Savings & Loan institutions -- wobbly, but safe?

For years, the window displays in savings and loans have leaned heavily to photos of kittens, puppies, and small children. Placards carried slogans such as "there's no place like home," and "Shouldn't you be saving for a rainy day?"

Now many of the S&Ls clustered around Washington's Farragut Square flaunt a large poster picturing nothing but a small penny. "This," says the accompanying caption, "is more money than has ever been lost in a savings account with us."

Once S&Ls and mutual savings banks were symbols of home, family, and frugality. Today they are troubled institutions, struggling to keep depositor confidence and cash.

"We're kind of like the automotive industry," says James L. Harris, president of Washington Federal Savings & Loan. "We have hit on hard times."

Like many pensioners, the thrift industry has been forced to live on a fixed income while its costs rise. Thrifts have most of their money tied up in mortgage portfolios, which earn an average 9 percent. But to attract new cash S&Ls and mutuals have to pay today's high rates. Around Farragut Square this week's going rate on a six-month money-market certificate is about 14.7 percent.

Passbook savings account -- at 5 1/2 percent a source of cheap money -- no longer can compete with the siren song of money-market funds that pay 15 percent or more. Saving your money in a thrift account is like "buying a ticket on the Titanic," in the words of money-market fund guru William Donoghue.

A record $4.63 billion in net deposits marched out the door of government-insured S&Ls in April. Although the rush was partly prodded by seasonal factors (April income tax payments), it caused the net worth of these institutions to shrink $358 million -- another record.

Last week, for the first time in memory, two reeling S&Ls had to be rescued on the same day. Both Financial Security Savings & Loan of Berwyn, Ill., and New York Suburban Savings & Loan of Scarsdale, N.Y., were merged into stronger institutions by the Federal Savings & Loan Insurance Corporation (FSLIC).

These latest failures raise to eight the number of cash- drained S&Ls that have failed this year. All were covered with federal aid from the FSLIC.

Another 255 S&Ls are wobbly at the knees, listed by the Federal Home Loan Bank Board as troubled by weak performance. A year and a half ago there were only 79.

The smaller mutual industry (centered in the Northeastern states) is no better off. "We're in about the same position as S&Ls," says Frank Wright, assistant director of the Washington office of the National Association of Savings Banks.

Is this the 1930s all over again? Should thrift depositors run out and grab their money back?

No, say industry analysts. Individual S&Ls may be in trouble, but thrifts as a whole are far from a depression-era collapse. If your neighborhood S&L flops, most experts believe the FSLIC can deliver on its promise to insure deposits up to $100,000.

Paul Mackey, a vice-president at Bache Halsey Stuart Shields Inc., says if he had an S&L account he "wouldn't be at all concerned" about its safety. Mr. Mackey roughly estimates the FSLIC has dispensed $160 million in aid this year.

"What they've paid out is small in relation to the income they receive," he says.

The FSLIC's income is paid by member institutions (most S&Ls belong, although some are insured by state agencies), who contribute one-twelfth of 1 percent of savings deposits each month. Currently, the insurance fund totals about $6.5 billion.

An FSLIC spokesman claims the fund "can withstand even the worst case scenario," and points out that with $3 million a day rolling in it only takes 10 days' income to bail out the average failing S&L.

But, according to a report in the June 8 Wall Street Journal, the fund might have to be used to bail out the West Side Federal Savings & Loan Association in New York. The Journal says West Side is not only the largest S&L on the East Coast, but one of the most troubled. Its collapse could drain as much as $700 million from the FSLIC fund.

One investment banker speculates that it "wouldn't take many major S&Ls to run through" the FSLIC's money, although he believes that may be a moot point.

Behind the FSLIC stands the federal government, and most analysts think that in a crunch the Treasury would be forced to grab the insurance fund by the scruff of the neck and pull it out of trouble.

"Whether the insurance fund is literally adequate to pay out in a catastrohe is not the point. The government has what amounts to a moral commitment standing behind that institution," claims a spokesman for the US League of Savings Associations.

That commitment could be inflationary.The possibility of the Treasury turning on the printing presses to bail out failing thrifts "has monetarists up against the wall" as they believe the resultant money supply bulge could send the inflation rate soaring, Mackey says.

In the long run, thrifts will be saved only by getting the return on their loan portfolios to match the interest they pay to attract new money. In the short run, keeping up the cash flow to pay out withdrawals and keep customer confidence is crucial.

And it may be a while before government help arrives."There doesn't seem to be a consensus among the administration and regulators as to what should be done ," says one congressional staffer involved in the planning.

One effort -- a bill that would have provided for forced interstate mergers and increased government credit lines for thrifts -- stalled when Treasury Secretary Donald Regan objected to parts of the legislation.

And despite administration opposition, the Federal Home Loan Bank Board is proceeding with a plan to prop up troubled S&Ls with direct infusions from the FSLIC.

"Any program implemented will be based on policy directed, developed, and initiated" by the board, said chairman Richard Pratt in a statement released last week.

One proposal floated by Treasury officials would allow the FSLIC to issue S&Ls "demand notes," secured by FSLIC funds. The notes could be counted as assets, but no money would change hands unless the institution failed.

Critics call this move mere cosmetics, although one analyst says "the cosmetics may be necessary in order to assuage the public" and keep up cash flow.

The thrift industry itself is pushing tax incentives for small savers, and an "All Savers Act" that would authorize a tax-exempt savings certificate with a yield linked to Treasury bill rates.

They also want restrictions placed on their arch-enemies, money-market funds, which they believe are stealing many of their depositors.