The S&L Crisis Is Far From Over

SINCE the beginning of this election year the Bush administration and Congress have been fighting over the savings-and-loan cleanup. The administration has said that we are in the eighth inning of the cleanup with only 40 or so remaining S&Ls to be added to previous failures. The administration has repeatedly attacked Congress for not providing another $43 billion to finish the cleanup.

Congress has balked, expressing skepticism about the most recent estimates and deriding the cleanup efforts. So far the result has been a stalemate, with Congress on the defensive and both presidential candidates ducking the issue. Here is why we think taxpayers will have to sit through a long ninth inning after the election.

The administration's sanguine estimates of future failures are based primarily on the S&Ls' overall profitability. In announcing record profits since the beginning of 1992, for example, the Office of Thrift Supervision has touted several consecutive quarters in which most S&Ls reported profits.

Whenever the government uses overall or average profitability to allay fears about S&L or bank failures, taxpayers should ask, "So what?" Taxpayers only pay for the relative dregs that have been pulling down the group averages. For 12 years that is where losses have emerged and where they are lurking today.

At the beginning of 1992 there were 282 S&Ls with $176 billion in assets that were unprofitable. Of that number, 152 S&Ls had next to no reported capital - the buffer between losses and taxpayer expenditures. Perhaps the most important word in the previous sentence is "reported."

Capital is reported on the basis of historical cost accounting that essentially does not require S&Ls to report deterioration in the value of assets unless they are sold. Many of the unprofitable S&Ls would report insolvency if they were required to report their market value. These are the S&Ls that will be at the top of the batting order in the ninth inning.

BUT the flow of future red ink does not stop there. At the beginning of 1992 another 552 S&Ls with $201 billion in assets earned a return on assets of less than one-half of 1 percent, peanuts by historical standards. What makes these puny earnings even more startling is that the regulators are winking at the kind of excessive risk-taking that brought the S&Ls to their knees in the early 1980s. Short-term interest rates at 30-year lows are allowing many S&Ls to make a killing the old fashioned way by borr owing short and lending long.

Under these circumstances, one might expect that a large segment of the industry is on the verge of being dumped on the taxpayers' door step. This is especially true today because beginning in December federal legislation requires regulators to resolve any S&L or bank whose capital falls below a "critical capital" level of 2 percent. This is the much talked about "December surprise" in which regulators' rosiness is supposed to be dropped.

Yet we do not expect a big surprise. As long as interest rates remain low, regulators are likely to continue hiding the extent of the problem behind industry-wide profitability statistics and capital values inflated by regulatory accounting gimmickry. Taxpayers can then expect even higher costs in the long run for another round of short-term political face saving.

There is a political cat-and-mouse quality to all of this to which many may have become inured. Yet the S&L cleanup has already cost about $150 billion before interest payments. Now additional failures are being hidden from the American voter. When the next president is inaugurated, the S&L debacle will begin its 13th year. How long will it take until it gets the respect it deserves and is resolved? We expect well into extra innings.

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