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
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
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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