Maryland Gov. Harry Hughes traveled to his Delaware beach retreat last weekend to begin spending two weeks soaking up the sun of which he is so fond and, his aides believe, mulling a race for the U.S. Senate. Literally and figuratively, he ran into heavy weather.
During Hughes' first week at Rehoboth Beach, rain pounded the sands, and the second major squall in less than four months pummeled the state's troubled savings and loan industry. On Monday, and again on Friday, Hughes signed executive orders temporarily freezing withdrawals at two of the largest state thrift associations that have encountered difficulty in winning federal deposit insurance, Community Savings and Loan of Bethesda and First Maryland Savings and Loan of Silver Spring.
Even during a vacation at the end of a hectic summer, the 58-year-old chief executive has been unable to escape what has turned into the severest challenge of his seven years as governor. The flash fire that erupted in the thrift industry in May with heavy runs by depositors on Baltimore's Old Court Savings and Loan Association -- and which was thought to have been doused by firm and decisive action by Hughes and the legislature -- has in fact been smoldering all summer. Now, it has flared anew, this time in Montgomery County, traditionally a political stronghold for the liberal Hughes.
This second explosion in the industry comes at a particularly awkward time for the governor, who a year from January will leave the governor's office at the end of his second term. Considered the leading Democratic prospect for the Senate seat held by Republican Charles McC. Mathias Jr., Hughes must make a decision soon if he is to build the political and financial support necessary for a long campaign through next September's primary and the general election six weeks later. Aides to the governor think he will return from the beach next week having made up his mind.
The governor's wife Patricia, who is regarded as a key player in his decision, is said by some to favor the race and by others to be reluctant to go to Washington. A Prince George's County politician interprets her decision to allow the county Democratic central committee to use the governor's mansion for an October fund-raiser as a certain sign Hughes is running.
Other possible Democratic candidates are already zeroing in on the race. No formal announcements have been made, but among them are Rep. Barbara Mikulski of Baltimore and state Sen. Stewart Bainum Jr. of Montgomery County. Hughes is regarded in some Democratic quarters as the best bet to defeat Mathias, but the Democratic field is expected to grow if Mathias retires. Possible entries under that scenario include Rep. Michael D. Barnes of Montgomery County and Baltimore County Executive Donald P. Hutchinson.
"There's a bit of a game of chicken here," said one veteran of Maryland Democratic politics. "The clock is running and everyone is waiting to see who blinks first."
Added one longtime supporter of Mathias: "If Mac says he's going back to the farm to raise peacocks, a lot of people will come out of the woodwork and it will be a very interesting Democratic primary."
A wild card in all the deliberations is how the continuing savings and loan crisis will play politically for Hughes, who captured the statehouse by pledging to restore integrity to state government and whose hallmark in office has been deliberate management untouched by scandal. Though many political insiders believe that Hughes has yet to be wounded by the crisis and praise his calm and resolute stewardship so far, they concede that there is considerable potential for damage.
They point to the fact that about 137,000 depositors are unable to withdraw any money from the four institutions subject to withdrawal freezes, and that many more are subject to a $1,000-per-month withdrawal limit per account. Moreover, many people in the financial community predict that if any thrifts have to be liquidated and Maryland makes good on its guarantee insuring depositors up to $100,000 per account, the ultimate cost to Maryland taxpayers could be as high as $500 million.
"It's the death by a thousand cuts," said one veteran Democratic activist and Hughes supporter. "He's being cumulatively injured . . . . My analogy is the Iranian hostage crisis. Carter was originally helped because the nation rallied, but then as it went on, the guy on watch got the blame."
Some of the political fallout will come months from now, if at all. A great deal will depend on the outcome of a special counsel's investigation, due in March, which is likely to reveal the extent of any regulatory failures by the Hughes administration.
Until now, Hughes has "managed to keep the lid on and distance himself from it," said one congressional source, "but it could still blow up in his face. That's why he hasn't declared for the Senate . He's gingerly waiting to see the fallout."
Hughes press secretary Lou Panos said yesterday that the governor was not available for comment. Arguing that the long-term prognosis for the thrift industry is "optimistic," Panos predicted that the governor ultimately will benefit from his handling of the crisis.
Hughes, said Panos, could "salvage virtually all the assets the depositors have in troubled institutions without costing them or the taxpayers any money. If he were to do that, it could be viewed as a strong accomplishment."
While acknowledging that there are political risks to the savings and loan situation, Panos said, "According to reviews from political and financial observers in and out of government, he has won extremely high marks for the way he's handled the crisis."
The troubles at Community and First Maryland come at a time when Hughes and his staff expected to be riding a crest of good news. A deal is nearing completion under which Chase Manhattan Corp. of New York will acquire three state thrifts, including Merritt Commercial Savings and Loan of Baltimore, which has been under state conservatorship since May. A number of the largest associations are expected to win federal insurance shortly, including John Hanson and Fairfax, which have recently received conditional insurance approval. A special legislative session is anticipated for late September to enact a new banking law permitting the Chase acquisitions.
The Hughes administration had known for some weeks it would have to stem the hemorrhaging of deposits at First Maryland through a conservatorship or a withdrawal freeze. But officials had planned to soft-pedal that dose of bad news under the fanfare accompanying an announcement of the Chase deal to take over Merritt and the calling of a special session. Their obvious hope was that the public would see First Maryland as an isolated dip in a generally upward trend line.
But those plans have been overtaken by events. The deal for Merritt has taken longer than expected. The drain on savings deposits at First Maryland was so severe that immediate action was necessary to preserve its vanishing liquidity. And no one anticipated that Community would announce that it might default on payments that its real estate subsidiary owes investors, causing a two-day run on deposits and forcing a freeze on withdrawals.
Some Maryland politicians with long memories refuse to believe that Hughes will be hurt by these events. He has a history of miraculous political recoveries, they say.
"Politically, he carries a rabbit's foot around in his back pocket," said state Sen. Thomas V. Mike Miller Jr. (D-Prince George's). "Going into his last campaign everyone said he was a dead duck. He had one good session, two lackluster opponents, and he went back into office with an overwhelming margin. I think he can pull it off. He doesn't have to come out looking like Winston Churchill or FDR. If he comes out looking halfway statesmanlike . . . he has a good chance of getting elected to the Senate."
Added state Sen. Laurence Levitan (D-Montgomery): "He's like Ronald Reagan. It sort of runs off him."
So far, little seems to have stuck. A Baltimore Sun poll at the end of June showed that more than twice as many Marylanders blamed the legislature for the savings and loan crisis as blamed the governor. And few customers at First Maryland on Friday were critical of Hughes or the $1,000 limit on withdrawals that was about to be replaced by a 60-day freeze.
"I never liked Hughes, but I happen to think what he did was probably good," said Carter French, a computer technician.
"I think the governor is between a rock and a hard place," added Estelle Alexander, a Rockville librarian who was transferring her First Maryland deposits to a commercial bank.
Nonetheless, the political antennae of Hughes' potential opponents are already quivering. Bainum, for instance, who has considerable personal wealth to invest in a campaign, has begun to criticize the governor -- however mildly -- for not hiring the best outside experts available to help the state work its way out of the crisis.
"I'm afraid we are not managing the crisis quite the way it ought to be managed," he said.
The longer it takes for the Hughes administration to get out from under the thrift crisis, the more frequent that kind of criticism may become.
Said one Baltimore business figure, "If Harry is damaged, it becomes a really interesting race."