June 18, 1993
"It's Time to Throw $35 Billion on Them - Congress Fiddles, S&Ls Smolder"
San Jose Mercury News
By Timothy Taylor
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THE MAIN agency responsible for cleaning up insolvent savings and loans institutions, the Resolution Trust Corporation, has been on hold since April 1992, waiting for Congress to appropriate about $35 billion to finish the job. The delay is now 15 months. It's as if firefighters damped the worst of the flames, and while the embers continued to burn, were told to sit around and evaluate their performance for a few days before finishing up.

The problem is that politicians have become confused, in the case of savings and loans, between fighting the fire and taking responsibility for causing the blaze. They seem to fear that if they vote money to clean up bankrupt savings and loans, the public will blame them for causing the problem.

From the start of the S&L debacle, denial has been a problem. People wanted to believe that Charles Keating and others of his ilk had a couple of hundred billion stashed in a bank account somewhere, and tough prosecution would get that money back.

But the primary problem of savings and loans was never fraud, but rather that the value of the loans they had made -- the assets of a depository institution -- fell so sharply. There were loans to finance commercial office buildings that ended up empty; loans to small businesses that went broke; oil wells that didn't make economic sense after oil prices dropped in the mid- 1980s; homes that dropped in value.

Probably most of all, S&Ls suffered from the high inflation and interest rates of the late 1970s and early 1980s. They had made enormous numbers of home loans at low, fixed interest rates up through the early '70s, but holding a mortgage that pays 6 percent isn't worth much when investors can collect 15 percent from a money-market fund, as they could in the early 1980s.

Although so many loans turned out badly, making risky decisions that sometimes lead to bankruptcy is not illegal. On the contrary, it's a working definition of what capitalism is all about.

As a result of the drop in their loan values, the amount owed by S&Ls to depositors far exceeded the value of their assets. The government had promised to insure all deposits up to $100,000, but the Federal Savings and Loan Insurance Corporation (FSLIC) hadn't collected nearly enough in premiums from the S&Ls. By promise of Congress, taxpayers were on the hook for the balance. From the start, the S&L "bailout" had nothing to do with assisting the owners or shareholders of bankrupt institutions. The only choice was whether to pay off depositors with tax money, or have the government break its promise that deposits are insured up to $100,000.

Since its inception in August 1989, the Resolution Trust Corporation has the thankless task of selling off what remains of bankrupt S&Ls, using that money to pay off part of what is owed to depositors, and then sending along the rest from the federal government. Since then, it has closed 654 S&Ls, about one-quarter of the entire industry, and protected nearly 22 million deposit accounts.

Like every monumental effort, this one could probably be accomplished more efficiently if it was to happen a second time. But on the whole, the RTC has performed a Herculean task fairly well.

The total cost of protecting S&L depositors, from 1980 through 1998, looks like it will reach $180 billion, according to an April 1993 study from the Congressional Budget Office. The far higher estimates one sometimes sees -- figures approaching $500 billion -- are misleading, because they include interest payments over the next few decades. But if you use a credit card to buy a new sofa for $800, the price of the sofa remains $800, regardless of the interest rate or the time taken to pay off the credit card.

The RTC currently has 85 more S&Ls to close, at a cost of perhaps $35 billion. The Senate approved spending this amount in mid-May, but nothing further appears likely to happen in Congress for a month or two. Meanwhile, according to CBO: "The lack of funding since April 1992 has almost stopped the cleanup."

This delay might be comic, if it weren't so ironic. Cleaning up the S&L mess would probably have cost less than half as much if Congress had acted quickly in the mid-1980s, when the problems became apparent. The delay since April 1992 has already added a few billion dollars to the ultimate cost. Congress still hasn't come to grips with what went wrong with the government insurance, or how to regulate future risky practices in the remaining S&Ls, or in banks and pension funds.

But after years of fuddling about, some members of Congress still apparently cling to the belief that if they just refuse to appropriate money to pay off depositors at insolvent S&Ls, then no one will blame them for anything.

Apportioning responsibility for the collapse of the savings and loan industry will (and should) continue for years. But now, it's time for Congress to appropriate the last $35 billion or so, and ring down the curtain on this act of the drama.

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