For S&L; Industry, Bailout Bill May Be a Fatal Blow : NEWS ANALYSIS


The federal thrift bailout law signed by President Bush a year ago this week was supposed to bring stability to the nation’s financial system and eventually solve the savings and loan debacle. Instead, it helped cause a financial earthquake that many believe will ultimately end the savings and loan business as we know it.

In many ways the law has made things worse. It was woefully under-funded, thus extending the lives of some of the nation’s sickest thrifts because there was no money to sell or close them. It set up a cumbersome bureaucracy to mop up the mess. And its stricter operating rules have forced some marginal thrifts to fail while making it tougher for some stronger institutions to compete against banks.

Meanwhile, the industry is shrinking by the week. Of the 2,500 thrifts still in private hands, one in four is losing money. Only half are considered both strong and profitable. Hundreds more are headed for the government’s S&L; graveyard.

The body count of failed thrifts is rising unabated. The government took over 200 savings and loans nationwide in the last year, more than exist in the entire state of California.


About 310 are hopelessly insolvent; 311 others are classified as “troubled,” which these days is synonymous with failure. Add to the bleak scenario an ominous real estate recession spreading nationwide that threatens to bring down even more.

“The industry is a dinosaur. The only real question is when, not if, it is going to be folded into the banking industry,” said Robert Litan of the Brookings Institution, who follows bank and thrift issues.

Despite all the problems, the Financial Institutions Reform, Recovery and Enforcement Act has done some good. To its credit the act, signed Aug. 9, 1989, brought badly needed discipline to a wayward business. And many believe that the shakeout will ultimately benefit the American financial system by reducing the glut of financial institutions.

In the past, savings and loans traditionally took in deposits, then used the money to finance low-risk home loans rather than the business loans that were the specialty of banks.


That changed when rules were loosened in 1982. Many savings and loans gambled and lost deposits on risky deals involving office buildings, shopping centers and securities. Because the government guarantees that most depositors won’t lose their money, taxpayers are now stuck with a tab that some estimate will rise to $500 billion over the next 30 years.

To bring discipline to the business, the year-old legislation forced savings and loan owners to pony up more of their own money. That should result in stronger financial safety nets to protect against future losses and discourage reckless investing. The legislation also forced savings and loans to reverse what had been unrestrained growth, as well as to shed speculative real estate and securities investments bought with taxpayer-insured deposits.

But it was clearly a flawed piece of legislation. Funding was so poorly designed that just last week the government disclosed that it needs an additional $100 billion in short-term funds to finance operations over the next year. That is almost twice the size of California’s annual state budget.

The Resolution Trust Corporation, a federal agency with a Rube Goldberg-like organizational design, was started from scratch to sell failed savings and loans and their money-draining office buildings, shopping centers, loans and securities. It is finally moving after one year. In the next five months, the agency plans to sell $50 billion in assets, the equivalent in size to Wells Fargo Bank.


Cleaning up the rubble left behind by sick thrifts is critical to restoring the nation’s financial systems. But many are concerned that the federal agency is taking too long because of a lack of funds and its cumbersome bureaucracy.

“We are alarmed because the “TC just isn’t working the way it should work, and the “TC is the linchpin of this law,” said Frederick L. Webber, president of the U.”. League of Savings Institutions, thrifts’ major trade group.

But L. William Seidman, chairman of the Resolution Trust Corporation and the government’s point man in cleaning up the mess, defends the agency. He compares the agency to a long train that is finally picking up steam.

“It is just a year old. We think it is rather amazing when you look at how much it has done,” Seidman said.


Complicating the cleanup is a real estate recession that has hit many parts of the country, causing the costs of the bailout to soar. In a small session with reporters last week, Deputy Treasury Secretary John Robson called it a “double whammy” for the Administration’s bailout efforts. Troubled institutions that were big real estate lenders or developers are losing more money, he said, while it is harder for the government to sell the bad assets in its growing inventory.

For thrifts operating under the new rules, the higher standards, combined with a slowing economy, have often been merciless in claiming victims. Some of the nation’s best-known savings and loans have failed or are insolvent.

Mercury Savings in Huntington Beach was seized this year. It was headed by Leonard Shane, the former head of the thrift industry’s main trade group and once one of its most respected and visible boosters of traditional thrift practices.

Columbia Savings & Loan in Beverly Hills is insolvent. For years it was one of the strongest savings and loans in the nation despite being a high-risk operation with risky investments. And Franklin Savings in Kansas, a savings and loan whose innovative investment strategies drew widespread praise on Wall Street, was seized.


One irony is that a handful of giant savings and loans--notably three in California, Home Savings of America, Great Western Bank and World Savings & Loan--are enjoying some of their strongest profits. One reason is because some of their sickest competitors have failed, or other rivals are busy trying to strengthen themselves financially.

“For the surviving solvent thrifts, FIRREA was a boon. It knocked out of the marketplace the capricious competitors,” said Rep. Jim Leach (R-Iowa), a member of the House Banking Committee.

But for many savings and loans, it has been a nightmare. They add that it has been made worse by overzealous regulators sensitive to past criticism that they were too lax.

Last Tuesday, Pan American Savings, a Latino-owned thrift in San Francisco, published an open letter to Bush in a New York Times advertisement claiming that it “is in danger of being crushed by the weight of rules intended for giant speculators.”


Pan American contended that it has been profitable since the early 1980s, shunning speculative investments. But it is having trouble meeting the financial cushion the legislation requires thrifts to maintain.

Regulators counter that they are flexible and willing to work with institutions with good management that draw up a sound business plan. And they reject the argument that they are now overly tough.

“In the case of thrifts, regulators were loose. I think they are moving to standards they always should have had, which makes them look tough,” Seidman said.

Some believe that the higher standards could have been phased in more slowly. That would give some of the borderline institutions more time to comply, possibly saving taxpayers from bailing them out.


“I think it was too aggressive. It is unexpectedly increasing the costs,” said M. Danny Wall, the nation’s chief thrift regulator until he resigned under pressure earlier this year.

The legislation also failed to accomplish some of its goals as intended. The legislation, for example, is forcing thrifts to sell their high-risk, high-yield junk bonds within five years. Junk bonds are issued by corporations with low credit ratings that pay investors a high rate of interest to compensate for their risk.

Now the government or insolvent thrifts own most of the junk bonds that savings and loans previously held. Some critics believe the legislation contributed to the mess by helping depress junk-bond prices, which in turn forced some savings and loans to recognize big losses.

To many experts, the S&L; legislation is helping bring closer a day of reckoning when thrifts will no longer exist as we know them and the survivors become commercial banks specializing in making home loans.


Thrifts historically were the dominant home lenders. But their share of the market has slipped, while the share held by banks has risen. Recent figures from the Department of Housing and Urban Development show that banks and thrifts each make about a little more than one out of three home loans nationwide, with the rest funded by mortgage banking and insurance firms.

If the savings and loan industry wants to maintain a separate identity, it isn’t trying very hard. Eight of the 10 largest S&Ls; in California don’t even carry the words “savings and loan” on signs or branches. That’s because they call themselves banks, largely to improve their public image.

Another reason healthy thrifts find being an S&L; a burden is that, under the legislation, they pay much higher premiums than banks for federal deposit insurance.

Tired of the problems, some thrifts are breaking rank.


Westside Savings in Westwood converted from a thrift to a bank, partly out of frustration at trying to raise $2 million by selling stock. That means that, as Westside Bank of Southern California, it follows a different set of rules that, among other things, allow it to make commercial loans and report to different regulators.

“We were told by everybody we talked to that because we were a savings and loan there was no investor appetite for our stock. But if we were a bank they would look more kindly on us,” said Westside Chief Executive Joseph Borda.

But a few are still not writing off the thrift business yet. They argue that home ownership will always be a top policy priority, and that Washington will always try to preserve a source of finance that thrifts offer.

“I don’t believe it will disappear,” said Richard H. Deihl, chief executive of Los Angeles-based H.F. Ahmanson & Co., parent of Home Savings of America. But, he adds, “I’m in the minority.”


Staff writer Ronald J. Ostrow in Washington contributed to this story.


Some of the major rules savings and loans must operate under as a result of last year’s Financial Institutions Reform, Recovery and Enforcement Act, or FIRREA.



Goal: Forces thrifts to boost capital, or their financial cushion, to protect against losses, in phases through 1994; ties one measurement of capital to the riskiness of their loans and other assets. Idea is to protect against losses and bring discipline to the industry by forcing thrift owners to invest more of their own money, thereby discouraging them from taking big investment risks with taxpayer-insured deposits.

Criticism: Main criticism is it is being phased in too quickly, forcing some thrifts that might survive to fail. A smaller group of critics believe the rules are still too lax by historical standards and should be toughened further.

Junk Bonds

Goal: Forces savings and loans to sell their junk bonds by 1994 so they will rid themselves of a high-risk investment.


Criticism: Forcing thrifts to sell the bonds may have played a major role in the recent plunge in junk-bond values. Thrifts also recognized big losses they might not have had otherwise. Resulted in the government or insolvent thrifts holding most of the junk bonds that savings and loans owned.

Loans to One Borrower

Goal: Limits the amount a thrift can lend to a single borrower to 15% of its capital. Provision is designed so that savings and loans will not become too tied to the fortunes of a single borrower.

Criticism: Hurts smaller thrifts because the amounts are too small. The former Westside Savings in Westwood, for example, was limited to providing $1.2 million to a single borrower, not enough to finance many homes and construction projects on the Westside. The thrift has converted to a bank.


Qualified Thrift Lender Test

Goal: Will increase the amount of assets that thrifts must have in mortgage-related areas to guarantee that they use their money for home loans.

Criticism: The rule is chasing away potential investors in thrifts who may not feel they can earn enough money making so many home loans. Critics also contend that the rule is forcing some to buy securities backed by home loans, which may be risky.

Insurance Premiums


Goal: Help rebuild the nation’s depleted deposit insurance fund through stiff assessments on thrifts.

Criticism: Savings and loans pay much higher rates than banks, penalizing healthy, well-run thrifts.