Savings and Loans Report a Profit

SPARRING over the savings and loan crisis by candidates in today's presidential primaries in Illinois and Michigan almost obscured the good news from the Office of Thrift Supervision: 1991 was the industry's first profitable year since 1986.

"We are now in the eighth inning of the cleanup process," OTS director Timothy Ryan said last week in announcing the results. The industry - 2,100 thrifts at year-end, not including those seized by the OTS - earned $1.97 billion last year.

In Texas, where the OTS closed the most thrifts, business is looking up so much that the Texas Savings and Loan League has had an inquiry about how to start an S&L, says president Tom King. He says the market is ripe for new savings institutions in the many towns and counties that no longer have one.

On the other hand, New England thrifts remain troubled. That region has a large number of state-chartered savings banks, a type of thrift found almost nowhere else. Savings banks act very much like S&Ls but are regulated by their respective states and the Federal Deposit Insurance Corporation. While classed as thrifts, they were not included in the OTS data. Ross Waldrop, a financial analyst with the FDIC, says that the 441 savings banks lost $1.2 billion in 1991, down from $2.6 billion the previous year . These institutions are "overwhelmingly concentrated in real estate," he says. Savings bank failures

Not surprisingly, failures surged as the New England real estate market crashed: zero in 1988; one in 1989; 10 in 1990, and 19 last year. The FDIC listed only 17 savings banks as "troubled" at the end of 1989, but the number doubled in 1990 and again last year, to 72.

"The New England economy is incredibly weak. It's probably not that far behind where Texas was in the mid-1980s," says Michael Wilson, an economist with the US League of Savings Institutions.

Still, he likens the tough tactics of industry overseers there to a "regulatory reign of terror. Banks and S&L managers are literally afraid to make a loan," causing a credit crunch. Although Washington has urged banks to lend, "that word is trickling down very slowly, if at all, to the regional and local regulatory system," Mr. Wilson says.

Some analysts are apprehensive that California could be the next problem area. It ranks second in thrifts "resolved" (sold or closed) by the government, and that was before the state's economy went soft.

The Resolution Trust Corporation, which handles S&Ls once they are taken over by the OTS, currently operates 81 insolvent thrifts. That number rises when OTS sends it more and declines as the RTC resolves them. At year-end the OTS classed 65 thrifts as likely to need federal assistance.

As of March 9, the RTC had resolved 605 institutions since its inception in 1989. It had pumped $78.7 billion - the apparent gap between assets and liabilities - into those institutions or directly to depositors to protect 19.7 million accounts. "That is like black hole money - money that is never going to be recovered," says RTC spokeswoman Felisa Neuringer.

The RTC has sold off $234.1 billion in assets from failed thrifts, sometimes even at a premium but on the whole recovering 90 to 95 percent of their value, Ms. Neuringer says. Still in the RTC's hands are $128.4 billion in hard-to-sell assets.

The RTC appears close to getting another $25 billion from Congress for the bailout, less than the $55 billion that President Bush requested. "We're going to be singing the same old song when that runs out," Neuringer says. Including interest from the 30- and 40-year bonds issued to finance the cleanup, the S&L crisis is expected to cost taxpayers $500 billion.

The crisis originated in the early 1980s. Competition for deposits led the government to remove ceilings on the interest that financial institutions could pay depositors. As rates rose, thrifts began to receive less from their main line of business - fixed-rate, long-term home mortgages - than they paid to depositors. Deregulation to blame?

The institutions that failed took advantage of deregulation to invest in nontraditional areas such as commercial real estate and junk bonds. Some, like Charles Keating Jr.'s American Continental Corporation in Phoenix, succumbed to fraudulent practices by their management.

Contrary to Democratic candidate Bill Clinton's charges against opponent Paul Tsongas, who as a US senator helped loosen controls on the thrift industry, deregulation wasn't to blame for the S&L mess, thrift industry officials and regulators say. Rather, it was the inadequacy of regulators, in training and numbers, for the task of supervising S&Ls.

"[President] Reagan's whole push was to get the government off the backs of business," Wilson says. "That's fine ... but in the case of the financial industry, where you had literally a couple trillion dollars' worth of insured deposits out there ... the government still should have been there to make sure their risk exposure was carefully monitored."

In 1989 reforms, regulators won powers to intervene even before thrifts fail, which formerly was difficult. And regulatory staff has doubled since the mid-1980s.