The new law meant to bail out the Savings Association Insurance Fund recognizes how banks and thrifts are converging, but an obscure change in federal law will do much more to drive banks and thrifts together, analysts say.

Two months ago Congress tucked into the minimum-wage hike signed by President Clinton provisions waiving tax liability that thrifts accumulated through 1988 on bad loans. This liability discouraged thrifts from converting to banks, and hindered banks from buying thrifts.

"Banks really face no hurdles to buying savings and loans anymore," said Lehman Brothers thrift analyst Bruce W. Harting. "It'll be Takeover City for the next three years."

The main benefactors will be banks that have already bought a lot of thrifts but not converted them to banks, industry officials said. Such banks include BankAmerica Corp., KeyCorp, First Union Corp., and NationsBank Corp., a bank trade association official said. "This change in law is a horrendous windfall for these banks," the official said.

Previously, a bank that bought a thrift could not covert it into a bank without paying the thrift's accumulated tax liability. Until 1989, the government let thrifts deduct bad debts such as loan losses from their taxable income. But the taxes had to be paid if the thrift was to be turned into a bank. That could cost tens or hundreds of millions of dollars.

Now that the government will no longer collect those taxes, observers expect a surge of bank-thrift mergers and thrift-to-bank conversions.

"Any thrift that wants to convert that's well-capitalized - and even if it's not - could go ahead and do it now," said a thrift industry official who spoke on the condition of anonymity.

Thrift stocks have increased 7.64% on the American Banker thrift index over the past month, more than double banks' pace.

Congress' decision to ease thrift-to-bank conversion culminates years of lobbying by major banks that own thrifts but never converted them, and by some large thrifts that would like to shed the stigma and restrictions of being a savings and loan and enter more potentially lucrative ventures.

For the smaller thrifts or thrifts whose tax liability began after 1988, the future is uncertain.

"We're going to see a declining universe of thrifts," said Patrick Forte, president of the Association of Financial Service Holding Companies. "What do the small ones do now? They light candles. They pray."

Conversion to a bank not only offers thrifts the chance to invest in more profitable places, it also offers immediate attractions for would-be buyers.

According to research conducted by Lehman's Mr. Harting, the benefits to be gained from bank conversion can more than offset the costs thrifts must pay under the thrift fund bailout plan.

For example, the new law requires Charter One Financial Inc., Cleveland, a $13.9 billion thrift, to pay a one-time $52 million to help bail out the thrift fund, according to Mr. Harting. But Charter One's bad-debt tax liability, which the government will no longer collect in case of a sale or conversion, is $59 million. That's "a pretty significant number for any acquirer," Mr. Harting said.

He said H.F. Ahmanson & Co. had bad-debt tax liabilities of $250 million, and Great Western Financial $200 million to $250 million. The new law cancels those liabilities.

Analysts expect most conversion and merger activity to occur in California and in the New York City area and nearby New Jersey, which have more thrifts than other areas.

To Mr. Harting, the ultimate result of Congress' recent tax action couldn't be more clear: Soon there will be few thrifts left, or none.

"Let's ride thrifts into the sunset and make a lot of money doing it,"he said.

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