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Outlook Grim for Recovery of 445 Ailing S&Ls : GAO Report Says Rise in Inflation, Interest Rates Would Worsen Situation

May 11, 1987|From Reuters

WASHINGTON — A total of 445 savings and loan institutions across the country are running in the red with little chance of recovering because of higher inflation and interest rates, a government report said Friday.

The General Accounting Office said the institutions suffered mainly from a loss of value of their real estate and other assets.

It does little good for regulators not to close or merge the thrifts in the hope that the institutions will solve their financial difficulties, the congressional agency said.

In any event, forbearance, the policy of refraining from closing the ailing thrifts, has become unavoidable because the depleted Federal Savings and Loan Insurance Corp. cannot absorb the costs of closing or merging them, the GAO said.

FSLIC insures deposit accounts up to $100,000.

The thrift industry and lawmakers from states with troubled thrifts favor the forbearance policy.

The number of insolvent savings and loan institutions stood at 445 in September, 1986, compared to 222 in December, 1982, the GAO said. It said another 600 thrifts were barely solvent last September.

"Given that today's insolvent thrifts are troubled because of bad assets, and the possibility that future changes in interest rates and inflation will be less favorable for profitability than those of the recent past, it is difficult to conclude that prospects are good for recovery of these institutions," the agency said.

The report was requested by Senate Banking Committee Chairman William Proxmire (D-Wis.)

The House has adopted a bill to recapitalize the FSLIC by borrowing $5 billion and the Senate has voted for $7.5 billion. It is expected that a conference committee will be needed to work out the differences.

In the early 1980s, thrifts suffered from high interest rates, but most recovered when interest rates declined, the GAO said. Today's insolvent institutions suffer from bad assets in their portfolios, particularly in regions dependent on agriculture and the energy industry.

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