Prudent S&Ls pay for mistakes of others - and their regulator

Last year, First Federal Savings and & Loan of Longview, Texas, earned a modest $1 million. And the Federal Savings and Loan Insurance Corporation took one-quarter of that in insurance premiums.

``I'm not even insolvent, and I have a real problem coming up with the money to pay FSLIC,'' says A.E. Davis, president and chief executive officer of the $139 million east Texas thrift.

The reason for the high premiums? The insurer and many of its charges are broke.

Nevertheless, Mr. Davis doesn't particularly enjoy having to pay $145,000 for the special assessment levied by FSLIC on his operation - on top of the normal $100,000 a year.

All S&Ls in the United States are now paying 0.12 percent of their assets for the special assessment, plus the normal 0.08 percent, to FSLIC, more than twice what banks pay to their regulator, the Federal Deposit Insurance Corporation (FDIC).

These payments are actually easier on insolvent thrifts, which can merely charge the assessment to their negative net worth, but those with money must pay the premiums out of their pockets.

``This puts the little guy at a disadvantage with other institutions and with my commercial banking friends,'' Davis says.

So far, despite the insurance premiums, the FSLIC hasn't been able to dent its debt - $50 billion and growing.

Nor has the industry's Southwest Plan sufficiently lowered the ``Texas premium,'' or higher cost of deposits, being paid by most Texas S&Ls. The plan is designed to merge failing thrifts - partly by getting private investors, including strong banks and thrifts, to use some of their own capital to support the mergers. Rather than close the worst-off thrifts, the cleanup has merged several into a few (often broke) institutions.

One way Texas thrifts got into trouble was by offering higher-than-average interest on savings. To keep up those rates, the S&Ls have tried to attract more deposits by raising their rates even further.

As a result, while commercial bank deposits are down in Texas, deposits at S&Ls are up.

``It may be that people are shifting money from commercial banks to thrifts even though thrifts are in worse shape than the banks,'' says Bernard Weinstein, director of the Center for Enterprise at Southern Methodist University's business school. People know that up to $100,000 of their deposits are completely guaranteed by FSLIC.

``Why should I, as a depositor, care how safe my bank is?'' asks Kenneth Biederman, president of Gibraltar Savings, one of the few solvent thrifts in Texas.

But regulators are ``allowing inefficient insolvent companies to continue to grow and attract more deposits,'' says Texas bank commissioner Kenneth Littlefield.

The problem, combined with an overall rise in interest rates, could bring trouble for both banks and S&Ls in the state, says Gary Bechtol, banking analyst at the state comptroller's office in Austin. Rising costs are already taxing the thrifts, FSLIC, and the competitors, and will ultimately tax the taxpayers, he says.

Likening the industry to a Model T, Mr. Littlefield wonders if it will survive existing regulatory changes and proposals being debated by Congress. Lawmakers are considering breaking down the barriers that still exist among banking, investment, and insurance activities which were put up after the depression.

One much-discussed solution to the S&L industry's bankruptcies has been to merge FSLIC with FDIC. With reserves of $18.3 billion, the FDIC is viewed by some in Congress as a considerable patch to plug FSLIC's $50 billion hole.

But the solution is unattractive to many other politicians, and members of both industries.

``When the FDIC finally has to confront its huge outstanding foreign loans that aren't ever going to be paid, both funds will probably end up needing taxpayer assistance,'' says Thomas King, president at the Texas Savings and Loan League in Austin.

But the separation of savings-and-loan business and banking services is being tested by the market. Banks are doing much of what S&Ls do, and under deregulation, S&Ls are engaged in activities previously closed to them and out of the scope of their experience.

Since S&Ls provide home financing by originating loans and selling them to investors in the secondary markets, ``home financing is really provided by insurance companies and pension funds,'' says Ray Rucksdashel, an Austin accountant.

With higher operating costs and a depleted loan volume in the state, it is very difficult for an S&L in Texas to make any money, says Frank Anderson, an analyst at D. Latin & Co., an investment banking firm outside Dallas.

To make money, Mr. Rucksdashel recommends, S&Ls invest in guaranteed government securities. That would make them more like banks.

Some of the stronger S&Ls would like to leave FSLIC and move into the FDIC by getting a bank charter - but they can't, because of a moratorium imposed on such a move by President Reagan, who feared that a flight of healthy money would be disastrous to other thrifts.

Leaving FSLIC could have its own drawbacks, points out Lawrence Connell, president of United States Savings of Texas in Austin. The Federal Home Loan Bank system, he says, provides its member associations with advantages not available to FDIC banks, like access to credit on less expensive terms.

``The industry has practiced broad resistance to [higher] standards of capital and discipline,'' like those required of banks, he says.

``They should bear some of the responsibilities,'' he says, adding that his $6 billion thrift is insolvent as well.