Bush's Bailout Proposal: a Sweetheart Deal

ON Capitol Hill, many members regard the savings-and-loan scandal as a reeking mess that should be moved out of their front yard as quickly as possible. The proposed solution is outrageously expensive, and Congress owes the public a lot more for its money. Richard Darman, director of the Office of Management and Budget, recently put the cost of the bailout between $80 billion and $110 billion - almost one-tenth of the entire federal budget for 1989 and 10 to 12 times the entire budget for all Housing and Urban Development-assisted housing programs in '89. These figures do not even include the interest on what the government will borrow for the bailout. The chairman of the House Banking Committee has estimated total costs, including interest, at $335 billion over 30 years.

And what will the public get from the industry in return for this huge taxpayer bailout? Under the Bush proposal, the answer is - absolutely nothing more than the hopeful promise that the S&L industry will never come begging again. We are looking at a sweetheart deal in which the industry gets only a slap on the wrist and the public foots the bill.

S&Ls should be required to serve some public purpose to justify this bailout. Given the industry's historical role in mortgage lending, S&Ls should help with the unmet housing needs of low- and moderate-income consumers.

Originally S&Ls were created to provide long-term mortgage loans for private home ownership. But today the secondary mortgage market has plenty of investors willing to fund mortgage loans. In fact, the S&L industry holds only about 33 percent of all mortgage loans, and the interest rates S&Ls offer on the loans they originate actually tend to be slightly higher than the rates offered by their major non-insured competitors. Obviously there is no justification for propping up an industry with huge amounts of public funds unless it serves a function that the private sector would not serve as well on its own.

The S&L industry has a very profitable source of funds which should be put to public use. Twelve Federal Home Loan Banks are owned by the industry. These banks borrow at preferred rates and relend these funds through long-term cash advances to their shareholder S&Ls at a sizable profit. From this so-called ``cash advance'' program, the banks have been able to accumulate a capital base of $15 billion. While we will be forced by the current crisis to subsidize the failing S&Ls, the banks will continue to rake in huge earnings that will eventually accrue to their shareholders - the very same S&L industry.

That's why any bailout legislation should force the banks to set aside some portion of their future profit stream to help subsidize low- and moderate-income mortgage loans. With this set-aside fund, the industry as a whole could help individual S&Ls finance the reduced-rate mortgage loans for first-time home buyers priced out of the local housing markets, and for moderately priced rental units that are now in short supply.

On Capitol Hill, very few members are raising these public-policy issues. Most are saying there is not enough time to develop mechanisms to ensure that the industry meets public goals. As quickly as possible, they want to throw $335 billion at the mess, move a few regulatory boxes to keep the smell from returning, and hope that consumers are so confused by the technical questions that they will not object.

It is miserably true that Congress has left itself no choice but to move steadily forward with a bailout bill. Because of the failed legislative policies of the past few years, insolvent thrifts that should have been closed years ago are losing millions of dollars every day. Since the government will eventually have to close them and pay off depositors, the losses accruing are really our own.

But the public-policy questions and solutions are not so difficult that Congress must pass the bailout without addressing them. Congress needs to respond to the public's demands with only half the vigor with which it responded to industry demands over the years.