RTC Rebuked Over Handling of S&L; Cleanup
The General Accounting Office charged Monday that the federal agency handling the massive savings and loan cleanup cannot properly identify or track the billions of dollars worth of real estate up for sale and does a poor job of handling cash and overseeing contractors.
In a stinging critique, the GAO said it cannot verify the accuracy of the Resolution Trust Corp.’s financial reports or its estimates of the costs of disposing of the properties of hundreds of failed S&Ls.;
The criticisms were contained in a letter to Treasury Secretary Nicholas F. Brady from Comptroller General Charles A. Bowsher, who will testify today before the Senate Banking Committee.
The report drew prompt reaction on Capitol Hill, where Rep. Henry B. Gonzalez (D-Tex.), chairman of the House Banking Committee, said the GAO inquiry shows that the Resolution Trust Corp. “is an unguided missile headed for certain disaster.”
The RTC, with more than $100 billion in assets from defunct S&Ls;, is already the nation’s biggest holder of commercial real estate. And the economic recession, now in its 11th month, has only increased the pressure on the agency.
The downturn has made it harder for the RTC to dispose of its real estate holdings and has further weakened many S&Ls.; Several hundred more institutions are expected to fail; that will only add to the RTC’s portfolio of troubled properties.
Similiar problems are plaguing the banking industry, which also is burdened with big portfolios of poorly performing real estate loans.
The RTC said Monday that its sister agency, the Federal Deposit Insurance Corp., has adopted a “dimmer forecast” for bank failures this year and in 1992.
Previously, the FDIC--which insures bank deposits up to $100,000--indicated it expected to pay out $15 billion to cover the cost of bank failures in 1991 and 1992. On Monday, L. William Seidman, who heads both the RTC and the FDIC, issued a statement warning that the cost of the bank bailout instead could mount to $23 billion. That made official the pessimistic hints aired last month by a Seidman aide.
The culprit, again, is the recession, which is boosting the tally of fatally wounded banks. As many as 440 banks could close this year and next, Seidman noted, adopting a figure once reserved for describing an unlikely “pessimistic” scenario in a bad recession.
The discouraging reports about both banks and S&Ls; could generate serious problems for the Bush Administration, which is pushing an ambitious legislative agenda calling for new bank powers. Congress may be increasingly reluctant to expand bank activities while the number of bank failures is mounting.
On the S&L; side, the Admininstration also faces the difficult task in September of trying to persuade Congress to allocate billions of dollars more for the thrift clean-up.
In Monday’s letter to Brady, the GAO, the investigative arm of Congress, said that the Resolution Trust Corp. has been sloppy in handling the money already at its disposal. The RTC, it said, “has not yet provided us with the financial statements or the supporting information necessary to evaluate its estimated losses.”
The GAO cited glaring examples of financial weakness:
* The RTC awarded a contract to sell $7.4 million in real estate that had already been sold by the agency. Now the RTC could be liable for $144,000 in fees to the contractor, even though the properties have already been sold.
* The GAO could find no information about three of 17 financial accounts it checked in one RTC office and only inadequate information on two other accounts.
* When a contractor hired by the RTC submitted “miscellaneous operating expenses” of $120,000 a month, his bills were never questioned by the agency.
* Three RTC offices checked by the auditors “lacked adequate controls to ensure that duplicate payments were not made to vendors” and others doing business with the RTC.
Bowsher’s letter said that the RTC must improve its “controls over cash receipts, which is the most fundamental and important of RTC’s control systems.”
The RTC “has little control over market conditions,” the letter said. “However, it can gain better control over the accountability and management of its assets.”
The GAO criticism means the agency may be unable to certify the accuracy of the RTC’s financial statements for 1990. That would be the equivalent of a warning from a public accounting firm that a big corporation’s financial report could not be fully trusted and should be viewed with concern and skepticism by investors.
