Just about everyone involved in the current legislative effort to modernize the Federal Home Loan Bank System agrees that the sticking point is a proposal to reallocate part of the bill for the thrift bailout among the 12 district Home Loan banks.
Increasingly, observers are saying that the only way to untangle the mess is simply to drop the new allocation formula for the thrift bailout bond interest out of the legislation. And some observers say Rep. Richard Baker, the bill's sponsor, may do just that.
"There is optimism that Baker will drop it in subcommittee, because it's the only way to keep this bill moving," said an administration source close to the matter. The House Banking subcommittee on capital markets is expected to begin deliberations on the measure this Wednesday.
The Louisiana Republican and the Clinton administration have introduced similar plans to modernize the Home Loan Bank System, and each plan incorporates a new way of divvying up how much each of the Home Loan districts have to pay towards interest on thrift bailout bonds.
The new allocation plan essentially would have each of the 12 district banks pay its share in proportion to its required capital. What makes this so controversial is that some Home Loan districts could see a significant increase in their share of the bailout tab.
Congress established the Resolution Funding Corp. in 1989 to issue bonds, the proceeds of which went to help cover thrift losses. Each year for the next 35 years, the Home Loan Bank System must pay $300 million in interest on the bonds.
The current allocation formula has each Home Loan district bank pay up to 20% of its income to the Resolution Funding Corp. If this totals less than $300 million, then the shortfall is collected from each district bank in proportion to its advances to members insured by the Savings Association Insurance Fund.
The allocation issue is such a bone of contention among districts that last week, the presidents of the 12 Home Loan district banks met in Washington and voted 9-2 - with one abstaining - to support the Baker bill only if the allocation formula is dropped.
"If we can eliminate that section, the rest of the bill can sail through with little or no controversy and proceed to quick passage," said an aide in Rep. Paul Kanjorski's office.
The Pennsylvania Democrat has slammed the formula proposed in the Baker bill, mainly because it could slug the Pittsburgh district bank with a 60% increase in Resolution Funding Corp. obligations.
And, since half of Rep. Baker's subcommittee members hail from northeastern states served by Home Loan districts that would generally have to pay more under the new allocation plan, many doubt that the bill would make it through the panel with the proposed changes intact.
"The New York and New Jersey members on both sides of the aisle are going to be the swing votes on this," said one legislative source.
So dropping the controversial allocation formula out of the system modernization plan seems like a logical move. But punting the problem now won't make it go away. Industry sources agree that it has to be fixed sometime.
That's because the current formula - which tends to place more of the Resolution Funding Corp. burden on Home Loan districts with a larger proportion of members insured by the thrift fund - can discourage system banks from lending to such members.
And the logical place to attack the allocation question, according to some sources, would be in the broader context of shoring up the sagging thrift fund.
"In restructuring the Federal Home Loan Bank System, you don't really have to deal with the reallocation issue," said Bert Ely, a banking consultant based in Alexandria, Va.
"In any SAIF legislation, you have to deal with it, because the RefCorp allocation is based on SAIF-insured institutions, and if you merge the funds - an important part of the SAIF solution - you don't have that SAIF distinction to base the allocation on anymore."
While one administration source said the contentious issue should not be attached to the already sticky debate over the Bank Insurance Fund and the thrift fund, others in the executive branch said that the Resolution Funding Corp. allocation involves a relatively insignificant amount of money, and probably would not hamper any move to pump up the thrift insurance fund.
"A lot of people are thinking that this is really an issue that will have to be taken up as a BIF-SAIF issue," an administration source said.
