Federal savings and loan regulators today disclosed formation of a new organization that will bail out the dwindling Federal Savings and Loan Insurance Corp. by taking responsibility for $3 billion worth of FSLIC's bad debts.
The new organization, called the Federal Asset Disposition Association (FADA), has been chartered as a savings and loan by the Federal Home Loan Bank Board, but its main job will be to take over the worst of the problem loans and foreclosed property held by FSLIC.
The FSLIC -- which insures deposits in federally chartered thrift institutions -- has in the last three years been forced to rescue hundreds of savings and loans that failed because of bad management and high interest rates. But the insurance fund itself has begun running low on cash and has allowed many S&Ls that are technically broke to continue operating because it can't afford to take them over.
Federal regulators for several months have been discussing a plan proposed by the S&L industry to bail out the insurance fund by allowing FSLIC to dump its bad debts on some other organization.
Today, at the convention of the U.S. League of Savings Institutions, Home Loan Bank Board Chairman Edwin J. Gray disclosed they have done it.
Gray said the bank board -- apparently with no public discussion -- granted a savings and loan charter for the new organization to a "group of interested citizens." The action was taken under existing law that gives the bank board the authority to help FSLIC achieve maximum return on its assets.
According to its charter, the purpose of FADA is "to facilitate the liquidation of insured institutions and to take over assets of institutions in receivership."
Gray described the establishment of the new FADA as "but one of many steps which need to be taken to strengthen the ability of the FSLIC to deal with its problems in the future."
In addition to the nearly $3 billion in foreclosed real estate and other assets in FSLIC coffers, another $3 billion in bad loans and foreclosed property held by savings and loans that are still operational may "someday" be acquired by the new organization, said Norman Raiden, general counsel of the league in a press conference after Gray's speech.
An estimated 17 percent of the nation's 3,000 savings and loans are not making money or are considered insolvent because they do not have enough assets to pay off all their debts.
The savings and loan industry has so far blocked two other proposals for helping FSLIC. Gray recently suggested replenishing the insurance fund by requiring all federally insured S&Ls to contribute 1 percent of their deposits to FSLIC; the industry complained that the "1 percent solution" would wipe out dozens of already-weak institutions. Proposals to merge FSLIC with the larger and healthier Federal Deposit Insurance Corp., which insures banks, has drawn heavy opposition from the industry, which fears assimilation by the bankers.
The new organization will liquidate and dispose of the assets it receives and will use any funds it receives to finance its operations. It could become profit-making, but this is not expected, Raiden said. About a third of these assets are real estate while the rest are loans and "some more bizarre" assets, including a ski lodge and "some strange joint ventures," he said.
Whether the organization will buy these assets from FSLIC or manage them for the insurance corporation has not been decided, Raiden said.
FADA will be based in Denver and run by an 11-member board of directors, made up of industry leaders from all over the country. Its chairman is William F. McKenna, former chairman of the Federal Home Loan Bank of San Francisco. McKenna headed an industry task force that first proposed the idea of shifting FSLIC's troubles to a new bad-debt bank.
The newly established association will receive $1 million from FSLIC, in return for 1,000 shares of common stock in the new organization, to set up offices and cover the expense of finding a president. The association has the authority to borrow from home loan banks and to sell securities. It cannot accept deposits without permission from the bank board, Raiden said.
Denver was chosen as headquarters of the organization because, "We wanted it removed from Washington politics and areas . . . where a lot of our problems are," Raiden said.
One reason for spinning off a new organization to dispose of FSLIC bad loans is to hire a staff freed of federal budget constraints and salary requirements, he said. FSLIC, a government agency, has only 19 staff members working to liquidate assets acquired from S&Ls.
"We feel that hiring highly capable people will save FSLIC a great deal of money," said Raiden. But he said reports that the new association will pay its president $500,000 annually are "out of thin air."
In a speech to the S&L industry leaders, Gray said the thrift industry itself is to blame for "imprudent and excessive risk-taking engaged in by the high flyers and daredevils in the industry . . . who often carry out their activities using high-cost funds on lower levels of net worth and have cost and will continue to cost the FSLIC huge sums of money."
Gray and other speakers at the convention here warned that if the thrift industry does not come to grips with the crisis faced by the insurance fund, a solution may be forced on it by Congress or regulatory agencies. One of the most frequently discussed solutions is the merger of FSLIC and the FDIC.
Gray did not refer in his speech to widespread speculation that he plans to resign soon from the bank board. At the beginning of his speech, he said, "If you're holding your breath, don't."