S&L; Regulators Use High Rates as Bailout Lure
Federal regulators who are managing nearly 200 insolvent savings and loan associations are offering extra high interest rates to lure wealthy depositors--apparently in violation of their own policies.
The regulators began the practice, which threatens to add billions of dollars to the cost of the government’s bailout of the S&L; industry, without telling Congress, which must pay for the failures, The Times has learned.
Agency officials estimate that more than $8-billion worth of such high-rate deposits have flooded into the thrifts taken over by the government since regulators began to offer the higher rates--increasing the costs of operating those S&Ls.;
Officials at the Resolution Trust Corporation, the federal agency that oversees the bailout operation, admit that they have been pursuing so-called “hot money” from large investors in an effort to stave off the collapse of some of the S&Ls; now being run by the RTC.
The interest rates being paid by these government-run S&Ls; are significantly higher than those currently being offered by healthy thrift institutions and banks.
In many cases, the rates at the government-run S&Ls; are nearly half a percentage-point above those offered by privately held institutions and have attracted brokerage firms and other affluent investors who scan the country looking for the most favorable rates.
The move has sparked complaints from the banking industry, which contends that it is facing unfair competition. And it is angering congressional leaders, who must try to sell other lawmakers on the need for another $80 billion to help pay for the S&L; bailout.
Told by The Times of the interest-rate practice, Rep. Bruce F. Vento (D-Minn.), chairman of the House S&L; task force, said that regulators have not informed lawmakers that they have decided to disregard their own written policies and said that his task force will investigate the issue.
“They are not doing what they told Congress they were going to do,” Vento complained.
RTC officials said that they started to offer above-market interest rates to large depositors because the government does not have enough money to shut down and liquidate every failed S&L; that it has seized.
The RTC’s Oversight Board, a high-level panel that helps set RTC policy, has quietly agreed to let the RTC pursue “hot money” to keep some S&Ls; alive so that the agency can concentrate the bulk of its funds on thrifts that must be closed immediately.
“This allows us to take care of the problem gradually” since the government doesn’t have the money “to do it all in one fell swoop,” one senior RTC official said. “It’s a practical impossibility to liquidate everything all at once.”
But critics charged that federal officials are repeating the same mistakes made earlier by the original S&L; managers. And, they said, trying to keep sick institutions afloat with costly deposits will only worsen the crisis and increase costs of the taxpayer bailout.
“If the institutions failed when they were trying to attract ‘hot money,’ how the hell do these regulators think they are going to do any better?” Vento asked.
Bert Ely, a private consultant who specializes in the S&L; problem, warned that “instead of biting the bullet, they (the regulators) are prolonging the problem.”
Of the 623 savings and loans seized by the government by the last day of June, 193 were being kept open and managed by the government in what the RTC calls “conservatorships.”
RTC officials said that by mid-July, 179 of those S&Ls; were offering above-market interest rates and that those thrifts are becoming increasingly dependent on such costly deposits to survive.
The $8.1 billion in “hot money” that they have attracted now accounts for well over 10% of their total deposits of $69.5 billion.
Much of that money is flowing into the government-run thrifts in huge blocks of as much as $1 million and, despite the $100,000 limit on deposit insurance, is still being fully insured by the federal government.
Under banking laws, brokerage firms can package large amounts of money from groups of wealthy investors, buy jumbo certificates of deposit and get $100,000 worth of federal insurance for each individual participating in the investment.
When the RTC first began taking over failed thrifts in 1989 and 1990, it sought to avoid paying high interest rates at the institutions it operated. In fact, federal law gives the RTC the right to reduce the rates on CDs when it seizes a thrift, if those rates are above current market rates. Private buyers of seized thrifts also may unilaterally reduce CD rates after they acquire the institutions from the government.
Today, most private buyers of S&Ls; immediately reduce interest rates but the RTC does not. Officials said the agency is fearful that depositors will withdraw their money if they cut rates, making it more difficult to keep the doors of such thrifts open.
They also argue that while private buyers can make a “business decision” to cut rates, it is more difficult for bureaucrats to take such financial risks with government-held assets.
“The law gives us the power to break contracts on CDs but we’ve generally decided not to do so,” RTC spokesman Steve Katsanos said.
The RTC previously had told Congress that it was routinely honoring existing CD rates at thrifts that it was running. But the agency long has insisted in public that it would not attempt to lure new deposits by offering high rates.
In fact, the operating manual for managers of thrifts under government conservatorship states that “leading the market” by offering rates above those paid by competing local financial institutions is forbidden.
“It is one of the first things you see in the manual,” one senior RTC official said.
The RTC Oversight Board, chaired by Treasury Secretary Nicholas F. Brady, has admonished the agency publicly to avoid high interest rates, but has privately given its approval to the RTC’s new practice, Oversight Board President Peter Monroe acknowledged in an interview.
“The thrust of our effort has to be resolving (closing down or selling) thrifts,” Monroe said. “So, to operate conservatorships, we have got to pay above-market rates. If (government funds) were limitless, we wouldn’t have to.”
RTC spokesman Katsanos added: “Money started getting tighter, so we decided to use RTC funds only for resolutions (S&L; closings and payoffs) and to rely on the market to fund conservatorships.”
But, like the S&L; operators of the mid-1980s, who steered their industry toward disaster, the government has quickly gotten hooked on the high-rate deposits and is continuing to lead the market even as interest rates are dropping sharply. And, as they attempt to hold on to wealthy depositors, regulators are allowing them to roll their money over continually at premium rates.
Most of the high-rate money now on the books at the RTC-run thrifts is in the form of short-term, one- to three-month CDs issued since the government seized the institutions.
In March, interest rates offered by government-run thrifts for one- to three-month CDs averaged 6.4%, while comparable CDs at private thrifts averaged just 6.27%, according to statistics compiled by the Office of Thrift Supervision.
The RTC has also been giving an extra premium to very large depositors that is not available to normal customers at the government-run thrifts. As of July 17, three-month CDs in units of $100,000 offered by government-run thrifts were paying interest rates averaging 6.29%, while the same institutions were offering just 5.75% on smaller three-month certificates, according to statistics provided by the RTC.
