S&L; Mess Will Be Around for Generations
The savings and loan mess, a financial quagmire that may still be with us when your grandchildren are old, grew a few billion dollars larger the other day with the insolvency of Columbia Savings & Loan.
The Beverly Hills-based thrift that made a specialty of investing in junk bonds will be taken over by the government eventually. But first the government has its own problems, such as gaining Senate approval for a new boss for the Resolution Trust Corp., or RTC, the federal agency charged with disposing of failed S&L; properties.
And the RTC has problems, too. It doesn’t know the extent and real value of the assets that it has inherited from hundreds of failed S&Ls.; It is still in the midst of computerizing its inventory. Now comes Columbia’s portfolio of junk bonds--many of them worth considerably less than stated value of $3 billion.
The truth is the S&L; problem is more complex and intractable than politicians let on. The problem is bigger than you think--and will be around longer than most imagine.
To be sure, there may be no real problems for most depositors, whose savings are insured up to $100,000. But depositors also pay taxes, and taxpayers will foot the bill for the S&L; debacle. So will borrowers, because the cost of paying off insured deposits and losses on bad thrift assets will make loans scarcer and dearer.
Estimates of the S&L; cleanup cost keep growing. Initially the government said the total would be $157 billion over 10 years. But many today, including Federal Deposit Insurance Corp. Chairman L. William Seidman, make estimates closer to $300 billion.
And this Friday, when officials of the General Accounting Office testify before the Senate Banking Committee, they may toss out estimates larger than any yet dreamed of. The advance word is that GAO could put the total as high as $600 billion to $800 billion over 10 years.
Be prepared for political playacting as soon as Congress hears such numbers. Its members will start braying for a solution, urging employees of Resolution Trust--who will be derided as “bureaucrats”--to sell assets quickly so we can put this nagging problem behind us. The Bush Administration will chime in that steps will be taken to speed the S&L; cleanup.
But nothing much will--or can--be done because almost all S&L; assets the government has taken over are unsalable.
The public may have a picture of neat real estate properties, available at bargain prices from RTC. But reality is different, say experts in real estate and finance. Reality, says James Noteware, a director of accounting firm Laventhol & Horwath, is that raw land and participations in syndicated mortgage loans make up a large measure of the assets.
Neither can be sold easily. The raw land often is speculative lots without clear title. “In Texas, they’re called red-flag lots because they’re way outside of town and all they have on them is a red flag; they’ve been sold and resold to poor suckers, so now the titles aren’t even clear,” says one expert.
Commercial mortgage loans syndicated among S&Ls; and others in many states need approvals from all the lenders before they can be marked down and sold--and such approvals are hard to come by from lenders who don’t wish to reduce the stated value of their portion.
The real point, says an S&L; expert, is that “all salable assets were sold before the institution went bankrupt. All that’s left now are bad assets.”
Furthermore, bankrupt properties are not well maintained. “Frankly, the only solution for some is to bulldoze them,” says S&L; consultant Bert Ely of Ely & Co.
Yet even if properties are salable, the question arises: Sell to whom? “There is little or no economic demand for commercial real estate in this country today,” says bank consultant Alex Sheshunoff of Sheshunoff & Co. Instead, banks in most parts of the United States are reserving against loan losses or trying to sell commercial real estate themselves. The simple fact is that office buildings, shopping centers and apartment projects are in surplus after a 10-year building boom funded by S&L; billions.
Which answers the most frequently asked question: Where did all the money go? The answer is it has been lost. It has financed overbuilding by now-bankrupt developers, high living by S&L; operators--Columbia Chairman Thomas Spiegel made $9 million one year--and wasteful loans to businesses now gone bust. In short, the money is gone like water absorbed into dry land, and now the government must come up with fresh cash to back up depositors’ accounts.
That will be expensive, of course, but the total cost need not be as high as $300 billion. Those mammoth estimates reflect costs of financing over time--much as mortgage interest payments over 30 years make the total cost of your house much greater than the cash price you paid to purchase it.
Congress probably could solve the S&L; mess for $100 billion if it bit the bullet and immediately wrote off bad assets, closed S&L; doors and paid off depositors. The longer sick institutions are left open, paying high interest rates to attract deposits while earning nothing on failed assets, the bigger the ultimate bill to the taxpayers.
But nobody’s about to appropriate $100 billion in hard cash today to clean up the mess once and for all. Politics dictate that Congress and the President will let the S&L; problem fester, amid much talk but little action. And your grandchildren may still be hearing about it.
