WASHINGTON - Thrifts may not be able to meet interest payments on bonds that were authorized in 1987 as part of an early effort to stem the savings and loan crisis, the industry's top regulator said Thursday.
"The government, administration, and Congress will have to devise an alternative way to service the Fico debt," said Jonathan L. Fiechter, acting director of the Office of Thrift Supervision.
The Financing Corp., or Fico, was created by the 1987 Competitive Equality Banking Act, which provided $10.8 billion to recapitalize the now defunct Federal Savings and Loan Insurance Corp.
The principal will be repaid with the proceeds from zero coupon bonds that were purchased with funds from the Federal Home Loan banks. But the thrift industry is supposed pay the remaining $18.7 billion in interest.
However, Mr. Fiechter said the thrift industry is disappearing in the face of a looming gap between what thrifts and banks pay for deposit insurance.
The thrift industry's major trade group agrees.
"The handwriting there is clearly on the wall," said Paul A. Schosberg, president of America's Community Bankers.
"It seems likely that the SAIF assessment base is going to continue to shrink, and I think the only argument is at what pace," he added, referring to the Savings Association Insurance Fund.
Thrifts are slated to pay roughly six times more than banks starting this fall because they must recapitalize their insurance fund while paying interest on part of the S&L cleanup costs.
Reacting to the looming rate disparity, a number of large thrifts are chartering commercial banks that they will use as vehicles to shift deposits out of SAIF and into the Bank Insurance Fund. In addition, Mr. Fiechter noted, those thrifts that remain in SAIF will soon face strong competitive pressure.
Mr. Fiechter delivered his warning on the Fico bonds while announcing that the thrift industry earned $1.1 billion in 1994's fourth quarter, "down moderately from the previous two quarters."
And though, at $1.1 billion, thrifts' profits are still strong, the regulator pointed out that "thrifts have consistently earned less than their banking cousins."
The nation's 1,543 thrifts had $774 billion in assets at the end of the year.
Profits have been squeezed because interest rates have risen. That narrows the spread between what thrifts charge customers who borrow money and what they pay customers who deposit money with them.
Mr. Schosberg said the trend will likely continue.
"Profits are stagnant," he said. "Barring some really significant economic change, you would probably expect that 1995 would look very much like 1994 and may be even be a little poorer."
But in the future, thrifts will have more to worry about than the effects of interest rates on their profits.
Mr. Fiechter predicted that the long-term effect of a large gap between the rates banks and thrifts pay for deposit insurance, "will be a drag on thrift earnings."
If the government does not address that problem, "we are going to see all kinds of creative restructurings," in the thrift industry, Mr. Fiechter said.
Though thrifts' capital and earnings have recovered from the doldrums they reached during the S&L crisis, "it would be a mistake to take the current financial condition of the industry for granted," Mr. Fiechter warned.
"The first order of business is to figure out a way to fund Fico other than with SAIF premiums," Mr. Fiechter said.
Most think it is unlikely that the government would allow the Financing Corp. bonds to default, because of their implied government guarantee. But Congress is unlikely to look to taxpayers to pay the tab. So industry sources believe banks would be the most likely deep-pockets to be tapped for the interest payments.
