Treasury Aide: Thrift Bailout May Be Lacking

Deputy Treasury Secretary John E. Robson told the House Banking Committee on Tuesday that the $50 billion provided by Congress last year may be inadequate to close all insolvent savings and loan associations and make good on federal deposit insurance.

“And if it is (inadequate), we will return to Congress in a timely manner to request more funds,” Robson said in the first formal recognition by the Bush Administration that additional money could be needed to shore up the ravaged thrift industry. Independent regulators not reporting directly to the White House, such as Federal Deposit Insurance Corp. Chairman L. William Seidman, had previously suggested that more money might be needed.

Meanwhile, the House committee voted to subpoena former junk bond financier Michael Milken as part of an investigation into the role played by high-risk securities in the $2-billion collapse of Lincoln Savings & Loan of Irvine and the failures of other S&Ls.;

The investigation “will concentrate on the extent to which trading in junk bonds and subordinated debt contributed to the collapse of Lincoln and other savings institutions,” Banking Committee Chairman Henry B. Gonzalez (D-Tex.) said in a notice to committee members.

The vote, 31-to-1, with District of Columbia Delegate Walter Fauntroy, a Democrat, the lone dissenter, also authorized subpoenas for two Phoenix businessmen, Ernest Garcia and Fernando Acosta, who were involved in deals with Lincoln.

All committee witnesses, including federal regulators, have been subpoenaed as the committee has pursued its investigation of management and regulatory actions that contributed to Lincoln’s failure.

The new probe will focus on trading in high-yield junk bonds by Lincoln, CenTrust Savings Bank of Miami and Silverado Banking, Savings & Loan Assn. of Denver.

One of President Bush’s sons, Neil Bush, was a director of Silverado from 1985 until August of last year. Federal regulators are examining his activities at the S&L;, which collapsed into insolvency after heavy investments in the Denver real estate market.

The enforcement committee at the Office of Thrift Supervision has conducted an intensive discussion during the past week of possible action in Neil Bush’s case, and regulators said late Tuesday that a decision will be announced within 10 days.

In the past week, five former officers and directors of Silverado have consented to prohibition orders barring them from taking future jobs in the S&L; industry without receiving advance permission from federal regulators.

CenTrust stock was suspended from trading Tuesday on the American Stock Exchange in New York and the Midwest Exchange in Chicago after regulators said the company failed to provide “full, fair, and accurate disclosure in its securities filings.”

The company would be insolvent if its financial results were properly reported, the Office of Thrift Supervision said.

House Banking Committee sources indicated that the panel will look at the tangled relationships involving Lincoln and Drexel Burnham Lambert, the high-flying Wall Street firm where Milken pioneered the lucrative sale of junk bonds.

Lincoln and its parent company, American Continental Corp., were active buyers and sellers along with CenTrust of restricted stock and bonds issued by Memorex and Playtex, and Drexel handled the securities sales, the sources said.

The committee inquiry also will look at trading activities by S&Ls; on commodity exchanges, according to the memo from Gonzalez.

Committee members were angered by Robson’s suggestion that more funds may be needed to complete the liquidation or sale of failed S&Ls; and the repayment of depositors, whose accounts are insured up to $100,000.

“My constituents say, ‘Don’t put another nickel in this, no matter what,’ ” said Rep. Charles Schumer (D-N.Y.).

“We cannot expect taxpayers to pay any more in this S&L; debacle,” noted Rep. Cliff Stearns (R-Fla.).

Robson, however, told the skeptical committee members that there was no immediate need for extra money. “We don’t see the problem cropping up for a while,” he said.

The legislators complained that federal regulators were moving too slowly to shut down insolvent thrifts, which continue to lose money at a rapid rate.

“The President urged us to pass the bill as quickly as we could,” Schumer said of the bailout bill, which was approved in August.

“Only 40 small thrifts have been resolved,” he said. “Why have the brain-dead thrifts been allowed to live so long?”

The Resolution Trust Corp., which oversees the disposal of failed S&Ls;, has estimated it may need an additional $40 billion to $100 billion in working capital--temporary funds to be repaid later from the sale of real estate and other S&L; assets.

The oversight board that directs RTC policy has accepted those numbers without any attempt at independent verification, according to Rep. Bruce Vento (D-Minn.), chairman of a task force appointed by the House committee to monitor the S&L; cleanup.

The huge request for funds “should certainly not be taken at face value,” Vento said in a letter to Daniel Kearney, president of the oversight board. “Before the Administration and Congress take off on a long and painful debate about the method of obtaining working capital, we should be on solid ground with some certainty as to the projected cost,” Vento said.