Major Revisions Sought for Deposit Insurance : Banking: White House will push to end safety net for the rich. Ordinary small savers would still be protected.

The Bush Administration and powerful members of Congress will be pushing next year for a major overhaul of federal deposit insurance on savings. It is designed to continue to protect ordinary depositors while eliminating the financial safety net for the rich and for large institutions such as pension funds.

“We want to scale it back,” said an Administration official who is preparing the complex package of financial reform legislation. Deposit insurance should “serve its original goal, making it possible for small savers to sleep well at night,” he said in an interview.

The policy debate is just beginning, with Congress sure to offer its own variations on the plan that the Administration will announce early next year. But all the major players agree that insurance should be restored to the principles established during the Great Depression, when it was created to prevent panic among depositors, who previously had swarmed into troubled banks to withdraw their savings.

Administration policy-makers regard the current level of the insurance, which protects deposits in banks and savings and loan associations up to $100,000, as politically untouchable. But there is considerable discussion about various methods to prevent wealthy individuals or families from insuring large sums of money--for example, a family of four can cover well over $1 million at just one institution by using combinations of accounts among parents and children.

The average account in a thrift institution is $8,733.20 and may be slightly higher in banks, according to Rep. Henry B. Gonzalez (D-Tex.), chairman of the House Banking Committee. He believes individuals should be limited to the $100,000 umbrella on three insured holdings: a personal account, business account and an individual retirement account. Sen. Donald W. Riegle Jr. (D-Mich.) believes an individual should have no more than one account per savings institution.

The Administration hasn’t yet decided on the precise limitations it wants to impose on insurance for individual savers, but planners are agreed that the range of coverage should be restricted.

There is also agreement among Administration officials as well as Gonzalez and Riegle that professional money managers should not continue to operate under the same protections given to small savers.

They argue that a major factor in the collapse of hundreds of S&Ls; was the ability of inept or corrupt thrift executives to make dangerously risky investments, using billions of dollars in deposits protected by federal insurance. S&Ls; in financial trouble offered extraordinarily high interest rates, drawing in capital from all over the country.

“Pension funds hire very sophisticated managers, and I don’t think they need to avail themselves of insurance the way an individual investor does,” an Administration official said.

Under the current insurance system, coverage up to $100,000 is passed through to each member enrolled in a pension plan. Thus, it becomes possible for pension funds to have millions or even billions of dollars on deposit with banks, fully protected just as a $100,000 account is covered.

Pension managers should be able to find secure and diversified investments without relying on federal insurance, according to the Administration official. “That’s what they get paid for,” he said.

Pension funds and money market funds also are heavy buyers of bank investment contracts, accounts offering guaranteed rates of interest on large amounts of money. These accounts have insurance coverage.

“So-called ‘super accounts’ like bank investment contracts, pension fund deposits and others should not get the kind of free multimillion-dollar protection that exists today,” Gonzalez said in a letter to his colleagues. “These are funds placed by professionals, who ought to be able to evaluate risks for themselves and certainly shouldn’t be rewarded for placing huge sums in weak institutions,” he said.

Although Riegle wants the pass-through coverage for pension funds curtailed, he is concerned about maintaining protection for people enrolled in the pension plans.

“There are a lot of people who are fairly unsophisticated,” an aide to Riegle said. “We do not want to unduly alarm people.” The pension plan could invest in Treasury bills, a conservative and safe investment, instead of the huge bank investment contracts, he noted.

The restrictions on deposit insurance would be part of a major overhaul of the banking system, in which the Administration will also propose legislation to allow banks to move into the business of underwriting and marketing securities and insurance. The proposed changes would also allow banks to move without hindrance across state lines. The changes, if approved by Congress, would mark the biggest expansion of bank powers in 50 years.