It's a curious time for savings-and-loans. Congressional committees began hearings on the S&L industry this week amid concern about the stability of thrifts and calls for a government bailout.
But in some ways, the industry is doing remarkably well -- as it should be during a period of level or declining interest rates. The first half of 1985 has been good to most thrifts. Value Line Investment Survey calls it a ``terrific year'' so far.
Economically, the worst period for thrifts was back in the third quarter of 1981, when 85 percent were running losses, says Jonathan Gray, who follows the industry for Sanford C. Bernstein & Co., a New York securities firm.
Many of the problems back then, however, were ``swept under the carpet'' at that time by ``liberal accounting,'' Mr. Gray says. This was to prevent the ``full-blown financial panic that could have ensued.''
Since then with declining interest rates, a number of S&Ls have recovered. The loans on their books are bringing in more money than the thrifts are paying for funds from either depositors or from the Federal Home Loan Bank system. This is reason for optimism, according to specialists who follow the thrift industry.
But the ``tail end of the interest-rate squeeze'' is still around, Gray says, and some thrifts tottered much nearer the brink with more questionable loanmaking than did the majority.
Savings-and-loans, moreover, operate under constant worries about the future course of interest rates and the worth of loans -- especially real estate loans -- in their portfolios.
Quality of management is also a concern, notes Cynthia Latta, senior financial economist at Data Resources Inc., an economic consulting firm. S&L managers were sheltered from the financial marketplace until deregulation in the late 1970s. Since then, they have been forced to learn sophisticated financial techniques.
``Managements have not been up to the task of running institutions in that environment,'' Dr. Latta says. ``Some know just enough to make things dangerous.''
Hence, many thrifts have expanded rapidly, writing loans based on a hunch that interest rates would fall faster, that inflation would perk up again, or that the economy would roar away. Often, S&Ls diversified into areas such as mortgage banking, discount brokerages, credit cards, and real estate developments -- all of which added to costs.
Although most S&Ls have been conservative and methodical, says Gray, ``in each market there are those that are mavericks -- they're often called `crazies' -- that have been growing rapidly and making bad loans.''
``The ones doing all right,'' affirms Latta, ``have been those that stuck to residential lending -- those that didn't go whole hog. There are a number of thrifts that just have not clawed their way back.''
One of the biggest problems in the industry has been Financial Corporation of America, a huge Irvine, Calif., thrift chain that will remain in great danger, analysts say, if interest rates rise again. Some $75 million in loans a month have been going bad at FCA, says Gray, and to date there has been little ``material improvement'' in the company's financial condition.
The Federal Savings and Loan Insurance Corporation has had to bail out such thrifts when they get in financial trouble. This has happened so often in recent years that the FSLIC's reserves have been run down.
There are a number of proposals for helping the thrifts and the FSLIC through the tight spot they are in. Among them:
Write off some of those bad loans. This might imperil the FSLIC's reserves even more. But Latta of DRI notes that it is costly to keep bad real estate loans on the books of S&Ls and figures ``some losses will have to be taken.''
Continue to creak along, hoping that interest rates remain low. If interest rates rise -- which is always a possibility -- the finances of many thrifts could be in trouble.
Create a new agency -- as the industry lobby, the United States League of Savings Institutions, advocates -- to take over some of the bad loans from S&Ls. The final point is what the Federal Home Loan Bank Board and congressional committees are apparently studying.
(The Federal Home Loan Bank Board has also reportedly been studying a plan to borrow as much as $20 billion from district FHLB banks to back up the thrift industry and bolster the FSLIC.)
A new agency might relieve pressure on the thrifts and the FSLIC, says Gray, but there are many who worry that this new agency would be tantamount to nationalization of a big part of the financial community in the US. Moreover, with $50 billion to $100 billion in assets, this new ``phoenix,'' as Gray dubs it, would have tremendous weight in the market.
Hence, it is not going to be a decision taken lightly by federal regulators, he says.