Ailing Savings and Loan Industry
Get ready for the bankers and politicians to push for the biggest taxpayer bailout in American history next year.
Reagan’s nominal bank regulators are telling Congress that there are 515 insolvent savings and loans associations and another 300 to 500 nearly insolvent thrift institutions in these United States. Their doors are still open for business and federal law insures the savings up to $100,000 per customer.
So someone has to give. Either these savings banks close down and the savers lose their money. Or the federal government finds a way to refill its deficit-ridden Federal Savings and Loan Insurance Corporation (FSLIC) to a level estimated to be from $40 to $70 billion.
Letting savers lose their savings would be a breach of federal deposit insurance guarantees — up to $100,000 per depositor — and could trigger a massive panic flowing into commercial banking circles. So the real question is where is the federal government going to get the money?
One approach would be to sharply increase the assessments imposed on the healthy savings and loans to build up the insurance fund. Already complaining under the load, the solid savings and loans, which number about 2000, can reply that their entire capital is less than the cost of “resolving” their more reckless brethren.
Another approach is to float more government bonds or go for a direct tax increase from Congress. Already, in 1987, Congress passed a $10 billion government bonding authority to allow FSLIC to shut down insolvent thrifts. How much more will the public tolerate adding to the federal deficit and taking money away from other necessary federal programs to pay for the mismanagement, speculation and fraud infecting these banks.
The Federal Home Loan Bank Board — the agency whose staggering ineptitude gave a signal that almost anything goes — estimates that 75 percent of the insolvent thrifts involved fraud and criminal conduct as contributing factors.
There is one other way out. Congress could merge FSLIC with the Federal Deposit Insurance Corporation (FDIC) which insures deposits of commercial banks and then assess these much larger capitalized banks to pay for the resolution costs.
Commercial banks posted near record earnings of $5 billion last year. For decades they have been benefiting from a wide array of government-induced subsidies, including a large taxpayer bailout for their foreign loans that passed Congress in the early eighties disguised as a capital infusion to the International Monetary Fund.
Furthermore, the commercial banking industry wants Congress to give it expanding powers to go into securities underwriting, insurance and other traditionally prohibited activity. Presently, Congress is considering amending the Glass-Steagall law to do just that. So there are grounds for Congress to engage in some horsetrading.
However, if solutions should have some relation to reducing the conditions that led to the problems in the first place, more rigorous policies are needed. The red ink from the insolvent thrifts is increasing at a rate of $30 million per day, according to Cong. Chuck Schumer of the House Banking Committee.
Urgent, more comprehensive action is needed. The deregulatory policies of the Reagan years, which were a major factor in permitting speculative real estate equity investments, are still largely in place. The laxness of the Federal Home Loan Bank Board, dominated by the savings and loan industry, remains invincible. Criminal prosecutions against looting bank executives, while on the increase, are minuscule compared to the size of this corporate crime wave. And stronger civil and criminal laws are needed to reach all the assets of those culpable executives.
In my opinion, making the taxpayers pay for this swelling scandal does not signal either prudence or discipline to future financial wrongdoers who think big. Both George Bush and Michael Dukakis need to be asked to take a specific stand against this stripe of corporate socialism.
The most deterrent-prone solution is to increase the assessments on the solvent savings and loans — encouraging more early vigilance on their part toward their wayward colleagues — and merge the two federal deposit insurance funds to have the commercial banks contribute toward averting a major instability in the nation’s financial systems.
You have a double stake in this looming thunder cloud — as a saver and as a taxpayer, if, that is, you have somehow managed to be both.