OTS Scores Coup by Hiring An Expert in 'Pay as You Go'

WASHINGTON - Kenneth F. Ryder Jr. has an obscure claim to fame: He understands better than any other regulator the crucial "pay-go" issue.

Pay-go?

Pay-go is Washington idiom for "pay as you go." Enacted as part of the 1990 budget law, pay-go forces Congress to offset any deficit increases caused by new legislation with spending cuts.

Pay-go became important in banking circles when government officials started hunting around for a way to rebuild the Savings Association Insurance Fund. Finding the billions of dollars needed to capitalize the fund would be difficult under the best of circumstances. With pay-go, it is almost hopelessly complicated.

Enter Ken Ryder.

After a 21-year career at the Office of Management and Budget, Mr. Ryder quit to join the Office of Thrift Supervision as director of research and analysis, a new position.

His hiring in February is viewed as a coup for the agency, which has seen its budget and staff dwindle during the '90s. So far, he's happy with the move because he can dig deeper into issues than he could at OMB.

"My expectations were high coming into the job, and I haven't been disappointed," he said.

Mr. Ryder, 52, speaks in a low, gravelly voice and sprinkles his sentences with the phrase "all right." With snap-on suspenders and scuffed up shoes, Mr. Ryder manages to be casual and serious at the same time. His gruff exterior doesn't quite cover up the sense of humor below the surface.

Right now, he's spending much of his time helping the thrift agency's leaders understand how potential funding sources for SAIF would affect the federal budget.

"If the effect of a proposal is going to be to increase the federal deficit either now or over ... the next seven years, then you're going to run into a pay-go problem," Mr. Ryder said in an interview, alluding to the GOP deadline for balancing the federal budget.

"The big problem - to put it in a nutshell - is that the thrift industry is facing a $15 billion problem and there aren't a lot of other people who want to help pick up part of the tab," he added. "To the extent that the government picks up part of the tab, it becomes a pay-go problem."

For example, many people are arguing that leftover Resolution Trust Corp. money should be funneled into SAIF. But that poses a pay-go problem because it would increase the budget deficit.

"You would be forcing the federal government to make a payment that it doesn't have to pay now," he explained. "Besides, thrifts are footing the bill through 11 cents of premium, which is revenue."

The budget treats the premiums that banks and thrifts pay the Federal Deposit Insurance Corp. as government revenue.

In contrast, the government does not count as revenue money earned on assets invested by the FDIC. That's because the government itself is paying the interest on those assets, which are mainly invested in Treasury bonds, Mr. Ryder said.

If RTC funds are simply set aside to cover future thrift failures, as has been proposed, pay-go is still a problem, Mr. Ryder explained. Further complicating matters, the FDIC's estimate of future losses is lower than the projections made by the Congressional Budget Office, and lawmakers use CBO numbers when figuring a bill's budget impact.

In addition to deciphering pay-go, Mr. Ryder is responsible for spotting trends and trouble spots in the thrift industry.

For example, he is worried that the combination of conditions attached to adjustable-rate mortgages, such as lifetime caps and teaser rates, could make these assets much riskier than they appear.

He's also working on the agency's sophisticated interest rate risk model. Before thrifts with too much exposure are required to add capital, the OTS wants to institute an appeals process. Mr. Ryder said he expects the agency to propose an appeals system this month.

The agency's quarterly analysis of the industry's financial performance also falls under Mr. Ryder's purview. Beyond the usual earnings figures, the next report, due out June 7, will examine the industry's decline in core deposits, he said.

While at OMB, Mr. Ryder worked on the budgets of many government programs, including the Small Business Administration and the District of Columbia's government. But during his last 10 years at the agency, Mr. Ryder also had a front-row seat at the S&L crisis.

In fact, in the mid-1980s he helped develop President Bush's first bailout bill for the thrift industry and then followed the evolution of the Competitive Equality Banking Act of 1987 to the Financial Institutions Reform, Recovery, and Enforcement Act of 1991, and finally the FDIC Improvement Act of 1993.

Basically, he thinks the government did too little too late to avert the thrift industry's collapse. Does he think we're running the same risk now?

"No, these are much different circumstances, and both the industry and the government have learned a lot since then," according to Mr. Ryder. "Today the problem we face is a competitive one. How will thrifts fare once banks pay five times less for the same product - deposit insurance?"

(By the third quarter, bank deposit insurance rates are expected to be cut 83% while thrifts continue to pay 24-cent premiums.)

Mr. Ryder thinks Congress should shore up SAIF by merging the two deposit insurance funds before bank premiums are lowered.

"There is no question that there will be a draining away of SAIF-insured deposits if, in fact, a significant premium differential emerges and is sustained," he said.

While it's hard to predict how quickly deposits will move out of SAIF, Mr. Ryder said: "I think there's a concern that the deposits could move fairly quickly - much more quickly than anyone is anticipating."

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