OTS Eyes 10 Ailing Thrifts As Candidates for Aid Plan

WASHINGTON -- Banking and thrift regulators are exploring the possibility of pumping federal assistance into some large institutions that are solvent but face severe real estate problems.

The aid would be accompanied by infusions of private capital from investors whose potential losses would be limited by regulators. The program would be aimed at salvaging institutions that might otherwise fail in a year or two.

"About 10 thrifts would be qualified for this type of assistance if it were available," said T. Timothy Ryan Jr., director of the Office of Thrift Supervision. "I have a pretty good idea of who they are."

Controversial Strategy

The early-resolution idea is a variation on a controversial and sparingly used rescue technique known as open-bank assistance. In that process, used when a failure is imminent, a bank is not closed. But management is dismissed and the stake of existing shareholders is severely reduced.

The new proposal calls for much more aggressive action by regulators and existing bank managements. Under the plan, a bank or thrift would approach the Federal Deposit Insurance Corp. for assistance. "The bank would say, |We don't know if we are going to fail, but we think there's enough risk for us to seek early resolution,'" said Harrison Young, director of resolutions at the FDIC.

Institutions with strong franchise value and strong management would be the best candidates for the program. Fresh private capital would have to be offered. Also, "there would have to be a substantial dilution of shareholders and substantial concessions by debtholders," Mr. Young said.

"If you can get everybody on board to deal with a sensible, realistic resolution 18 months before the bank would otherwise fail, you can save a great deal of money for the insurance fund," he added.

Help for Regional Economies

Directing federal aid to these institutions would salvage maximum value in those institutions, while preventing collapses that could shake the already frail economies of those regions.

The program would have to bring in substantial new private capital, result in consolidation, give the government a stake in any profits, and be structured so that the government gets out first, Mr. Ryan said.

In a new twist designed to overcome potential acquirers' reluctance to absorb unforeseen risks, the regulators would grant "black-hole insurance" against loan losses.

For instance, an acquirer agree to absorb the first $50 million in unreserved loan losses. If losses exceeded that amount, the FDIC would cover a portion, perhaps 75%. But in exchange for this coverage, the investor would have to either pay a premium or give the FDIC an stake in the company.

Banking regulators have been discussing such a program for several months, and the Treasury Department and the Office of Management and Budget are now involved in negotiations.

Agency Approvals Needed

Mr. Ryan noted that an early resolution program for thrifts would need approval from the OTS, the Federal Deposit Insurance Corp., and the Resolution Trust Corp. Oversight Board, which would have to authorize funds for the Savings Association Insurance Fund. A similar program for banks would need approval from the FDIC, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

With the job of shifting 120 insolvent thrifts into government control six months from completion, the OTS is turning its attention to resolving weak but still solvent institutions.

Strategies for handling some 375 undercapitalized thrifts with roughly $260 billion in assets will move to center stage today as the OTS unveils its report on the condition of the thrift industry for the first quarter of 1991.

A Germ of Good News

Fewer than half of these so-called "Group 3" thrifts are considered government takeover candidates right now, Mr. Ryan said in an interview Tuesday. Most will remain under tight supervision while they are prodded to obtain new capital, replace managers and directors, or merge with healthier institutions.

The quarterly report contains a germ of good news: The OTS will announce that the 2,283 thrifts remaining in private hands turned a profit for the first time in four years.

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