Members of the House Banking Committee met in an unusual private session with Federal Reserve Board Chairman Paul Volcker yesterday in an attempt to work out details of proposed legislation to bail out failing financial institutions.
The 90-minute meeting came as thrift institutions -- savings and loans and mutual savings banks -- this week announced their biggest deposit outflows in history, $6.6 billion during April. Operating losses in the first half of this year are anticipated to be in the $2 billion range, with losses of between $6 billion and $8 billion over the entire year if high interest rates persist. The number of thrifts on the government's list of troubled institutions nearly doubled during March, to 246 out of about 4,000.
After yesterday's meeting, one member said, "We were trying to find out in advance what objections the banking industry or the administration might have to the bill, so it doesn't become a political football. We want to do it right the first time and not drag [the legislation] out so it will exacerbate the situation." The reference was to previous banking legislation that languished in committee for years while the condition of thrift institutions worsened.
Two weeks ago federal banking regulators, headed by the Fed, sent Congress proposed legislation to grant the Federal Deposit Insurance Corp. and the Federal Savings and Loan Insurance Corp. emergency powers to arrange for interstate mergers, if necessary, to rescue troubled banks and thrifts. The interstate proposal applies only to banks with assets of $2 billion or more, and only if an interstate merger cannot be arranged. Banks -- or bank holding companies -- would also be allowed to take over failing thrifts.
The Fed's bill also would make it easier for the FDIC to inject funds to keep technically failing banks alive while a merger is sought. FSLIC's line of credit with the Treasury would be increased to $3 billion, from $750 million, to help bail out savings and loans.
Yesterday's extraordinary meeting took place before the bill's formal introduction. Volcker called it "just sort of an introductory session; we were basically answering questions." It was closed to the press, lobbyists and the public at the request of House Banking Committee Chairman Fernand J. St. German (D-R.I.), who wanted to assure a "free give and take."
Included in yesterday's discussion was the expected opposition to the bill from the thrift industry, which fears that big money center banks will gobble up savings and loans and mutual savings banks. The administration has not yet made its position known.Another member said he thought the secrecy was intended to allow the regulators to identify individual banks in trouble. Members who attended the meeting said no specific banks were discussed, but hard-hit regions -- such as New York City -- were mentioned.
Most of the session was concentrated on defining the criteria for federal intervention. Currently, the FDIC cannot inject money into a troubled bank unless it finds that the bank's continued operation is "essential to provide adequate banking service to the community." The proposed legislation would change that condition to when "severe financial conditions threaten the stability of a significant number" of banks, and when the assistance probably would "substantially reduce the risk of loss" to the FDIC.
According to one person present at the meeting. St Germain convinced the FSLIC of the need to outline the conditions more specifically, whereas the FDIC held out for more discretion in deciding when to intervene. No date has yet been set for formal hearings on the bill. St. Germasin refused to predict yesterday whether the legislation would pass.
In a related development, the Federal Home Loan Mortgage Corp. yesterday said mortgage rates in its secondary market auction fell for the second straight week. The average weighted yield of mortgages accepted was 16.448 percent, down from 16.768 two weeks ago. On Friday the Mortgage Corp. will announce its plan for buying adjustable-rate mortgages from primary lenders. Banks and thrifts have been awaiting its terms -- particularly its position on negative amortization -- before setting their own terms for borrowers.