing or reimposing the kind of controls that could reduce the chance that another collapse could occur. That is a mistake. The need for stricter regulation is evident.
The S&L; disaster, as hearings and court cases have shown, was to a great extent the result of incredibly inept management practices, unrestrained personal corruption and greed, and basic structural flaws, all helped along by a political climate that encouraged relaxed oversight by federal regulatory agencies. A chief purpose of federal regulation is to detect and halt activities and practices that threaten to harm the public. That mechanism proved grossly inadequate in the case of the S&Ls.; One consequence is that taxpayers well into the next generation and beyond are going to be burdened by a staggering added layer of debt. That this happened during a period when any reduction in the role of government was advertised as an unqualified benefit has to be seen as one of the crueler political ironies of our time.
