White House May Drop Bank Bailout Plan

The Bush Administration, facing mounting opposition in Congress and the Federal Reserve Board, is considering backing away from its own $70-billion plan to rescue the depleted fund that protects deposits in the nation’s banks, officials said Monday.

While continuing to defend the controversial proposal publicly, senior Administration officials now concede that the current plan has the potential to turn into a massive taxpayer bailout of the banking industry, much like the rescue effort for savings and loans.

The mounting criticism that the plan is receiving in Congress is prompting a growing split between the White House and the Treasury over the issue--and a new round of recriminations within the Administration.

White House officials, who asked not to be identified, said they now believe that the current plan to rescue the deposit fund has little chance of passage in Congress.

It was not immediately clear what the Administration might be considering as an alternative. The White House is beginning to develop possible substitutes for the current plan--though Treasury remains committed to keeping the present proposal intact.

Meanwhile, senior White House officials are seeking to distance themselves from the plan and the potential for blame that could come if the banking crisis worsens.

They now say that Treasury Secretary Nicholas F. Brady was warned before the rescue plan was announced that it would be viewed as a backdoor attempt to push through a government rescue for the banks but they say Brady went ahead with the plan anyway.

Top Treasury officials, however, deny that any warnings were issued to Brady and note that White House Chief of Staff John H. Sununu and Office of Management and Budget Director Richard G. Darman at first both supported the plan.

The rescue of the insurance fund, which protects bank deposits up to $100,000 per account, is one of the most pressing tasks that Washington faces this spring as it attempts to deal with the nation’s worst wave of bank failures since the Great Depression.

And the internal dispute over the issue could make it far more difficult for the Administration to win support in Congress for its broader banking agenda, especially its aggressive campaign to deregulate the industry and give it expanded business powers.

The Administration proposal to bolster the deposit fund calls for the Federal Deposit Insurance Corp. to receive up to $70 billion in new resources and includes an unprecedented provision that would allow the FDIC to borrow up to $25 billion from the Federal Reserve.

Officially, the Administration expects the banking industry--which traditionally has financed the deposit fund through the payment of premiums--to repay any money borrowed from the Fed.

But if the economy worsens and the banks cannot repay the money, taxpayers would pay the tab.

Even critics of the Administration’s plan agree that the depleted fund is in desperate need of some form of rescue. The fund has never before needed backing from taxpayer funds.

But after suffering massive losses because of a banking crisis that has led to more than 1,200 bank failures since 1985, the FDIC fund began 1991 with just over $8 billion, or about 42 cents for each $100 of insured deposits, well below the $1.50 officials say is needed.

FDIC Chairman L. William Seidman has warned that the fund could go broke within the next year unless Congress comes up with a new plan.

But critics say that the proposal to borrow from the Fed rather than the Treasury appears to be part of an effort to obscure the fact that taxpayer funds may be at risk in the Administration’s plan.

Now, top Fed officials--including chairman Alan Greenspan--are united in opposing the borrowing proposal, Fed sources said. They contend that the concept of giving the deposit fund a credit line at the Fed was inserted at the last minute with virtually no Fed input.

At a meeting in late March in Washington, the Fed’s 12 regional presidents and its board of governors agreed that the proposal should be rejected, fearing that it would set a dangerous precedent.

Fed officials are concerned that if the FDIC is allowed to borrow at the Fed, other agencies may seek to skirt political problems in Congress by turning to the Fed.

“It may be politically convenient to avoid the appearance that public funds will have to be tapped,” W. Lee Hoskins, president of the Federal Reserve Bank of Cleveland, said in a recent speech.

“But this will be costly because it will delay recognition of the problem and, as the thrift crisis taught us, allow the problem to worsen further, increasing future and final costs,” he said.

Some congressional leaders share that skepticism.

The plan to borrow from the Fed “continues this horrendous mooching process,” complained Rep. Henry B. Gonzalez (D-Tex.), chairman of the House Banking, Finance and Urban Affairs Committee.

“There is a lot of skepticism in Congress about the Bush Administration plan,” agreed one Senate staff member. “It resorts to funny accounting,” in an effort to avoid having to “hand the taxpayers a direct bill for the bailout today,” he added.

Yet top Treasury officials insist that they do not intend to back away from the current recapitalization proposal and expressed surprise that other Administration officials were prepared to give up.

They stressed that the Fed was chosen to provide the credit line for the deposit fund only because the central bank has regulatory authority over the banking industry and not as part of an effort to hide the possibility of a bailout.