While Politicians Fiddle Banking Crises Explode : FDIC: Politicians are now repeating with banks the mistakes they made for the failed thrift industry. But this bailout will be bigger.

Experts in Washington did not learn a thing from the savings-and-loan crisis. As costs of the S&L; bailout continue to rise, it is becoming increasingly clear that the Federal Deposit Insurance Corp. will soon go the way of the Federal Savings and Loan Insurance Corp.--belly up. FDIC Chairman William L. Seidman recently told Congress that the FDIC’s insurance reserve fund for commercial banks, which protects three times as much depositor money as the now-defunct thrift fund, is suffering from “considerable stress” due to problems in the commercial banking industry.

Of course it doesn’t take an accounting genius to figure out that when you have an insurance fund with reserves of only $13 billion guaranteeing $2 trillion in deposits, problems are going to arise when the economy goes sour. Indeed, problems at only one of a dozen or so of the nation’s biggest banks could render the FDIC insolvent.

Recent estimates put the cost to taxpayers of the S&L; bailout at a staggering $500 billion. Is it any wonder taxpayers are annoyed by the massive political posturing and minimal meaningful reform? Incredibly, politicians are responding to the FDIC’s troubles in exactly the same way they responded to the troubles in the S&L; industry. Nobody seems to care that new legislation, the regulatory “cure” for the disease afflicting S&Ls;, only made the patient worse. Congress is now preparing the same medicine for the banking industry.

The now familiar political drama has three acts. In the first, politicians and bureaucrats deny the severity of the crisis. In the second, pols make a half-hearted attempt to solve the crisis by applying a cosmetic palliative to the problem--always being careful not to ruffle the feathers of important special-interest groups. The finale, of course, is the big bailout.

For comic relief, the final act contains amusing scenes of Republicans and Democrats vainly trying to shift blame for the fiasco onto each other. The newest wrinkle is for politicians to attempt to appease irate constituents by giving back the massive contributions collected in recent years from the banking industry. But while the scoundrels in Washington can give back the money donated by S&L; crooks, they can’t undo the political favors these tainted contributions bought. And voters realize it was the political favors--and not the contributions themselves--that got us into this nightmare.

In retrospect, the taxpayers were sold out on the cheap. In the decade preceding the collapse of the thrifts, Congress collected a paltry $11 million from S&L; special interests. Even if every penny were returned, it would only pay for a fraction of the art collection of a single S&L; kingpin, CenTrust Chairman David L. Paul. It’s surprising that Congress didn’t ask for more in return for the truly prodigious benefits it was bestowing on the financial services industry.

The sellout continues. Congress is not only unwilling to return all the money it has received from S&L; interests, it is even unwilling to agree to stop taking money from S&L; and commercial banking special interests in the future.

To understand why the problems afflicting the banking industry are spiraling out of control, one need only look at what the political favors that S&L; and banking special interests have been getting in exchange for their contributions. These contributions bought--and continue to buy--banking executives life’s most precious commodity: time.

The scandal surrounding Charles H. Keating Jr.’s collapsed Lincoln Savings & Loan is a perfect example of the problem. “All” that Keating was asking of his elected officials was that they exert pressure on the Federal Home Loan Bank Board to give Lincoln more time to deal with its problems by refraining from closing the place down. The time Keating was able to buy from Congress is going to cost taxpayers almost $2 billion.

Federal insurance of bank deposits enables even the most insolvent financial institution to extend a corrupt Ponzi scheme by collecting federally insured money from depositors long after it is insolvent. As long as a bank or thrift can continue to attract and retain federally insured deposits, it can use this borrowed cash to stay in business. Of course, the longer it stays in business, the more it has to borrow. And the more the bank borrows, the more taxpayers will have to pay when the day of reckoning arrives.

The mess plaguing the banking industry will continue to spiral out of control until the politicians stop slinging mud at one another and find the courage to do something besides throw money at the problem. First, insolvent banks and thrifts need to be shut down immediately. The costly search to find merger partners is popular with politicians and bureaucrats trying to postpone making payouts from the FDIC insurance fund, but the long bureaucratic delays in closing these banks has allowed losses to increase exponentially.

Second, once a thrift or bank is closed, the FDIC and the Resolution Trust Corp. need to act faster to sell the assets in its control. Not only is the market value of these assets declining rapidly, but the cost to taxpayers of maintaining this huge financial empire is more than 20% of the value of the property. Politicians and bureaucrats agreed to move slowly in selling assets to avoid upsetting local real-estate developers. This delay will cost billions.

Finally, the structural flaws in the deposit insurance system must be corrected. As administered now, deposit insurance eliminates depositors’ concerns with the riskiness of the banks they invest in. Large depositors should face a meaningful risk of loss if the banks they put their money in should go bust. This risk will induce sophisticated depositors to monitor the investments made by their banks.

Ironically, Congress’ first response to news of the impending collapse of the deposit insurance fund was to increase the premiums charged to commercial banks for deposit insurance. Have these representatives forgotten that the first thing they did when the S&L; crisis hit was to increase the premiums that the now-defunct FSLIC charged thrifts for insurance? Higher premiums were a bad idea then; they are a bad idea now. Higher premiums signal those banks trying to operate safely that their prudence will not be rewarded. Safe banks should be offered lower premiums, not higher ones. Unsafe banks shouldn’t be offered higher premiums either. They should be kicked out of the deposit insurance system.

The banking crisis should be over by now. Instead it has only just begun. The Bush Administration promised it had taken care of the problem last year, when it passed new banking legislation. In retrospect, it seems clear that George Bush was simply buying time to delay the banking industry’s day of reckoning until after the 1992 elections. He miscalculated. The problem is spiraling out of control. The solution is for U.S. taxpayers to convince their elected representatives to get time back on their side.