Less-Sickly S&Ls Mean OTS Faces Tougher Choices

Bailing out the savings and loan industry, the easy part, is nearly over. The Office of Thrift Supervision will finish ushering most dead thrifts into the Resolution Trust Corp. by the end of 1991.

Now, the thrift regulators are grappling with a vexing new problem: deciding whether barely solvent, money-losing S&Ls are worth saving. Their decisions over coming months could determine if some of the nation's largest thrifts will survive.

OTS Director T. Timothy Ryan Jr. told reporters recently that several multibillion-asset West Coast thrifts with serious commercial real estate problems have been transferred to the agency's watch list. These thrifts, whose aggregate assets could be as high as $80 billion, may ultimately require government aid.

Though Mr. Ryan did not name the institutions, thrift analysts think they include the major California thrifts Glendale Federal Bank, with $23 billion in assets; California Federal Bank, Los Angeles, $21.5 billion; and HomeFed Bank, San Diego, $18 billion. All are currently solvent, but continued losses could push them closer to the brink.

Big Challenge for Ryan

Deciding whether to close large troubled thrifts or find ways to let them work out of their troubles is the biggest challenge confronting Mr. Ryan, who recently began his second year as the top thrift regulator.

Up to now, targeting thrifts for takeover has been a matter of simple arithmetic. More than 600 institutions with negative capital and steady losses have been transferred to the RTC, and about 120 others with $80 billion in assets will be transferred by December.

That will clear out the bottom layer of thrifts that the OTS classifies as "Group 4," based on their financial condition and survival prospects.

|Balancing Act' to Come

But tougher judgment calls will come into play as the agency shifts attention to its "Group 3" -- mostly capital-poor institutions with minimal earnings and abundant nonperforming assets. Some 378 thrifts with $261 billion of assets currently fall into this category. Because these thrifts have some capital, they cannot be seized by the OTS.

"This is where a sophisticated balancing act takes place, because you've got institutions in a grey area," said Paul A. Schosberg, president of the New York League of Savings Institutions.

Mr. Ryan said he is exploring new strategies for dealing with these institutions in order to save money for taxpayers, promote consolidation, and give soundly run institutions a second chance. He bristles at the word "forbearance," which carries the emotional baggage of the lax regulation that sparked the S&L crisis. But some analysts say that is exactly what he is considering.

The OTS may be giving the benefit of the doubt to the large institutions in Group 3, even though some are insolvent on a market-value basis, said a source within the Congressional Budget Office. "They are hemorrhaging, and there is no evidence they won't deteriorate further."

Plea for Speedy Solutions

Mr. Ryan's principal deputy director, Jonathan Fiechter, disagrees. "We are not sitting on our hands and watching Group 3," he said. "The sooner we deal with these institutions, the less likely that they will end in Group 4 and cost the RTC money," Mr. Fiechter said.

Another analyst said forbearance is exactly what is needed to ride out the recession and give some large thrifts a chance to recover.

"It's a race between the business cycle and the balance sheet," said Allan G. Bortel, a vice president of Sutro & Co., San Francisco. He said the government could avoid further hefty bailout costs by giving breathing room to otherwise well-run thrifts that have been weakened by the commercial real estate downturn.

One new strategy floated by Mr. Ryan -- an early resolution program that would provide limited government aid to large, weak thrifts and commercial banks -- has raised the hackles of House Banking Committee Chairman Henry B. Gonzalez, D-Tex. Mr. Gonzalez worries that propping up weak institutions will simply delay the day of reckoning.

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