he chief economist for the Boston Federal Reserve Bank said today that two out of every three of the nation's savings institutions are insolvent when their assets and liabilities are calculated at realistic, current market levels.
As a result, Richard W. Kopcke told the opening session of a conference on the future of the thrift industry, the federal government faces a possible "bailout" cost of at least $30 billion. In the event of actual liquidation of failing thrift institutions, rather than a mere subsidy from Washington, Kopcke predicted the cost to the taxpayers could exceed $200 billion.
Kopcke's assessment of the industry came as Congress took a major step toward aiding the savings and loan industry. The House voted 371 to 46 to approve legislation allowing emergency takeovers of ailing thrift institutions. The legislation would permit banks and S&Ls in one state to take over ailing institutions in another state. The fate of the legislation is uncertain since the Senate favors a broader bill.
Kopcke's predictions were based on a detailed study of the financial situation of the mutual savings banks in the state of Massachusetts and of savings and loan associations in the state of California, as well as a more general examination of the condition of such institutions across the country.
He pointed out that sharply rising interest rates have not only raised dramatically the cost of money obtained by the thrifts but have also lowered the real value of many of their mortgages, written years ago at lower interest rates.
The plight of the S&Ls and other thrifts, he said, will not be relieved by the recent institution of the All Savers Certificates, which will establish an additional drain on the U.S. treasury.
Under conventional accounting practice, these institutions report their assets and liabilities at book value, even though in a liquidation the institutions could not get back 100 cents for each dollar of the mortgages they carry.
Kopcke's study was based on a system of current value reporting (CVR), a better barometer, he concludes, "because book values no longer accurately describe the financial condition of thrift institutions."
In effect, the CVR system provides a "useful measure" of determining the real solvency of a savings bank or an S&L, he said. The reason is that an institution with a declining net worth based on actual market conditions is confronted with the need to raise new capital. If the ratio of its capital to assets should fall seriously, Kopcke said, "the bank's (or S&L's) continuing ability to serve the public safely may be questioned."
Using his standard of measuring assets and liabilities based on current market conditions, Kopcke said that the average net worth of all thrift institutions in the United States works out to minus 7 percent. He said that 60 percent of all thrift institutions in the United States have a negative net worth.
According to his findings, he said, the prospective losses for fully two-thirds of all thrift institutions "will exhaust their reported net worth" unless interest rates fall sharply.
And as for the thrifts that will remain solvent, "the reported net worth-to-asset ratio of most will drop very close to zero during the 1980s."
Assessing what all this means, Kopcke said that in order to raise the industry's CVR net worth from the current minus 7 percent to a plus 6 percent, the industry would need a "bailout" of $80 to $120 billion to cover its current and prospective losses. A less ambitious subsidy, one that would simply bring the net worth of the thrift industry back to the zero point, he said, would cost $30 billion to $50 billion.
These estimates, he said, do not take into account the All Savers Certificate, which "is not likely . . . (to) reduce the price of the expected bailout to the U.S. treasury."
Kopcke readily conceded that all of his gloomy figures represent forecasts of events yet to come and that an unexpectedly sharp decline in interest rates leading to a new housing boom could prevent widespread failures of thrift institutions. Even so, he said, the thrift industry's net worth will decline during the next five years.