Compromise Will Cap S&L; Bailout Spending

The Bush Administration and Congress averted a clash Tuesday over the rising cost of the savings and loan rescue operation by agreeing to delay any borrowing in excess of the $50 billion already approved by Congress.

The House Ways and Means Committee approved a bill to curtail any new borrowing. But the measure won’t take effect until Jan. 15, giving federal regulators time to find a borrowing plan that satisfies Congress.

Legislation approved in August to clean up scores of failed thrifts across the country gave regulators the authority to borrow funds, using as collateral real estate and other assets from failed S&Ls; seized by the government.

However, regulators shocked Congress by disclosing in recent weeks that they might need to borrow an additional $50 billion to $100 billion to close failed institutions. That would be on top of $50 billion in proposed bond sales already approved by Congress.

Congress fears that the unchecked borrowing capacity will give regulators massive sums of money to spend without effective legislative control.

“We are dealing with one of the largest scandals the U.S. has ever been involved in,” said Rep. Sam Gibbons (D-Fla.). Congress can “stand supinely by and let the Administration handle it” or take an active role in overseeing the spending of money, he said.

Spending huge sums of money to close defunct S&Ls; “should smell and stink and hang out for everyone to see,” said Gibbons. “I can see why the Administration does not want it to stink and hang out.”

Rep. Willis D. Gradison Jr. (R-Ohio) said Congress wants the regulators “to come back with the least-cost solution” to the need for additional funds.

The $50 billion already approved by Congress and a $5 billion line of credit available at the Treasury can be used to pay off S&L; depositors, whose accounts are insured by the federal government up to $100,000.

Regulators already have seized control of 283 institutions and have identified 223 more that are likely takeover candidates. They have not yet determined which institutions must be closed and which can be dismantled and partially saved by selling branches and deposits to healthy banks and S&Ls.;

Eventually, the government will recover some of its outlays by selling assets from the seized institutions, including condominiums, shopping centers, apartment projects, office buildings and raw land. Estimates of the value of the seized assets range from $100 billion to more than $200 billion.

The process of selling assets may take several years, and the regulators have said they will need billions of dollars in the short run to close failed institutions. They want to get the needed working capital by borrowing against S&L; assets.

Under the deal announced Tuesday, the regulators have agreed to refrain from borrowing additional funds before Jan. 15 while they try to devise a system that would satisfy Congress. The committee approved the bill by voice vote, but it will not be transmitted to the full House unless the compromise effort fails.

“The Administration will work over the next two months on developing a detailed working capital proposal,” said Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.).

Assistant Treasury Secretary David Mullins said the Treasury opposed the bill but would accept the delay while a plan is being prepared. The Resolution Trust Corp., which is handling the closing and sale of S&Ls;, will not need additional working capital until April, he said.

The confrontation over the issue likely will resume after January if the Ways and Means Committee does not accept the plan to be proposed by the Administration.

In the Senate, lawmakers have warned that $50 billion to $100 billion in additional borrowings would be unacceptable without legislative approval.

“It’s clear to me it’s a veto prospect,” said Rep. Bill Archer (R-Tex). Any cap on spending would provide “a strong incentive to the Resolution Trust Corp. to dump assets to raise capital,” he said.

“If they dump assets in our part of the world, Jake, we are in deep, deep trouble,” Archer told Rep. J. J. Pickle (D-Tex.), one of the key authors of the legislation forbidding additional borrowing. “What bothers me is that it’s a tremendous threat to the underlying value of real estate in our state.”

Pickle said the Treasury had promised to come up with a plan to provide working capital, but had failed to deliver one despite repeated committee requests.

Any borrowing should be controlled, with regulators coming back to Congress when they need more money, committee members indicated.

“The bill says, ‘let’s wait and see if we can do it cheaper,’ ” said Rep. Raymond McGrath (R-N.Y.). The Administration accepted the deal without enthusiasm. If additional funds must be borrowed directly by the Treasury, the deficit would be increased. “We are concerned that it can be used as a battering ram to eviscerate the Gramm-Rudman (deficit control) process,” Assistant Treasury Secretary Mullins said in an interview after the Ways and Means meeting.

Spending for the RTC would become the biggest single discretionary item in the budget and would be injected into partisan budget politics, Mullins said.