THIS fall, the battle for political high ground over the savings and loan debacle will be fought over how bank and thrift deposits are insured. The upshot is almost certainly going to be a return of some financial risk to depositors from taxpayers.
When the White House wanted to send a warning shot early this summer to Democrats who were attacking President Bush on the S&L front, spokesman Marlin Fitzwater traced the roots of the disaster to the raising of the insurance to $100,000 per account in 1980.
Fernand St Germain (D) of Rhode Island, then House Banking Committee chairman, slipped through the increase from $40,000 ``in the dead of night,'' Mr. Fitzwater charged.
Democrats, such as Mr. St Germain's successor, Henry Gonzalez (D) of Texas, share the view of how the $100,000 limit came about.
The Treasury Department is working on a plan for reforming the deposit-insurance system. The study is scheduled for completion in January, but it could be ready as early as next month - before the Nov. 6 general elections.
Democrats are pressing the pace. Mr. Gonzalez called for changes in federal insurance in a plan he released last week. It calls for reducing the $100,000 limit, but he has not suggested by how much.
Treasury Secretary Nicholas Brady, concerned about the stability of the deposit insurance system, has said in congressional hearings the $100,000 limit will not be reduced in the Treasury plan.
A stronger concern among policymakers in the administration and on Capitol Hill is to pull brokered deposits - large sums accumulated by financial brokerages from many investors - from under the umbrella of federal insurance.
Currently, brokered funds are insured as if they were deposited by each of the many clients of the brokerage houses. Many policymakers object that these clients are investors who should bear risk, not depositors looking for a safe place for their money.
One reform proposal Gonzalez supports is to limit the number of accounts a depositor can expect federal insurance on. Now, one depositor can spread $1 million to 10 or more financial institutions for insurance on the whole amount.
Few people would be affected by such changes, even if the changes are extreme. A Federal Reserve Board study found that half the families in America hold less than $2,000 in liquid assets. A federal insurance ceiling set at $10,000, the study found, would cover more than three-quarters of these families.
The main purpose in tightening up federal deposit insurance would be to cut the potential liability to taxpayers - a liability fully realized in the S&L collapse.
`IT'S ultimately a vain effort,'' says Peter Wallison, a Washington lawyer and former counsel at the Treasury. ``It might make people feel better,'' he says, but a reform such as limiting each depositor to one insured account ``would just cause depositors and brokers to become more resourceful.''
Federal Reserve chairman Alan Greenspan has acknowledged in hearings that the depositor is a poor, disorderly source of market discipline for banks and thrifts. Depositors' only course of action in a risk situation is to withdraw their funds - exactly the sort of run that federal insurance was meant to avoid.
Even among deposits that are uninsured because they exceed $100,000, depositors are highly complacent about risk, because. ...
All the thrifts that had failed and were ``resolved,'' as the government puts it, by June 30, held $107 million in uninsured money. Yet in the end, the government actually covered all but $19 million of that amount. The other $88 million was covered when the government subsidized the takeover of the failed institutions by another outfit.
Why? Because it saves taxpayers money. Barry Kolach, an economist at the federal Resolution Trust Corporation, figures the government saved $933 million through June by passing most failed thrifts along to another thrift, rather than closing the doors, selling the assets, and paying off the insured deposits.