Casualties of the Revolution

By John S. DeMott

It is the worst of times for many savings and loans

The U.S.'s 3,800 federally insured savings and loan associations and the 449 mutual savings banks last week received another dose of bad news. The Federal Home Loan Bank Board reported that the net worth of S and Ls fell by $636 million in November, to $28 billion. That brought losses for the first eleven months of 1981 to $4.3 billion, which was more than in any year since the Great Depression. The new year does not promise to be much better. Says James Christian, chief economist of the U.S. League of Savings Association: "This will be another period of losses and accelerated mergers."

The S and Ls and mutual savings banks, which have long been the backbone of America's housing industry, have been caught in a profit squeeze caused by lending long at low interest rates and borrowing short at much higher ones. Al. though they were often earning 9% or less on 20- or 30-year mortgages that were created years ago, the savings institutions were sometimes paying customers 16% or more for new two- or three-year deposits. Making matters worse was the fact that as interest rates have risen during the past two years, many investors have pulled their cash out of thrift institutions and poured it into money-market funds or other places where they could get a greater return. In most months of 1981, withdrawals exceeded deposits at S and Ls and mutual savings banks.

These problems have been too much for many thrifts. During 1981 a record 256 S and Ls and savings banks slid into mergers with other institutions. Last month, for example, the Harlem Savings Bank announced its union with the Central Savings Bank on the other side of Manhattan. The marriage had been arranged by federal banking authorities to save failing Central, which had a third-quarter operating loss of $8.3 million against a net worth of $17.7 million. To bring off the merger with Harlem, the Federal Deposit Insurance Corporation took over a package of Central's weak loans and assumed other responsibilities totaling $160 million.

A plunge in interest levels has long been seen as just what the thrifts needed. But now that rates are falling, many S and Ls are not much better off. The declines are too small, come too late, and will probably not last long enough to help institutions already seriously endangered. Says David Levine, an analyst with Sanford C. Bernstein & Co.: "Rates have not dropped far enough to save the industry."

The thrifts have not been helped much either by the new All Savers Certificates created by Congress last summer. The new savings instruments, which the industry had lobbied to have included in the Reagan Administration's tax-cut package, were supposed to lure money to the S and Ls by allowing couples to earn up to $2,000 in tax-free interest.

Sales of the certificates started out well last October, when the return was a strong 12.6%, or the taxable equivalent of about 20% interest. But their appeal has waned in recent months as interest rates eased. The yield last week was as low as 8.3%, and deposits in All Savers accounts have almost dried up.

The condition of thrifts is perhaps worst in New York City. Federal officials are now trying to find a merger mate for the venerable (founded 1819) New York Bank for Savings, which has assets of $3.6 billion. At least eight other New York institutions are also in trouble. Says Muriel Siebert, the state's superintendent of banking: "The problems are extremely serious. These are institutions that survived the Civil War and the Great Depression and never missed an interest payment. This is air unprecedented phenomenon."

Problems for S and Ls are serious elsewhere too. A list kept by the Home Loan Bank Board shows that 200 S and Ls could be close to reaching the point where their liabilities exceed their assets and wipe out their net worth. Hundreds more may be in that position within a year.

There are fears that any new surge in interest rates, which many economists predict will occur perhaps as early as the summer, could eliminate one-third of the U.S. thrift industry. That would strain the Government's capacity to engineer the rescue mergers needed to absorb insolvent S and Ls. Says an official at the Federal Reserve: "If rates start to turn up again, then 1982 will be the crunch year. A lot of existing thrifts simply won't make it."

The Government's bailout agencies, the FDIC and the Federal Savings and Loan Insurance Corporation, have so far been able to deal with failing thrifts by buying up their old loans or forcing weak S and Ls to join with stronger institutions.

In 1980 there were eleven such federally assisted mergers. Last year there were 26.

The agency, though, was unable to find a merger partner last summer for Economy Savings and Loan in Chicago, and that bank was forced to close. But its 8,054 depositors did not lose any money because their accounts were insured up to $100,000 by the Federal Government.

There is hope that the downward drift of interest levels may help get the thrifts through their current troubles. Yet it would still take two to three years of lower interest rates before a substantial part of the older fixed-term mortgages could be replaced by new higher-yielding loans. The stronger thrifts may also be helped by some of the banking deregulation legislation now pending in Congress. One measure would allow S and Ls to offer loans to corporations, just as banks do, and another would permit thrifts to make a broader range of loans to consumers.

But the weak thrift institutions have been fighting deregulation out of fear that they would be unable to compete against banks and the new so-called financial supermarkets such as Merrill Lynch and Sears, Roebuck & Co., which offer every service from money-market accounts to insurance. Savings and loan lobbyists in Washington, for example, have been waging a rear-guard action to stop the deregulation of interest rates. In October they blocked a plan to lift the level that they pay on passbook accounts from 5.5% to 6%. The thrifts argued that such a move would cost them $500 million annually and make their plight even worse.

Before the financial revolution now taking place is concluded, the face of American savings institutions will be changed dramatically. The historic distinctions between banks, brokerage houses and savings and loans will largely vanish. Stronger thrifts will survive and operate much like today's banks, but many weaker S and Ls will be forced to merge with bigger institutions or simply close their doors.

--By John S. DeMott. Reported by Patricia Delaney/Chicago and Bruce van Voorst/New York

With reporting by Patricia Delaney, BRUCE VAN VOORST

This file is automatically generated by a robot program, so viewer discretion is required.