Panel Says Regulators Ignored Bailout Advice

Top federal regulators ignored early warnings that the savings and loan industry cleanup could cost hundreds of billions of dollars, congressional investigators said Tuesday.

A 1988 investigation by Dallas-based regulators warned that the bailout eventually could cost hundreds of billions, while senior regulators in Washington were estimating that it would cost just $15 billion.

The report, just made public, indicates that “much more was known by the top regulators in Washington than was previously acknowledged about the extent of the thrift problems,” said Rep. Charles Schumer (D-N.Y.), chairman of a congressional task force on urgent fiscal issues.

The report was available to top regulators two years ago, Schumer said. They ignored it, he contended.

“It’s as if an army general discovered a ticking nuclear bomb under his compound, simply walked away and said, ‘We’ll worry about it later,’ ” Schumer said.

“There is compelling evidence that at least one top regulator was deliberately low-balling the estimate of the thrift bailout cost,” he added.

Industry experts now say the cost of the thrift cleanup could reach $500 billion, including interest.

Schumer also said the investigation found favoritism toward industry executives by directors of the Dallas Federal Home Loan Bank, who often regulated the same thrifts at which they were themselves executives. The home loan bank system had responsibility for savings and loans before the system was restructured under the 1989 thrift bailout bill.

There also was a cover-up of billions of dollars in losses, and company officials were paid multimillion-dollar bonuses “while the thrifts they controlled teetered near insolvency,” Schumer said.

“The severity of these findings should have sent shock waves through Texas, the rest of the Federal Home Loan Bank system, the Administration, Congress and the American people,” he said.

But the study was left “on the dusty shelves of the top federal overseers in Washington,” Schumer said.

The five officers from the Federal Home Loan Bank of Cincinnati who carried out the 1988 investigation described the attitude of Dallas regulators as “lackadaisical.”

“After a few days, we developed what we called the Texas stare, we were so flabbergasted by what we saw--the files in the bank were in disarray,” said Gerald Summers, senior supervisory agent at the Cincinnati Federal Home Loan Bank.

“It was pretty obvious the Dallas bank had a philosophy to under-report (thrift) losses,” he said.