Federal regulators will ask Congress on Thursday to create a new corporation that would funnel as much as $15 billion to the ailing federal fund that insures savings and loan institutions, Federal Home Loan Bank Board officials said yesterday.
The $15 billion is needed to bolster the Federal Savings and Loan Insurance Corp., the fund that insures individual accounts at S&Ls up to $100,000. The fund, with only $6 billion in current reserves, has been drained by record S&L failures since 1980. It could go broke if forced to handle, without additional cash, the 216 S&Ls that are expected to fail in the next three years. In a worst-case scenario, those rescue efforts could cost more than $20 billion.
The bank board, which regulates the nation's 3,200 S&Ls and FSLIC, and the Treasury Department will ask the House and Senate banking committees to pass the package soon enough to get the corporation open by Oct. 1, officials said. The bailout plan was discussed by Edwin J. Gray, chairman of the bank board, yesterday at the National Council of Savings Institutions conference in Boca Raton, Fla., and by other federal officials in Washington.
The corporation would use an unusual three-step process to raise money for the federal government: first, it would receive cash from the 12 Federal Home Loan banks; then, it would use that cash to buy zero-coupon Treasury bonds; and, finally, it would use those bonds as financial backing to float bonds to raise the $15 billion.
Zero-coupon bonds often have been used as collateral to raise money for private companies and for state and local governments, but the technique has never been used by the federal government, Treasury officials said. Unlike most bonds, zero coupons pay no interest. Instead, investors purchase them, like U.S. savings bonds, at a deep discount and earn a profit when the bonds mature at full face value.
The proposed bailout plan involves a complex series of transactions involving the new corporation, the bond markets, FSLIC and the regional Home Loan banks. The banks, which are owned by member S&Ls and regulated by the bank board, borrow money for S&Ls in the open market.
The money that would be used to create the corporation is $1.8 billion in profits that the Home Loan banks have accumulated since being created by Congress 54 years ago. The profits are the difference between the price the banks pay to borrow money and the price they charge on loans to member S&Ls.
The banks also would give the corporation as much as $1.2 billion in additional cash from anticipated profits during the next five years.
Officials said that, by using a corporation to implement the bailout plan, neither the Home Loan banks nor FSLIC would have any obligation to repay the $15 billion. The corporate shield is intended to preserve the strong credit rating of the Home Loan banks and to appease federal budget-cutters.
The banks are permanently funded with approximately $8 billion derived from the sale of stock to member S&Ls. That money, which the S&Ls carry on their books as assets, would not be used in the new plan so that the credit rating of the banks and the S&Ls would not be hurt, officials said.
The corporation, which would be owned and operated by the Home Loan banks, would use its $3 billion in funding to buy zero-coupon Treasury bonds. The bonds would be worth the full $15 billion when they mature in 20 years, officials said.
The corporation would use the $15 billion future value of the zero-coupon bonds as collateral to issue $15 billion in regular bonds to investors in the open market. The money raised would pass to FSLIC in two ways.
First, FSLIC would get $3 billion from the corporation in exchange for newly issued FSLIC common stock. FSLIC then would pay stock dividends to the corporation, which would use the money to pay interest on the bonds sold to investors. FSLIC would get an additional $12 billion in cash from the corporation, on which it would pay no interest.
The corporation would use the $15 billion it would get when the zero-coupon bonds mature in the year 2020 to retire the $15 billion bond issue. Then the corporation would go out of business, officials said.
In addition to Congress, the Congressional Budget Office must approve the plan. By shielding FSLIC from obligation, bank board officials hope to assure the CBO that the $15 billion is not debt and therefore would not add to obligations of the U.S. government.
With or without the $15 billion bailout plan, FSLIC's current $6 billion in reserves will grow by several billion dollars during the next few years from premium payments received from insured S&Ls. It also will get money from a special assessment on deposits that the bank board imposed last year as an emergency measure to bolster the insurance fund.
Treasury and bank board officials expect that the plan they will unveil would allow the special assessment -- which last year garnered $1 billion -- to be phased out in five years. The phase-out is not officially included in the plan that will be submitted to Congress, however, officials said.
The U.S. League of Savings Institutions, a powerful S&L trade group, plans to lobby Congress hard to get the five-year phase-out into the bill. But industry sources say the league will back the plan as it stands.
The S&L community, the bank board and congressional banking leaders have been divided for months on whether a rescue plan was needed and, if so, how to devise one that would not harm the credit rating enjoyed by the Home Loan banks.
The catalyst for uniting the S&L community behind the plan came from Treasury Undersecretary George Gould, who contributed to many of the proposal's key features.