Twenty-seven more savings and loan institutions slipped into insolvency in the first half of 1985, bringing to 461 the number of S&Ls whose assets fall short of their liabilities, according to a General Accounting Office report scheduled for release Monday.
Unless these S&Ls regain their financial health, their growing debts threaten to bankrupt the federal agency that insures depositors against loss. The gap between their assets and liabilities grew $100 million in the first six months of 1985, meaning the troubled S&Ls would fall $3.4 billion short if pressed to pay deposits and other obligations, the GAO study says.
Under federal regulatory rules, the insolvent thrifts are too sick to keep going and should be merged or shut down. But the beleaguered Federal Savings and Loan Insurance Corp., the federal agency that insures S&Ls, cannot afford to take such action without itself going broke. And the collapse of FSLIC would trigger a crisis far more crippling to the nation's financial system than the recent S&L crises in Ohio and Maryland.
The plight of the S&L industry is not new. But Rep. Stan Parris (R-Va.) yesterday said that its severity as reflected in the new study suggests that Federal Home Loan Bank Board Chairman Edwin J. Gray has "done nothing to fix the problem and should consider tendering his resignation." The bank board regulates S&Ls.
Parris, a member of the House Banking Committee, requested the study from the GAO, a watchdog agency of Congress. Parris said he will tell the House Tuesday that Gray "must address the problem or resign."
In response, Gray said: "Scapegoating a regulator for failing to deal with problems Congress created is absurd. We've been waiting for three years for Congress to act."
FSLIC, the insurance arm of the bank board, insures accounts at nearly 3,200 thrifts across the country for up to $100,000. Because the insurance is backed by the U.S. government, thrift officials and politicians unanimously say that no depositor would lose a dime if a federally insured thrift failed.
But they warn that unless Congress and the bank board soon find a solution to the crisis, taxpayers may be forced to make up the losses.
The GAO report says that about 1,900 of the nation's 3,200 thrifts are in good shape and are growing healthier. But that good news is more than offset, GAO researchers say, by the strain put on the insurance system by the 461 thrifts with no net worth and the estimated 833 others with a net worth above zero but below the 3 percent required by regulatory rules. Net worth is an S&L's assets minus its liabilities, and the GAO calls a thrift insolvent if it has a negative net worth.
The report indicates that 40.7 percent of the S&Ls are operating with inadequate net worth. That doesn't mean a customer could not get cash out of such an S&L, but it does mean that if all depositors tried at once, the thrift would not be able to meet all its obligations.
The growth in the number of insolvent institutions comes even though interest rates and other economic conditions are favorable for S&Ls. In one conservative, worst-case scenario, the GAO report shows that the cost to FSLIC of merging or closing only the feeblest 239 thrifts would exceed the agency's insurance fund of $6.06 billion by at least by $5 billion.
Furthermore, the cost of bailing out S&Ls grows each year. FSLIC paid an average of 14.7 cents in 1984 for each $1 of S&L assets it merged or closed. The cost grew to 23 cents in 1985 and is expected to reach as high as 30 cents on the dollar in 1986, GAO researchers estimate.
Gray has told Congress repeatedly it has only three ways to shore up FSLIC: go to the taxpayers, raise insurance premiums of FSLIC-insured members or impose a one-time levy on the thrift industry. No one in industry or government favors turning to taxpayers for a bailout. No one accepts higher insurance premiums as anything more than a short-term solution intended to buy time while a real answer is found.
But that's where agreement ends. The industry, as represented by the powerful lobby, the U.S. League of Savings Institutions, favors letting the industry slowly recover under the current favorable market conditions. It also has proposed allowing FSLIC to borrow from the 12 regional Home Loan Banks.
But Gray and other bank board officials insist the agency needs a permanent and much more sizable infusion of money. Under protest from the U.S. League, Gray has proposed a one-time levy on all S&L assets, which would raise as estimated $8 billion for FSLIC.
But industry officials and the new GAO report say such an assessment merely would burden the industry's sick S&Ls and drive "hundreds" of the industry's healthiest institutions to withdraw from FSLIC and join the banking system's far healthier Federal Deposit Insurance Corp. That would leave FSLIC even more strapped for income.
In reaction to the GAO report, Parris said one possible solution is to enact a law forcing the bank board to sell ailing S&Ls to companies outside the thrift and banking industry, allowing insurance companies and brokerage firms to enter the field. The bank board now considers purchase offers from investors outside the financial community, but it complies with a federal law that prohibits brokerages from owning thrifts. In practice, most ailing S&Ls are sold to other thrifts and banks.
Parris acknowledges that the S&L leaders will resist efforts to open their industry to outsiders, but such a plan already is gaining favor among powerful players, including the Treasury Department.
Treasury Undersecretary George Gould, in fact, is expected to propose at Senate Banking Committee hearings next week that the bid for ailing thrifts be opened to a wider variety of industries. And privately, bank board officials say they soon may adopt a policy on their own of allowing insurance companies to buy ailing S&Ls.
"The FSLIC fund could use the capital these industries could bring, and Congress may have no choice but to let the Merrill Lynches and the Sears of the world come in and buy thrifts," Parris said.
"If you let Sears in, why not Hardee's or anybody else?" he said. "That, in effect, gives you interstate banking. These are policy issues Congress has got to make."
Parris faulted Gray for not presenting Congress with a "precise, detailed" plan for legislative changes, and for not "pressing Congress to act." But he acknowledged that Congress shares the blame equally for failure to pass laws.
Gray has been widely criticized for stating too aggressively in public that the insurance fund is in trouble and for allowing money-losing thrifts to stay open.
But Gray, in an interview Friday, defended his actions. "We can't close down institutions unless more money is raised, and Congress has chosen not to raise the money. We the bank board are regulators. We don't make laws. We don't print money. We have to operate within the constraints of the law and our resources."