THE TROUBLED THRIFT INDUSTRY : Plan to Aid Buyers of Weak S&Ls; Gets a Mixed Response
A controversial plan that would provide government financial aid to private buyers of several large, troubled California thrifts drew conflicting responses Wednesday from politicians, investors and financial experts.
Under the Office of Thrift Supervision’s proposal, the government would provide guarantees against losses by prospective purchasers of the sick thrifts. Shareholders, who would be wiped out if the institutions failed, would salvage some of their investment.
One supporter of the measure, Sen. Terry Sanford (D-N.C.), said that by pumping taxpayer funds into sick institutions early, the potential cost to the public would be kept to a minimum.
It “could save a great deal of money down the road and a great deal of trouble for our local economies,” he said in testimony before the Resolution Trust Corp. oversight board, which is likely to decide in the next two months whether to implement the OTS plan.
But Rep. Jim Leach (R-Iowa) denounced the plan as a “taxpayer-be-damned” proposal to help thrifts in California and Florida, two states “pivotal in presidential politics.” Several large, troubled thrifts in those two states are likely candidates for assistance.
The plan, devised by OTS Director Timothy Ryan, would mark a radical policy departure. In the past, S&L; shareholders lost all their investment when the government seized thrifts. Depositors, whose accounts are guaranteed up to $100,000, have been protected.
The Ryan proposal is being denounced as a bailout for a few selected institutions after the government seized more than 600 S&Ls; since February, 1989, without any compensation for their owners. It also recalls aspects of the controversial “Southwest plan,” in which regulators sold dozens of Texas thrifts to private investors on terms very favorable to the buyers.
Ryan said his plan would save the taxpayers money because “the vast majority of an institution’s assets would remain in the private sector, and we would avoid the time-consuming, costly and potentially disruptive effects of a government liquidation.”
Deputy Treasury Secretary John Robson, who presided over the opening of the hearing, said there has not yet been any firm evidence that the proposal would save money when compared to the costs of shutting down an insolvent thrift.
Ryan and other OTS officials have identified 10 struggling S&Ls;, including Glenfed and CalFed, that fail to meet strict federal capital requirements. Capital is a final cushion against losses.
The regulators say it is better to try to keep these S&Ls; alive and find buyers rather than waiting for them to collapse, throwing billions of dollars worth of real estate onto an already overburdened market.
Ryan’s proposal was also endorsed by Sen. Christopher Dodd (D-Conn.), a member of the Senate Banking Committee with Sanford. Financial aid to promote mergers “can save America some money,” Dodd said. “That’s the best reason to support it.”
Anthony Frank, the former postmaster general who is now representing major investors interested in big S&L; mergers, also supported the plan. “Billions of dollars will be saved” if the institutions can be sold as whole enterprises rather than being seized after insolvency and then dismantled, said Frank, who formerly ran a major thrift in California.
Frank said he is “on retainer to a large pool of capital which is investigating whether it should merge and capitalize two or more large California institutions.”
The potential buyers “are not interested” in picking up pieces of S&Ls;, whether branches or assets, after thrifts collapse into insolvency and are seized by the RTC, Frank said in an interview after his testimony. The Ryan plan would make it easier to put together a big merger deal in California, he said.
But other experts expressed doubts about the idea’s efficacy.
Promises of big savings for taxpayers by early financial aid for troubled thrifts “are an illusion,” said Lawrence White, a New York University professor and former member of the Federal Home Loan Bank Board, the agency that preceded the OTS. “Please, please do not go down that route,” he said. Steven A. Ludsin, a New York investment adviser, said financial aid granted to promote a merger “would possibly create an unfair benefit in the treatment of the surviving institution by regulators.”
The government’s involvement “could ward off the necessary review in determining the capital adequacy of the government-owned thrift,” he said.
