home
***
CD-ROM
|
disk
|
FTP
|
other
***
search
/
TIME: Almanac of the 20th Century
/
TIME, Almanac of the 20th Century.ISO
/
1990
/
90
/
jul_sep
/
0813209.000
< prev
next >
Wrap
Text File
|
1994-02-27
|
12KB
|
260 lines
<text>
<title>
(Aug. 13, 1990) No End In Sight
</title>
<history>
TIME--The Weekly Newsmagazine--1990
Aug. 13, 1990 Iraq On The March
The American Economy
</history>
<link 04329>
<link 01656>
<link 08905>
<link 00043>
<link 00044>
<link -0001>
<link -0001>
<article>
<source>Time Magazine</source>
<hdr>
BUSINESS, Page 50
No End in Sight
</hdr>
<body>
<p>Politicians hurl blame as the $500 billion S&L crisis races out
of control
</p>
<p>By John Greenwald--Reported by Hays Gorey and Richard Hornik/
Washington
</p>
<p> 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.
</p>
<p> 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."
</p>
<p> 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.
</p>
<p> 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."
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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."
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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."
</p>
<p> 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?
</p>
<p> Have you become more concerned about the country's savings and
loan problems?
</p>
<table>
More concerned 53%
Less concerned 7%
Haven't changed 36%
</table>
<p> How much confidence do you have in the Federal Government
to correct our S&L problems?
</p>
<table>
A lot of confidence 12%
Some confidence 48%
Not very much 38%
</table>
<p> Do you think President Bush is doing a good job handling the
S&L scandal?
</p>
<table>
Good job 33%
Bad job 49%
</table>
<p> Who do you think is more responsible for the S&L scandal?
</p>
<table>
Owners 59%
Government 28%
Equally responsible 8%
</table>
<p> Which party do you think is most responsible for the S&L
scandal?
</p>
<table>
Republican 36%
Democrat 18%
Equally responsible 14%
</table>
</body>
</article>
</text>
