GAO Report to Assess FDIC Role in S&L Crisis

EARLY next month a different sector of the savings and loan mess will open. That's when the General Accounting Office is expected to publish a report on how well the government has supervised the failed S&Ls that were sold in 1988, often under attractive financial terms to the new owners.

The scope of the GAO report itself will be narrow, limited to the quality of supervision the federal government has exercised.

But the publication of the report is likely to set off an outcry on Capitol Hill about the long-term impact of the 1988 deals.

``Those deals were a disaster,'' says Burt Ely, an S&L consultant from Alexandria, Va. ``I was very critical at the time and I remain critical.''

American taxpayers are paying huge unnecessary amounts of money, says Roger C. Kormendi, a professor of business economics and public policy at the University of Michigan School of Business in Ann Arbor, Mich. Mr. Kormendi headed an analysis last year of the thrift industry's resolution of insolvent S&Ls.

Taxpayers pick up tab

The federal government was so eager to unload these institutions that it gave the buyers tax exempt interest rates ``two to four points too high,'' Kormendi says. Taxpayers continue to pay these high rates today to owners who may be raking in the money, he adds.

Why the now-defunct Federal Home Loan Bank Board felt it essential to sell these institutions so fast at such appealing terms late in 1988 ``is anybody's guess,'' Mr. Ely says. ``I've never had a satisfactory answer.''

Several members of Congress are known to be very concerned about the large but undefined amounts of money that American taxpayers continue to pay to people who purchased failed S&Ls in those 1988 deals. Congressional criticism of this issue is certain, and hearings are likely.

The GAO report will be confined to three problems the agency identified this spring with supervision of new owners of these S&Ls by Uncle Sam's Federal Deposit Insurance Corporation. The criticisms the GAO voiced then were:

That the FDIC lacked a strategy on what was an acceptable approach to selling assets.

That the FDIC had no way of finding out what assets an S&L actually had.

That the FDIC needed to require a year-end audit of each S&L to determine how much money the federal government owed the new owners of each S&L under terms of its sale.

The new GAO report will say that FDIC has since corrected all three problems.

Disincentive to income

But the broader issues remain: How much money have the new owners of these thrifts been making? Have they been getting as much income as possible from the thrifts' assets, or depending on taxpayers' subsidies to turn a profit? Have they tried to reduce taxpayers' liabilities by selling their thrifts when they received reasonable bids?

No knows for sure the answers to these questions, but experts are skeptical.

By fall Americans may have some answers. A law passed last year requires the Resolution Trust Corporation, a new government agency, to have evaluated each 1988 sales of thrifts, and the performance of the new owners. Evaluation contracts ``are out now,'' Ely says; reports are likely in the fall.

Sale terms of the S&Ls varied from case to case, Ely says. He says each must be examined individually to know how well its management is doing, and how big a profit is being made.

But two disincentive trends are clear and must be reversed through renegotiation of contracts, Kormendi says.

Owners have an incentive to keep their income from assets at a low rate. That is because the federal government in effect subsidizes owners of these thrifts, by paying them enough money to keep their income up to a certain level. Regular income is taxable, but the subsidy is not, Kormendi says. If income is low, the subsidy is increased, which reduces taxes and increases profits.

The 1988 thrifts have problem assets on their books, ``but no incentive to market them'' so that taxpayers end their subsidies, Kormendi adds. He says that these S&Ls should be forced through contract renegotiation to market their assets aggressively.