S&L Law: |A' for Effort, |C' for Execution

When the savings and loan bailout bill was signed into law, thrift lobbyist James J. Butera was enthusiastic. The measure, he said that day, marked "the first time we've had real reform in the thrift industry."

Two years later, Mr. Butera's views have changed markedly. "In retrospect," he now says, "I think the bill set us off on a course debilitating to the thrift industry."

Mr. Butera is not alone. Interviews with thrift and bank executives, analysts, and consultants reveal that attitudes have turned increasing negative since President Bush signed the law on Aug. 9, 1989.

Most observers still give credit to the Bush administration and Congress for imposing a regimen of clean living on an industry that had spent the previous decade on a binge of phony accounting and lax capital standards.

In addition, they say, President Bush deserves plaudits for stepping up to the plate early in his administration and asking Congress to put up $50 billion in rescue money - an amount that seemed impossibly high just six months earlier.

But critics say that while the law provided the right medicine, the dosage in some cases was too high.

Specifically, many observers now say that tougher capital rules were implemented too quickly, as were accounting changes. The result: Many profitable thrifts have suffered unnecessarily.

Furthermore, there are complaints that Congress' emphasis on supervisory lapses of the past resulted in a backlash by regulators that helped touch off the credit crunch last year.

In a broader sense, the Bush administration clearly underestimated the scope of the industry's problems - and the cost of correcting them. And the mechanism created to sell off failed thrifts is widely regarded as a failure.

Effort Gets Low Marks

Because of these defects, observers say, the Bush administration and Congress deserve no better than a passing grade.

Not surprisingly, those most closely involved in writing the law - the Financial Institutions Reform, Recovery, and Enforcement Act - find little to fault in it.

"We did what we had to do," said Robert Glauber, Treasury under secretary for domestic finance and a principal architect of the bailout.

"FIRREA is what was needed," said Senate Banking Committee Chairman Donald W. Riegle, D-Mich.

Mr. Riegle acknowledged that the law has had a more severe impact than expected, but only because a recession intervened. "That could not have been predicted," he said.

Rapid Pace of Change

Even supporters of the measure generally agree that some of the changes were implemented too quickly.

While the law brought critically needed changes, "the timing has caused a lot of problems," said Patrick Forte, president of the Association of Financial Services Holding Companies, a group that represents the interests of thrift holding companies.

An example often cited was the tougher capital standards. In wake of widespread losses at thrifts, the Bush administration pushed for thrift rules to be brought in line with those for commercial banks by 1995.

Some think the phased-in requirement that thrifts have capital equal to 3% of equity is too draconian, considering the plight of the industry. "I've seen institutions closed that didn't have to be closed," said Mr. Butera, the lobbyist. "You have institutions below 2% capital that are profitable. What sense does it make to close them?"

Rep. Doug Barnard, D-Ga., a banking committee member who generally gives the law high marks, has some second thoughts on the timing of the capital rules, saying they have curbed the ability of some profitable thrifts to lend. "We have put so much emphasis on safety and soundness that we have caused some restriction of credit," he said.

|It Had to Be Done'

Mr. Glauber, nonetheless, staunchly defended the change. "Thrifts should have the same capital standards as banks," he said. "It was the right thing then. It's the right thing now. It had to be done."

Another topic of second-guessing is the elimination of supervisory goodwill as a component of capital. The law gave thrifts five years to eliminate the intangible asset, which resulted from the purchase of failed institutions. Regulators had allowed goodwill to count as capital to encourage acquisitions of failed thrifts with minimal assistance.

Rep. Peter Hoagland, D-Neb., wonders now if Congress didn't go too far in its attack on supervisory goodwill.

"I have a thrift in my district, Commercial Federal Savings and Loan Association, that was founded over 100 years ago, and it's been absolute hell for them" since the law was passed, he said. Commercial Federal took a failing thrift off the hands of regulators and received goodwill in return.

Resorting to Branch Sales

Now, he said, the thrift is selling off branches to raise funds to replace the goodwill on its books.

"If we had known then that the economy was going to have the difficulties it has had, and that the price tag [for the law's reforms] would be so high, I think we would have tried to give the S&Ls more time to adjust," he said.

Another thrift caught with supervisory goodwill on its books was Honolulu-based HonFed Bank.

HonFed had a negative net worth when it was purchased by an investor group led by former Treasury Secretary William Simon in 1986. The thrift was then brought into capital compliance without "a nickel of government money," said Gerald M. Czarnecki, HonFed's chairman and chief executive.

Their reward? The new capital rules. To meet the standards, Mr. Czarnecki said, a 25% share of HonFed had to be sold, diluting the investment of existing shareholders.

Regulators Crack Down

The CEO also pointed to the law as the cause of a subsequent regulatory crackdown. "Congress caused regulators to be afraid of their own shadow," he said. "Regulators now look for the toughest standard they can find and then double it."

While some thrift executives bristle over new capital rules, the public whipping boy of the bailout has been the Resolution Trust Corp., which has to dispose of about $500 billion in assets from failed S&Ls.

"It has an organization chart that looks like a plate of spaghetti," said Rep. Bruce Vento, D-Minn., a member of the House Banking Committee who chairs a task force that monitors the RTC. Still, Mr. Vento thinks the law might have worked if it had been implemented more effectively.

"If it had had a strong administrator, or if the President or [Treasury Secretary Nicholas] Brady has taken a strong role, it might have worked," Mr. Vento added. "But there's been no leadership there."

Karen Shaw, president of the Institute for Strategy Development, said Democrats like Mr. Vento should have known - and probably did know - that the RTC would not work. Its structure was flawed and it was underfunded, she said.

Campaign Issue

But Democrats were looking ahead to the next election and looking for issues to turn against the Bush administration, she asserted.

"The thing that is most depressing is that members [of Cogress] knew they were passing a deeply flawed piece of legislation," Ms. Shaw said. "They knew it would come back to haunt Republicans."

Mr. Vento and his colleagues deny that Democrats hoped to set Republicans up. The administration asked for the oversight board structure, he said, "and we felt they ought to have a chance to make it work."

For all the problems associated with the law, the most worrisome aspect in the minds of most observers is the escalating cost of the bailout.

"This thing is just costing too much money," said thrift lobbyist Richard F. Hohlt. "George Bush is going to go down with the largest deficit in history, and it's not caused by the space program or the need to deal with the Russians. It's caused by the S&L and banking industries."

Social Programs Suffer

The rising price tag has forced lawmakers to approve new money for S&Ls at the same time they were cutting back on social programs, a situation that created hard feelings among lawmakers toward insured institutions - banks as well as thrifts.

The mounting cost has forced the Bush administration to go back to Congress for additional funding twice already. While the two sides bickered over the funding issue, the bailout was slowed.

"It was noble of the Bush administration to say they would use taxpayer dollars, but they didn't ask for enough," said Bert Ely, an Alexandria, Va.-based consultant who consistently provided the most accurate estimates of the size of the bailout's needs.

"So the Resolution Trust Corp. got into the speed-up, slow-down, speed-up, slow-down routine," he said. "And if they don't get the money they need this fall, they'll have to slow down again."

Mr. Riegle does fault the Treasury for failing to predict the cost of the bailout.

"They asked for $50 billion and said $10 billion [of that] would not be needed, that it was only cushion," he said. "Then they asked for $30 billion more earlier this year, and they're asking for another $80 billion now. So it's gone from $40 billion to $160 billion. It's obvious they badly misjudged the size of the problem."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.