The troubled 'thrifts': don't write'em off yet

Richard W. Kopcke said he had a ''rude surprise'' for his audience at a conference here on ''The Future of the Thrift Industry.'' There had been a programming mistake on some calculations for the paper he gave. The condition of the thrifts, he said, ''is even worse than we thought.''

Conclusions for the $800 billion thrift industry by this economist, who is at the Federal Reserve Bank of Boston, were indeed gloomy. ''If yields do not decline more than is expected currently, as many as two-thirds of all thrifts are potentially insolvent, and the remaining one-third would be too weak to safely compete with other financial institutions until the late 1990s,'' he said.

If failing thrifts were liquidated, he said, the cost to the federal government could exceed $200 billion.

Another ''expert'' put that figure at $300 billion.

Whatever, those are scary numbers. It was no wonder Congress was busy last week with ''emergency legislation'' to rescue the nation's savings-and-loan associations and mutual savings banks from potential disaster.

But before anyone rushes out to withdraw savings from a local S&L, several things should be noted:

* Mr. Kopcke's calculations were based on a prediction of future interest rates derived from today's so-called ''yield curve'' - the interest rate yield on debts of short- through long-term maturities. Actual interest rates could be lower than now anticipated.

If interest rates in general dropped to 10 percent or below, Kopcke reckoned, the thrift institutions could once more breathe easy. Their return on assets today of some 10 or 11 percent would be adequate to make most of them profitable once more.

Actually, few economists expect rates to drop that low when inflation is still running at 8 or 9 percent. But any decline would reduce the danger of widespread insolvencies among the thrifts.

* Accounts in thrift institutions are insured by either the Federal Deposit Insurance Corporation (FDIC) of the Federal Savings and Loan Insurance Corporation (FSLIC) up to the $100,000 level. (A relatively small number are covered by state insurance funds.)

The funds held by these insurance agencies are far from adequate should a large number of thrifts be liguidated in a short time. But if by some quirk that should happen, Congress would be forced by political pressures to compensate deposit holders.

* Because of a positive cash flow resulting from mortgages and other loans being repaid, even most technically ''insolvent'' thrifts could last for some years before being forced out of business.

What has happened to the thrift industry is the result of what is generally considered a ''no-no'' in the banking business: They have borrowed short and lent long. In other words, they have used money from deposits that can be withdrawn immediately or after a short time span, say of six months, a year, or three years, to lend as mortage money for 20 or 30 years. That has worked reasonably well when interest rates were relatively stable. But with high inflation and record-high interest rates, the thrifts have found themselves clobbered by the low return on their outstanding fixed-rate mortgages.

Homeowners with old mortgages costing perhaps 6 to 10 percent are being subsidized to the tune of billions of dollars by the owners of the $330 billion of savings in thrifts still covered by so-called Regulation Q. When the so-called Depository Institutions Deregulation Committee last month proposed to boost the passbook savings rate to 6 percent, the thrift industry was so alarmed that Treasury Secretary Donald Regan changed his mind and the increase was postponed. Mr. Regan proved to be more concerned about the danger for the thrifts of an extra interest rate burden than for the ''small saver.'' Though that action may have seemed antisaver, the fact is that any extra costs for the thrift industry might produce more failures and, if bad enough, more costs for taxpayers through Treasury subsidies to the insurance funds. It was a ''no win'' situation for the government.

Meanwhile, money continues to flow out of low-interest savings accounts in the thrifts into money market funds, which now have more than $160 billion, and other higher-yielding investments.

At this point, the prime concern of Congress is to save the thrifts without its costing too much. The House voted 371 to 46 for a bill that would expand the authority of the FSLIC to help ailing thrifts by making deposits in troubled institutions or purchasing their securities. It would also give the insurance agency power to approve interstate and cross-industry mergers in emergency situations. A commercial bank in one state, for instance, could acquire a savings-and-loan institution with $2 billion or more in assets in another state. It would be an opening in the general ban on interstate banking. But the legislation expires next Sept. 30.

The Senate Banking Committee is considering broader banking reform legislation that would include emergency aid for thrifts.

Presumably, the two houses will have to compromise on some legislation.

Pressures for action are great. The Federal Home Loan Bank Board predicts that 244 S&Ls with total assets of $35 billion could be in danger of collapse next year if current interest rates continue. The FDIC says 12 mutual savings banks it insures are in trouble.

Mr. Kopcke's analysis looks at the current market value of thrifts' assets and liabilities, rather than the usual book value. To raise the thrift industry's current market value to 6 percent of net worth would require $80 billion to $120 billion. And even to maintain the net worth at zero would cost $ 30 billion to $50 billion.

It's no wonder that the Fed encouraged a decline in interest rates Monday by lowering the ''discount rate'' it charges on loans to commercial banks.