An article in Thursday's Business Section on the drain in deposits at savings and loan institutions should have been attributed remarks by a Federal Home Loan Bank Board official to William Black, deputy director of the Federal Savings and Loan Insurance Corp.
Depositors withdrew a record $14 billion from savings and loan institutions in the first four months of this year, creating a cash shortage at some S&Ls in the economically depressed Southwest and spreading fear among regulators that depositors might face delays in withdrawing money.
Deposits have been withdrawn mostly from S&Ls in Texas, Oklahoma and California in what regulators call a "slow, silent run."
Investors are pulling their deposits, regulators say, because they know that many of the S&Ls are insolvent, and they worry that the Federal Savings and Loan Insurance Corp., which insures deposits, is so short of cash that it might not be able to quickly pay off if an institution failed.
FSLIC's plight is especially serious because two key sources of additional money for S&Ls may not be available to forestall a crisis. First, presidents of the 12 regional Federal Home Loan Banks, which Congress created 50 years ago to provide cash to S&Ls, have warned federal regulators that they cannot continue to advance money to ailing S&Ls simply on the promise by FSLIC that any losses would be repaid.
Secondly, the Federal Reserve Board could lend the S&Ls money. But by law, the Fed can do so only if the loans are secured by "good collateral," such as government securities or first mortgages. For the most part, the S&Ls already have used those securities to secure other loans.
Officials at the Federal Home Loan Bank Board, the federal agency that regulates S&Ls, are painfully aware of a year-long drop in funds -- and public confidence -- that has accelerated since Jan. 1 amid continuing publicity about the deteriorating health of the S&L industry.
Southwest S&Ls have been paying some of the highest interest rates in the country as they try to keep their deposits. Nevertheless, numerous individuals and corporations quietly have withdrawn money once savings certificates mature. With inconspicuous telephone calls and computer messages, often through money brokers such as Merrill Lynch & Co., the money has been transferred to commercial banks, the stock market or other investments.
From January to April, S&L deposits shrank 1.6 percent to $876 billion. The cash crunch has become so acute in the Southwest that S&Ls in the region, even some that are not in serious trouble, are being shunned by investors in a peculiar form of regional red lining. Regulators are worried that the situation could spark a full-blown deposit run and undermine public confidence in the entire U.S. banking system.
"There is increased liquidity pressure," said Robert Sahadi, head of policy and research for the Bank Board. "The problem is getting worse. We knew the problem was going to get worse. We told people the problem was going to get worse. It's going to be worse tomorrow."
While S&Ls have been able to handle withdrawals, their cash reserves for disbursements have fallen below acceptable levels. Regulators and many S&L industry leaders blame Congress for failing to pass legislation that would give FSLIC enough money to shut down several hundred insolvent institutions and restore confidence in the system. If FSLIC had more money on hand, the regional home loan banks would have no qualms about advancing cash in exchange for a FSLIC guarantee.
A few months ago, auditors at the General Accounting Office declared that the insurance fund is insolvent, with its commitments exceeding its assets by at least $6.3 billion. Some analysts estimated that $25 billion or more eventually will be needed to put FSLIC and the thrift industry back on their feet.
Officials at the regional banks say they increasingly are caught between conflicting duties. The law requires that they lend money to needy S&Ls to protect the safety and soundness of the S&L system, and, by extension, the stability of the U.S. financial system as a whole.
But the bank officials say the law also requires that they operate their institutions in a safe and sound manner. For instance, the accounting firm for the Dallas Home Loan Bank warned that the bank had to get $1 billion from FSLIC to cover advances to some institutions, or else the bank would receive a "qualified" opinion of its financial status.
Should any of the regional banks get such a qualified opinion, it could jeopardize the ability of all of the 12 banks to raise money -- which they do jointly -- in the financial markets.
So far, the Bank Board has not had to order any of the 12 regional banks to advance cash to ailing S&L with no collateral. But a showdown, officials at the 12 regional banks say, could easily materialize.
"Any time there is a liquidity problem that could degenerate into a loss of public confidence, it bothers all of us," James Cirona, president of the Federal Home Loan Bank of San Francisco told a gathering of state S&L regulators recently.
Cirona also said that FSLIC's problems are so severe that it may be time to merge the S&L deposit fund with the much healthier fund that insures deposits at commercial banks, the Federal Deposit Insurance Corp. His comment is the first time an official of the Federal Home Loan Bank System has publicly joined ranks with a growing segment of the financial services industry who think the merger of the two funds is inevitable.
Roy Green, president of the Federal Home Loan Bank of Dallas, was so concerned about the cash drain in his bank's region that he made a special trip to Washington in the last two weeks to ask lawmakers and regulators for help.
Meanwhile, the presidents of the home loan banks have been holding numerous telephone conference calls to try to find a way to keep the system working while Congress debates refunding FSLIC. One idea being promoted by some regulators and the largest S&L trade group, the U.S. League of Savings Institutions, is to channel private deposits from healthier institutions in other parts of the country to the distressed, cash-short S&Ls in the Southwest.
The Dallas Home Loan Bank has been trying to persuade some major securities firms, such as Merrill Lynch, to participate in such a plan. However, Merrill Lynch reportedly has warned some Texas thrifts that it plans to withdraw millions of dollars in funds placed there for retail clients.
The U.S. League said it had gotten commitments to move $700 million from healthier institutions to those in Texas. The Federal Home Loan Bank Board similarly could quickly find cash to move within the thrift industry, the League maintained.
However, an official at one of the regional home loan banks noted that $700 million is not very much money with which to try to stop a genuine run on even one large institution, much less several. "If you solve the problem today, you have a bigger problem tomorrow and a bigger problem the next day," he said.
Bank Board official Sahadi said the rising concern among regulators and the S&L industry is "a recognition of reality," namely that the insolvency of hundreds of S&Ls is eroding public confidence in S&Ls but that Congress has failed to take steps to close the ailing institutions.
Because of bickering among lawmakers, Congress has failed to pass legislation that would pump billions of dollars into the FSLIC.
"It is dumb, it is irrational, it costs everybody -- the weak thrifts, the good thrifts, FSLIC, the taxpayers, if there is ultimately a public bailout -- more money to sit here and let the net operating losses grow this way," Sahadi said.
"It is something that people know about, have warned about, take steps to deal with, but we're not trying to con anyone, the steps are expensive and irrational. I mean they are not irrational in the crazed context we find ourselves in, obviously, but they are overall not the way to run a railroad," he said.
S&L executives warn that, as a last resort, the Bank Board could make S&Ls deposit 1 percent of their federally insured deposits with FSLIC. But most people acknowledge that the resulting $9 billion that would be put into FSLIC would be too little and too late to solve the agency's problems. They point out the money would barely cover FSLIC's $6.3 billion deficit.