It’s Time for Bush to Pay the Piper on the S&L; Bailout : Economy: With the costs of the thrift bailout spiraling, Bush should privatize the process--and stop lying to the public about it.
The ever-rising cost of bailing out the nation’s savings-and-loan industry is a brooding presence hovering over the Bush Administration.
George Bush’s legislative solution, the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), created just eight months ago, was to have solved the problem. But it is already clear that the crisis is getting worse. For months, Bush and his aides seemed engaged in a quixotic attempt to postpone recognition of the crisis until after the presidential election in 1992. Now there are rumors that meaningful changes may be made in the legislation.
Bush did not cause the S&L; crisis. But, for at least three reasons, it is becoming his problem. First, the crisis has escalated dramatically during his term. Second, his Administration has continually lied to the public about the size of the bailout. Third, Bush claimed FIRREA both as a major triumph and a reflection of his ability to shepherd meaningful legislative reform through Congress. With Bush so eager to take credit for his solution to the S&L; problem, he should also accept the blame for its failure.
The rate at which this crisis has increased in magnitude is staggering. In August, 1986, the General Accounting Office estimated that the now-defunct Federal Savings & Loan Insurance Corp. was insolvent to the tune of $6 billion. In February, 1988, M. Danny Wall, then Federal Home Loan Bank Board chairman, said that the “worst-case scenario” for a FSLIC bailout would cost taxpayers $16 billion. Then FIRREA, which was signed into law Aug. 9, 1989, provided $159 billion for the bailout.
In October, a bare two months later, L. William Seidman, chairman of the Federal Deposit Insurance Corp., said this wasn’t enough. On April 6, the GAO said the bailout would be a minimum of $325 billion. Seidman then insisted the bailout would be far more than that.
Any possibility that the early low estimates were honest mistakes was put to rest by Charles Bowsher, the comptroller general who has admitted the Bush Administration’s estimates were kept low for political reasons. Initially, the truth was suppressed so it would not interfere with Bush’s 1988 campaign. More recently, the magnitude of the crisis was underestimated so the government could appear to meet its legally mandated deficit-reduction targets.
Relatively minor tinkering could correct FIRREA’s defects. But major changes must be made in the regulatory philosophy of its administrators.
The Resolution Trust Corp. (RTC), the new federal agency created to deal with the problem of merging or liquidating insolvent thrifts, must be remodeled. This corporation is the cornerstone of the Bush bailout plan. The RTC bureaucracy has already developed a well-deserved reputation for incompetence. It has managed to dispose of only 52 of the 351 institutions under its control. The problem is sure to get worse unless changes are made: Ultimately more than 600 S&Ls; will have to be bailed out.
The classic bureaucratic tendency--to avoid responsibility and risk-taking--is evident at the RTC. Officials don’t want to be blamed for disposing of thrift assets too cheaply--so they are not aggressively seeking to dispose of assets. These officials are short-timers, expected to depart for the private sector or another government job. Their inclination seems to be to avoid controversy until they leave and a new group of officials marches through the revolving door. This bureaucratic proclivity toward delay and denial has increased the bailout costs.
Many insist that the investment bankers and real-estate developers interested in bidding on thrift assets are exploiting the bureaucratic mentality by playing a waiting game. The rationale is that the pressure to sell will become irresistible as real-estate markets continue to weaken and the government begins to drown in bad real estate. But there is no conspiracy. Potential buyers’ reluctance to bid reflects the indecisiveness in the RTC. After all, potential bidders must invest resources in deciding whether to bid and in valuing the real estate being offered. Right now bidders have little incentive to do this research since they don’t think the RTC is actually committed to selling.
For the bailout to work, the government must establish clear guidelines for disposing of the property it controls. Buyers must be given credible assurances that the RTC will sell its assets according to a known schedule.
The RTC is going to try to sell 140 thrifts in the next three to four months. This is almost three times the number of S&Ls; it managed to sell in the first eight months of its existence. It is unlikely to improve on its dismal record unless it establishes a viable auction process.
Another source of delay is contained in the statute itself. Under FIRREA, the RTC is prohibited from selling any of its real-property assets located in distressed areas for less than 95% of their market value; the act allows the RTC to designate those areas with distressed real-estate markets. This is silly--the price at which real estate can be sold to a willing buyer determines its market price. The appraisal process is cumbersome, inaccurate and highly politicized. It should be scrapped. If auctions are open, fair and competently administered, the auction price will be a far more reliable mechanism for establishing value than any sort of appraisal.
Federal law also decrees that the RTC and the FDIC must use the services of the private sector in property management and disposition--where such use is efficient. The most effective way to use the private sector would be to privatize all the RTC’s basic functions. Private firms, such as investment banks, should assume control of the assets now under the corporation’s control on a consignment basis. These firms would have strong market-based incentives to keep administrative costs down, act as quickly as possible and get the highest price.
The collapse of the junk-bond market and the decline of leveraged buyout transactions has put the investment banking industry in the doldrums. Privatizing the thrift bailout would channel the enormous financial sophistication and entrepreneurial skills of this industry into a useful social function and save the U.S taxpayer billions of dollars.
