It is the financial system's toxic waste dump: Hundreds of crippled or failed savings and loan companies. As much as $50 billion in bad loans and assets.
The health of the entire S&L industry is threatened and questions are being raised about whether the mess can be cleaned up before it completely erodes public confidence in that $1-trillion sector of the American financial network.
Like any toxic waste dump, the $50-billion S&L problem is mired in controversy: Who is responsible for the cleanup? How can it be cleaned up? What will it cost? Most important, who will get stuck with the bill, the industry or the taxpayer?
Just last August, Congress authorized the industry's insurer, the Federal Savings and Loan Insurance Corp., to raise $10.8 billion through bond sales so the agency can close more ailing thrifts. But already there is escalating talk within the industry that the cleanup costs, running into many billions of dollars, will have to be borne by the taxpayer.
The savings and loan business has been in trouble ever since this decade began--at first suffering from huge losses sparked by soaring interest rates and later from poor-quality lending that was aided by bank deregulation and abetted by lax regulatory supervision.
Through the years, the industry has crossed its fingers, hoping that a better economy would wash away the mess. Meantime, the government has struggled to devise a cleanup plan of its own. The problem hasn't disappeared; it has gotten bigger.
This is shaping up as a critical year. At stake may be the survival of savings and loans--the country's principal source of mortgage money--as a distinct industry. Some believe that a taxpayer bailout of FSLIC--or a merger with its counterpart in the commercial banking industry--will signal the industry's eventual fade-out.
A Massive Problem
Count M. Danny Wall among the optimists. "For an industry that has been undergoing the difficulties that the thrift industry has, any period of time is critical," said the former Senate staff member who took over last June as chairman of the Federal Home Loan Bank Board, the parent agency of the FSLIC. "Hopefully, 1988 will be a turnaround year."
That would be a remarkable feat, given the grim facts:
- Between 320 and 490 of the nation's 3,200 thrifts are insolvent, depending on whose figures are used. The low figure, which equals 10% of the total number of institutions, is from the FSLIC's chief economist. The high number is from Donald M. Kaplan, a former Harvard Business School professor and a leading industry consultant. The federal General Accounting Office said last year that 445 thrifts with assets of $112.7 billion were insolvent.
- Failed thrifts are kept open, and continue losing money, because the FSLIC lacks the funds to close them and instead has engaged in holding actions that delay the day of reckoning. The failure rate in the 1980s, counting insolvent thrifts allowed to remain open, is greater than that during the Depression of the 1930s.
- Insolvent thrifts lost $6 billion in 1986--nearly $14 million a day. The losses outstripped the earnings of healthy institutions, which comprise the vast majority of the industry. And red ink is rising: In the third quarter of 1987, insolvent thrifts lost $2.3 billion; healthy ones earned $712 million.
- Cost projections for rescuing the industry range from $20 billion to $50 billion and come from such prominent experts as William M. Isaac, former chairman of the Federal Deposit Insurance Corp., which insures commercial banks. The costs are so high because closing a failed savings and loan requires the FSLIC to pay off depositors or provide financial assistance to new owners and absorb losses from the institution's bad assets, which often run into hundreds of millions of dollars.
Estimates of the cost of bailing out Financial Corp. of America, the parent of ailing Stockton-based American Savings & Loan, run from $2 billion to $4.5 billion. In Texas, where as many as one in four thrifts is mired in insolvency, the recent cost of disposing of Vernon Savings & Loan alone was $1.3 billion, the biggest rescue in FSLIC history.
"That is one point three billion dollars," Rep. Doug Barnard Jr. (D-Ga.), chairman of a House subcommittee that has been investigating fraud in the industry, said in a slow drawl, emphasizing the "b" in billion. "I'm going to be looking at that one very closely."
Overlying these statistics has been the inability of regulators to develop workable solutions to one of the nation's most serious financial problems.
The most recent innovation for cleaning up the industry, the Federal Asset Disposition Assn., deteriorated into an embarrassing political mess. Congressmen demanded the resignation of its $250,000-a-year chief executive and the Justice Department was asked to investigate its tactics.