The $70 Billion Sellout

By Janice Castro

Talk about adding insult to injury. As if the initial S&L scandal were not outrageous enough, the government reports that, thanks to sweetheart deals handed to federally subsidized fat cats, the bailout program will cost taxpayers tens of billions more than it might have.

The worst examples of government ineptitude concern 97 packages hurriedly thrown together in 1988 to shore up collapsing thrifts, many of them in the Southwest. Last week the Resolution Trust Corporation (RTC) reported its findings on how this first wave of bailouts was handled. Among its conclusions: the transactions were so poorly designed and generous that they allowed investors to reap billions that could have been saved had Congress and the Reagan-Bush Administration been willing to cough up more money up front.

In 1988 the Federal Savings and Loan Insurance Corporation was desperate. Losses at the federally insured thrifts whose deposits it guaranteed were running out of control. But neither Congress nor the Reagan-Bush White House was willing in the midst of an election to force an up-front resolution. Danny M. Wall, who oversaw the FSLIC, sought investors from outside the S&L business to pump new capital into the failures but by September had made just 35 deals.

Wall was facing a deadline. On Dec. 31, the enormously generous tax benefits that could attract new investors would expire. So he mounted a closeout sale, adding profit guarantees and other subsidies for all comers. The big-money boys came running. In just four months, his agency unloaded some 114 shattered thrifts -- 71 in December alone -- at a cost to taxpayers calculated at nearly $70 billion.

Among those who took advantage of the year-end sale were some of the savviest business minds in the country: former Treasury Secretary William Simon, former Commerce Secretary Peter Peterson, Revlon chairman Ronald Perelman and financier Robert Bass. Simon was assisted in his low-cost purchase of a $1 billion California thrift by Preston Martin, who served as vice chairman of the Federal Reserve Board from 1982 to 1986.

The RTC criticized federal officials who built in financial cushions so generous that they acted as counterincentives to swift resolutions of the thrifts' problems. While investors were able to apply their new tax write-offs to other businesses, for example, some of the deals did not require them to provide adequate capital to support the faltering institutions.

Still, the RTC found that as much as $4 billion can be pared from the cost of those transactions, mostly by prepaying notes and taking back bad assets. Trouble is, it will take $18 billion to $20 billion in operating cash to do it. And it may push 17 of the shakier institutions back into insolvency. As before, a political unwillingness to face the true magnitude of bailing out the thrifts, and put up the money for it, means that the costs will remain obscured -- and will probably continue to rise.

With reporting by Gisela Bolte/Washington and Richard Woodbury/Houston