Conceding that the outlook for legislation shoring up the thrift insurance fund is bleak, House Banking Committee Chairman Jim Leach proposed a near-term solution Thursday.
The committee will hold a hearing Tuesday on the Iowa Republican's plan to avoid a default on Financing Corp., or Fico, bonds issued in the late 1980s to pay for the first savings and loan bailout.
"It is important at least to adopt a short-term fix to resolve any market questions on Fico," Rep. Leach wrote in a letter to committee members. "Longer-term issues would remain on the table, but taxpayers would be protected fully in the meantime."
To avoid a default, Rep. Leach's bill would direct the Federal Deposit Insurance Corp. to allow premiums paid on any deposit in the thrift fund to cover Fico interest. Currently, premiums paid on 37% of the Savings Association Insurance Fund's deposits may not be used to pay Fico's $780 million annual interest tab. These deposits are owned by banks or by thrifts that have converted to bank charters.
But Rep. Leach's idea is likely to face stiff opposition.
"We should be trying all other options before giving up and trying a narrow fix," said Rep. Marge Roukema, the New Jersey Republican who is chairwoman of the House Banking Committee's subcommittee with jurisdiction over the deposit insurance funds.
Making more deposits eligible for Fico, according to FDIC spokesman Robert M. Garsson, "doesn't fix the underlying problem, it delays the problem."
"Short-term solutions like this just won't work," said Lou Nevins, president of the Western League of Savings Institutions. He predicted an acceleration of deposit shifting from the SAIF to the Bank Insurance Fund.
Such deposit shifting could lead to a default on the Fico bonds. It takes $329 billion of deposits to generate the $780 million in premiums needed to pay Fico interest. At yearend, just $459 billion of the thrift fund's $734 billion of deposits was available to pay Fico interest. So if just $130 billion more was transferred from the thrift fund, there wouldn't be enough premium income to pay off the Fico bonds.
FDIC Chairman Ricki Helfer said this week that this cushion is threatened because 80 thrifts holding $150 billion of deposits could shift funds to affiliates covered by the Bank Insurance Fund.
Rep. Leach has long supported a "galactic solution" that would capitalize the fund through a one-time fee on thrift deposits and require banks to pay $600 million of the Fico tab per year. But in his letter, he said the banking industry's opposition has frozen the legislation.
"Given the virtually unanimous opposition of the banking industry to the Fico payment, moving BIF-SAIF legislation ... would be highly problematic," Rep. Leach wrote. "The S&L industry would likely lose in such a face-off."