The coming thrift bailout

THE predicament of the 500 insolvent savings-and-loan institutions in the United States is the biggest financial disaster since the Great Depression. It makes the Washington Public Power Supply System (Whoops) bond default look like small potatoes. And perhaps even more troubling, the problem appears likely to get worse before it gets better. Calls in Congress are being heard for a federal bailout of the thrifts, but the $60 billion required will not exactly come out of petty cash.

Basically, the nation's thrifts have been skewered by rising interest rates and then whipsawed by deregulation. When in the late 1970s the Federal Reserve allowed interest rates to soar in order to wring inflation out of the economy, thrifts had to offer double-digit interest on deposits - even as their loan portfolios were heavy with 30-year fixed-rate mortgages at 5 or 6 percent.

This was a real blow, and it wasn't the thrifts' fault. Even very conservatively managed institutions had a tough time coping. But then some of the ostensible remedies for the situation made things worse, especially as thrifts were allowed into commercial real estate. Executives used to the nice, safe home mortgage business suddenly found themselves playing hardball, especially in areas, notably Texas, where the local economy was weak and the commercial sector hopelessly overbuilt.

Meanwhile, capital requirements of thrifts were relaxed. This is like saying, If a restaurant is crowded beyond its posted legal capacity, we'll just change the number on the sign.

With relaxed capital requirements, but deposit insurance still in place, the owners and managers of thrifts had less of their own money on the line, and less incentive to put their financial house in order before the feds got there.

Then the number of regulatory officials was cut, so that there were fewer examiners checking the books of potentially troubled thrifts. Problems were discovered later rather than sooner, and of course they are always more expensive to take care of later.

Basic greed and venality, along with congressional dawdling, also came into play. Indeed, some observers hold that the industry might have recovered on its own if so many in it hadn't started overextending themselves again as soon as they got back on their feet in the mid-'80s.

But again, some of the ``rescues'' merely delay problems rather than solve them. The Federal Saving and Loan Insurance Corporation has been criticized for making all kinds of concessions to the buyers of troubled thrifts; ``FSLIC Devises Gimmick to Aid Thrift Rescues'' was a recent headline in the Wall Street Journal. Such ``gimmicks'' do not get at the issue of requiring the owners of a thrift to have a serious capital stake therein.

A great many questions continue to swirl about the thrift industry - including the big one, Does the United States still need it? But the bottom line is that through FSLIC, the government is committed to protecting the deposits at thrifts, to the amount of $100,000 per depositor. Some 500 thrifts, with $180 billion in assets, are in trouble. The cost of merging or liquidating a thrift is running at least 32 cents per asset dollar. So it could easily cost $60 billion to bail out the troubled thrifts today. Those assets, moreover, are evaporating at some 15 percent a year. Better to close them while there's still something left, even if FSLIC must borrow to do so.

Despite all the headlines the thrift crisis has generated over the past few months, congressional action will have to wait until January. But let's hope that FSLIC's problems are a priority then.