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S&Ls Accuse U.S. of 'Confiscating' Reserve Funds : FHLBB Calls Charge a 'Lie'; Industry Faces a Loss of $800 Million in Quarter

May 16, 1987|TOM FURLONG | Times Staff Writer

Already tattered relations between the Federal Home Loan Bank Board and the nation's savings and loan industry got decidedly worse Friday after the U.S. League of Savings Institutions accused the S&L regulators of "confiscating" an industry-owned reserve fund valued at close to $800 million.

"It's nothing short of an outrage to go forward with an arbitrary confiscation of $800 million," said a statement issued by William B. O'Connell, president of the U.S. League. The Chicago-based trade group suggested that it may sue the bank board if the move, made this week, is not rescinded.

The action raises the possibility that the savings and loan industry will have to take an $800-million loss in the second quarter. "This will tank the second quarter (earnings) for a lot of firms," one industry consultant said.

O'Connell's remarks about confiscation drew an equally harsh rebuttal from Shannon Fairbanks, chief of staff for bank board Chairman Edwin J. Gray. "That's a lie," she said. "That's just absurd."

Auditors from the Government Accounting Office, she said, forced the bank board to write off the $774-million value of the fund because the Federal Savings and Loan Insurance Corp., an arm of the bank board, faces future losses of $10.5 billion in connection with the closure of failing savings and loan firms. The fund is known as FSLIC's secondary reserve.

Carried As an Asset

"The GAO wiped out those secondary reserves," she said. "We didn't do it." FSLIC has only an estimated $1 billion in cash in its primary reserves, which are used for liquidations and forced sales of insolvent S&Ls.

Quite significantly, the money in the secondary reserve was carried as an asset by the contributing financial institutions because it was intended that the money would eventually be repaid when FSLIC regained its financial health.

However, the GAO declared FSLIC insolvent earlier this year because of the $10.5 billion in contingent liabilities and because financial institutions cannot carry assets on their books that are backed by insolvent institutions.

The secondary reserve was built up from 1961 to 1973 by industry payments as a way to bolster FSLIC's coffers. The payments were based on size, with the largest firms paying the most.

Now, if the reserve is wiped out by accounting fiat, it means that the financial institutions must reduce their assets by the amount they contributed. This means that Great Western Financial in Beverly Hills may have to reduce its capital of $1.7 billion by about $30 million, company Chairman James Montgomery said.

"That's not a great amount for us," Montgomery said, "but we're going to fight this thing."

Bonding Authority Sought

Veteran industry observers say they cannot remember a time when relations have been this bad between the bank board and the industry it has overseen for more than five decades.

The angry words are a side show to heightening tensions over the continuing dispute about how much money should be be raised to recapitalize FSLIC.

Chairman Gray has been pushing hard for legislation that would give the bank board the bonding authority to borrow as much as $15 billion over the next five years in order to liquidate and sell troubled savings and loans.

Industry officials and most leaders in Congress have been pushing for a two-year program that would pump between $5 billion and $7.5 billion into FSLIC. The Senate late this week passed a $7.5-billion, two-year bonding authority. The U.S. League favors a two-year, $5-billion program.

The harsh wording of the U.S. League's press release--issued so late Thursday that it was not picked up by the media until Friday--was particularly notable because O'Connell's public remarks are usually reserved and understated.

"We can only conclude that the bank board, in a display of pique over the failure to get its way on the FSLIC bonding authority issue, is still trying to stampede Congress to change its mind and go along with" the $15-billion program, O'Connell said.

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