S&L; Bailout Agency Is Ripe for Fraud, GAO Tells Congress

The General Accounting Office warned on Monday that the Resolution Trust Corp., the federal agency overseeing the savings and loan bailout, is understaffed and too heavily dependent on lawyers and consultants, making it vulnerable to fraud and abuse.

In testimony at a Senate hearing, Comptroller General Charles Bowsher charged that more than a year after the establishment of the RTC, the agency’s skeleton staff relies too much on outside contractors--mainly private lawyers, accountants and appraisers--to manage the $30 billion to $40 billion in assets that Washington has taken over from failed S&Ls.;

In an interview after his appearance, Bowsher said he believes that the Bush

Administration should expand the RTC’s staff substantially to avoid repeating the mistakes that were made in late 1988, when the government rapidly sold off a wide array of troubled S&Ls; without first accounting fully for their assets.

Because there is so little government oversight of those consultants, the RTC could easily become the victim of a new round of S&L; abuse, including inflated fees and other conflict-of-interest problems involving attorneys and accountants who are hired to handle legal and financial work at failed thrifts, Bowsher warned.

He also charged that the RTC still has not accounted fully for the assets it holds.

The testimony came as, separately, the federal Office of Thrift Supervision reported that losses in the S&L; industry moderated in the second quarter of 1990, suggesting some relief for what is left of the financially troubled industry.

Private-sector S&Ls--those; that have not been taken over by the government--posted a combined loss of $196 million for the three-month period, down from $374 million in the first quarter and $3.4 billion in the fourth quarter of 1989.

In his testimony before a governmental affairs subcommittee, Bowsher warned that unless the RTC’s staff is beefed up with additional specialists, the agency’s massive disposal of S&L; assets could turn into another debacle for the government, much like the recent Housing and Urban Development scandals.

“We lost a lot of money at HUD because we didn’t have enough talent in government for the proper oversight of outside contractors,” he said. “And when I saw the billions of dollars going into this program and so much of it going to private contractors, I was concerned.”

The RTC currently has 3,200 employees, and the Bush Administration plans to increase that staffing to a peak of 6,200, Bowsher said--a level that he insisted is meager by historical standards in Washington.

By contrast, Bowsher noted, the Reconstruction Finance Corp., set up by President Franklin D. Roosevelt during the New Deal to help industries whose companies had failed during the Depression, had as many as 12,000 staff members at its peak.

“The RTC doesn’t have enough staff in place,” Bowsher added. “They have to have some management systems in place. . . . They have to have people who know what the assets of these S&Ls; are . . . or this is going to be a very bad situation.”

Sen. David Pryor (D-Ark.), chairman of the subcommittee, charged that the RTC is already too lax in its supervision of outside consultants.

Pryor said lawyers are already profiteering at the RTC’s expense, charging $300 per hour in some cases. And he warned that inflated fees charged by consultants and private contractors could seriously reduce the amount of money the government will be able to take out of the S&Ls; that it sells to the public.

In response to Pryor’s charges, Lamar Kelly, director of the RTC’s asset management division, acknowledged that the agency has no way of knowing whether any conflicts of interest exist among the thousands of lawyers and other professionals hired to oversee the failed thrifts.

He said that the RTC now has 120,000 legal cases pending and that it has been forced to hire thousands of lawyers around the nation without cross-checking on their backgrounds to determine whether they have previously been involved in questionable S&L; transactions.

Pryor also complained that the RTC’s headquarters in Washington does not appear to have much control over the agency’s regional offices, where most of the agency’s day-to-day work is actually taking place.

That lack of communication is holding up the negotiations involved in some sales of S&Ls;, and is also making it easy for questionable entrepreneurs, who previously were involved in the S&L; scandal, to invest in the industry again.

“The carcass (of the thrift industry) is out there lying on the beach, and I don’t want to see someone else get to the meat that’s left before the public,” Pryor said.

Despite the improvement in the industry’s overall loss figures last quarter, Timothy Ryan, the OTS director, said continued softening in many of the nation’s real estate markets may make it difficult for the thrift industry to continue to reduce its quarterly losses through the remainder of the year.

He added that total assets held by the industry, including assets at thrifts now controlled by the government, declined by $20 billion from first-quarter levels. Deposits fell by $13 billion during the period.

Some $89 billion in deposits has flowed out of the nation’s thrifts over the last 12 months. Most of the outflows have come at institutions already acquired by the RTC, he added.

“It’s very difficult to predict that the industry will become profitable this year,” Ryan said.