No End in Sight

By John Greenwald

The dark portents came in rapid succession. First the Bush Administration angered friend and foe alike last week by admitting that it needs $100 billion much sooner than expected to continue its cleanup of the shattered savings and loan industry. Then tempers flared at a Senate probe of charges that the government turned over more than 200 failed thrifts to investors in 1988 in what amounted to sweetheart deals. Finally, the beleaguered Resolution Trust Corporation, which is managing the bailout, disclosed plans to dispose of 130 more thrifts and to sell $50 billion of seized assets by the end of the year in an effort to raise desperately needed cash.

The ominous signs that the bailout may be in trouble pushed public outrage over the S&L crisis to a new level of intensity. Demanded Congressman Toby Roth, a Wisconsin Democrat: "Is this a bottomless pit for taxpayers?" Said colleague Charles Schumer, a Democrat from New York: "By this point it was supposed to have been an issue for accountants and bureaucrats only. Yet it remains the country's No. 1 problem and the public's No. 1 cause for concern."

The cost of the S&L bailout seems to keep on rising uncontrollably. Since the President signed the cleanup law amid loud fanfare exactly one year ago, the price tag has grown from a White House projection of $166 billion over 10 years to what some experts now fear could be a $1 trillion bill spread over 30 years as the government shuts down nearly half the entire thrift industry. The White House's own current forecast projects a cleanup cost of at least $500 billion over the next 40 years. That includes $160 billion to be used mainly to pay insured depositors at shuttered thrifts plus some $340 billion of interest on the government bonds that will finance the bailout.

In fact, the law that set the rescue in motion last year was so deeply flawed that it may have worsened some of the industry's woes. For example, regulators imposed strict new lending standards on thrifts and commercial banks; the restrictions helped cause a credit crunch earlier this year. Ironically, many thrifts may go belly-up because of the tough new regulation. The standards require thrifts to have more capital on their books than even some profitable S&Ls had previously carried. As a result, even some well- managed institutions such as Chicago's 68-year-old Talman Home Federal Savings and Loan (assets: $5.7 billion), which expects to earn $20 million this year, may have to close their doors or be acquired. Says Theodore Roberts, chairman of Talman, which is the largest thrift in Illinois: "Our market values have been declining because of the turmoil that's been created in the S&L industry, and now we're told to go out and raise more capital. You've caught the dolphin in the tuna net here."

At the same time, the bailout failed to overhaul deposit-insurance policies that require U.S. taxpayers to pay virtually the full cost of a bank or S&L collapse. The Administration acknowledged the problem two weeks ago by indicating that it may propose limiting the $100,000 insurance coverage on bank and S&L deposits to just one account per person.

The worst fear is that U.S. banks could be the next disaster. In congressional testimony last week, L. William Seidman, who chairs both the RTC and the Federal Deposit Insurance Corp., said the $13 billion FDIC fund that guarantees bank deposits was under "very substantial stress" because of bank failures and would probably show a loss for the third straight year. So far, 112 banks have closed their doors in 1990. That is comparable to the rate last year, when some 200 banks were shut.

The problems of many large banks suffering from sour real estate loans are closely linked to the S&L mess. Seidman noted that the thrift crisis "has clearly had an effect on real estate markets" by lowering property values and making mortgage loans harder to get. "Real estate markets," he added, "have an effect on bank results. So there is a relationship between the two. And the effect has not been good." Nonetheless, bank depositors "shouldn't withdraw their money and hide it in mattresses," says Eli Schwartz, a Lehigh University economist. "We may be having a banking crisis, but it's not going to be of the same magnitude as the S&L crisis."

Yet a broad economic downturn could inflict heavy damage on both banks and S&Ls. The threat of a such a slump was aggravated last week, when oil prices rose more than 10% in response to Iraq's invasion of Kuwait. Ironically, rising crude prices would reinvigorate the economies of oil-patch states where thrifts have been hit hardest, but the effect would probably be too little, too late to reduce the cost of the bailout by much.

The thrift crisis could become the heaviest domestic burden of Bush's presidency. In a TIME/CNN poll conducted July 24 to July 25 by Yankelovich Clancy Shulman, 49% of the adults in the survey said Bush was doing a bad job of handling the crisis, vs. 33% who gave him good marks. When asked which party they blamed most for the thrift mess, 36% said the Republicans, while 18% said the Democrats were mostly at fault. Only 12% said they have a lot of confidence in the government to correct the S&L mess. Another 59% indicated they were losing confidence in their local S&Ls.

The bailout's woes were glaringly evident last week, when the Administration notified Congress that $100 billion will be needed by October to keep the program from running out of cash. The news angered Administration critics who were stunned by the size of the request. The $100 billion installment includes $60 billion in bonds the RTC plans to repay from the sale of assets of seized thrifts. The remaining $40 billion will become part of the bailout's long-term cost.

Under attack for liquidating its holdings too slowly, which increases the need for cash infusions, the RTC has begun to speed up the pace. Last week Seidman announced the details of a "fall inventory-reduction sale," in which the agency will unload shuttered thrifts and seized assets by the end of the year. Up for grabs will be everything from junk bonds to golf courses to shopping malls. The $50 billion asset sell-off will refuel the bailout process, but it will take its toll on the U.S. by depressing, to some extent, an already weak real estate market in many parts of the country. And taxpayers will be stuck for any losses on properties sold for less than the frequently overstated book values that Washington inherits when it shuts insolvent S&Ls.

In Congress, lawmakers adopted a get-tough posture, hastily passing several S&L measures last week before returning home for the summer recess. The House voted 424 to 4 for a bill that would mandate life sentences for persons convicted of major S&L swindles. The measure was similar to one overwhelmingly approved by the Senate last month. But while such penalties might deter future S&L looters, neither measure would retroactively apply to the fast-buck operators who are responsible for billions of dollars of S&L losses that taxpayers will have to meet. Government officials estimate that incidents of fraud played a role in about 50% of the S&L failures, yet very little of the purloined money is expected to be recovered.

The shame of the thrift crisis hung especially heavy over the Senate, where big donations from S&L operators had encouraged lawmakers to deal leniently ^ with the thrifts in the 1980s. In response, the Senate last week approved the most sweeping reform of campaign financing since the Watergate era. By a 59- to-40 vote, Democrats pushed through a measure that would limit campaign spending and bar Senate members from accepting outside speaking fees and other honorariums from special interests like S&Ls. But the reforms, which were similar to those later passed by the House, will probably face a presidential veto because Republicans fear that limits on campaign spending will make it harder to challenge the Democrats' control of Congress.

A particular point of political acrimony is the bailout of Texas thrifts in 1988, when regulators handed out lucrative packages in their hurry to put ailing thrifts in the hands of healthy investors. A panel of the Senate Judiciary Committee burrowed deeper in its probe of a 1988 deal that permitted businessman James Fail to acquire 15 insolvent Texas S&Ls for $1,000 in cash and $70 million of borrowed funds. Critics have charged that the deal, in which the government has pledged to put up $1.85 billion to protect depositors, was far too generous to Fail. In testimony last week, George Barclay, former president of the Federal Home Loan Bank Board of Dallas, acknowledged he would not have recommended approval of the transaction had he known that Fail's company had pleaded guilty to fraud in the mid-1970s.

The rancor over the thrift mess last week extended all the way to a meeting of U.S. Governors in Mobile. Partisan bickering broke out after the Republican National Committee placed an ad in a local newspaper calling Democrats "the guys who let the S&L problem explode" into a crisis. Declared Massachusetts Governor Michael Dukakis: "I hope this is the last time we see this kind of garbage. We had enough of it in 1988."

When George Bush unveiled the S&L cleanup last year, he promised it would end the thrift crisis. But while the bailout has protected depositors at hundreds of failed thrifts, it has also hobbled surviving institutions, hurt real estate values, infuriated taxpayers and stirred doubts that the government can really bring the S&L mess under control. That record raises a tough question for the White House and Congress on the first anniversary of the rescue program: If the bailout cannot cure the current crisis, how can it prevent the next one from taking place?

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CREDIT: TIME Chart by Joe Lertola.

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With reporting by Hays Gorey and Richard Hornik/Washington