GAO Says S&L; Cost Could Rise to $500 Billion

The savings and loan bailout, already pegged as the most expensive financial debacle in the nation’s history, will cost at least $325 billion and could cost as much as $500 billion over the next 30 or 40 years, the General Accounting Office told Congress on Friday.

The $325-billion estimate by the auditing arm of Congress is $68 billion higher than a GAO estimate last summer and is still “subject to significant change” if optimistic Bush Administration economic assumptions of steady growth and declining interest rates do not pan out, Comptroller General Charles A. Bowsher told the Senate Finance Committee.

If those assumptions prove wrong and the economy stumbles, the outcome could be far worse, Bowsher told the few senators who showed up at the hearing. “It could easily go to $400 billion if more savings and loans fail and their asset base proves to be as bad as it has in many cases,” Bowsher said. “If there is a recession, it could be as high as $500 billion.”

Bowsher seemed to take a morbid sort of pleasure in the magnitude of the eventual cost to the economy, noting at one point that it “would be bigger than New York, bigger than Lockheed, bigger than all the bailouts we’ve had put together.” Warming up, he said: “It would be bigger than the Marshall Plan. It would be bigger than the defense budget.”

Moreover, even though the S&L; legislation contemplated that part of the bailout costs would be covered by higher deposit insurance premiums paid by the thrift industry and by the sale of assets held as collateral for soured loans, most of the added cost would be borne directly by taxpayers, Bowsher said. “The (thrift) industry is deteriorating badly. Most of these add-on numbers are going to be taxpayer money.”

But Bowsher said he could not estimate how much of the added cost would be incurred during the next few years. Fifty-billion dollars has already been authorized under the bailout legislation to cover the operations of the Resolution Trust Corp., the new government entity created to close down insolvent thrifts, sell their assets and pay their depositors.

He called on Treasury Secretary Nicholas F. Brady and Federal Deposit Insurance Corp. Chairman L. William Seidman, who is administering the bailout, to “develop proposals to provide the additional funds.” And he recommended that twice a year the Resolution Trust Corp. and the FDIC give Congress updated estimates of cash needs, costs and current income so the progress of the bailout can be steadily tracked.

Bowsher’s report made it clear, however, that about half of the estimated $68 billion in additional costs probably will be incurred during the next few years.

For instance, the cost of the rushed closure of failing thrifts arranged by the now-defunct Federal Savings and Loan Insurance Corp. in the closing weeks of 1988 would cost $68 billion instead of the $56 billion originally earmarked. The total, including the extra $12 billion, would have to be paid by 1999.

Similarly, the $50 billion set aside for Resolution Trust Corp. operations through 1992 would have to be augmented by $13 billion. And, because it is running up administrative expenses of $1.6 billion a year, the GAO estimates that the trust corporation, which is supposed to go out of business at the end of 1996, would cost an additional $10 billion by that date to pay for staff, lawyers and administrative support.

The remaining $33 billion of the overrun could presumably be spread out over a longer period. The biggest single added expense is $28 billion in extra interest paid on the working capital that the Resolution Trust Corp. borrows to liquidate the failed thrifts and buy up their assets. Many of those borrowings are long-term, and the interest payments would be stretched out over the nominal 33 years of the whole bailout.

The GAO tacked on another $5 billion to the interest cost of the $9.5 billion in off-budget Resolution Funding Corp. bonds that have been issued so far. The added interest results from the decision to stretch the redemption term on the bonds a decade beyond GAO’s original assumption, to 40 years.

The GAO report, although it had been expected to reflect substantially higher costs for the huge bailout, was nevertheless greeted with cries of anguish by Senate Finance Committee Chairman Donald W. Riegle Jr. (D-Mich.), Bob Graham (D-Fla.) and Larry Pressler (R-S.D.), the only committee members present.

Riegle expressed great interest in Bowsher’s observation that Seidman, in previous public testimony, had noted that “60% of Resolution Trust Corp.-controlled institutions have been victimized by serious criminal activity” and that about 1,200 criminal referrals have already been passed on to the Justice Department for prosecution.

Riegle wanted to know if any additional criminal activity could be traced to the rush of “year-end deals” in 1988, but Assistant Comptroller General Richard L. Fogel, who accompanied Bowsher to the committee, said the audit of those activities had so far found none. Any criminal activity relating to the thrifts involved in those deals seems to have originated in the management of the thrifts themselves, not in the FSLIC stampede to close them.

Riegle said he would call on the Administration to come up with a funding plan for the whole program at a hearing he intends to call next month.

Graham declared Bowsher’s report a “devastating statement” that “should be a call to arms for all people involved, from the Administration to Congress to the industry.”

“We’ve pretty much spent the peace dividend here,” Pressler observed.

In reply to Pressler, Bowsher repeated the oft-stated observation that any further delay in liquidating failed thrifts now in receivership would drive up the costs still more. Over the last 14 months, regulators have seized 403 institutions but have disposed of only 52.

As an illustration of the point, Bowsher said his accountants estimated that, instead of the now-predicted $325 billion, the multiyear liquidation and bailout process would cost only $140 billion in “current value” if the entire expense of the operation could be carried in the 1991 budget. That would about double the deficit projected for the year.