Thrift Crisis II Depicts Collapse Of Home Banks

A sequel to the savings and loan crisis may be in production in the Federal Home Loan Bank System. Critics warn it will collapse unless drastic action is taken to increase its earning power.

Faithful to the horror-movie genre, the sequel won't be nearly as gruesome as the original. Congress, the administration, and thrift leaders are so far oblivious to what could be another painful experience for the industry and all taxpayers.

Part One's complicated plot, you'll recall, revolved around the collapse of the S&L industry's deposit insurance fund. The cheating, dirty politics, bureaucratic bungling, dastardly villains, and the horrendous impact on the economy earned it an X rating.

Part Two unfolds with warnings of the dissolution of the $152 billion-asset Home Loan Bank System, a source of liquidity to home lenders. The regional Home Loan banks accept mortgages as collateral for short- and long-term "advances" at low rates.

A Milder Version

The sequel gets a R rating because the subplots aren't as sexy and there is not quite as much gory red ink to spill. Nevertheless, the story is not for the faint of heart.

The bank system's capital comprises 30% of the S&L industry's net worth. Dividends from Home Loan banks' stock constitute 27% of the industry's pretax net income. And the system supplies $300 million each year from earnings to help pay off debts associated with the S&L insurance fund's collapse.

Customers Disappearing

The system is under pressure because advances to members are down. S&Ls that once comprised the majority of the system's customers are disappearing as regulators crack down on weak institutions; and the 287 commercial banks and credit unions that have recently joined the system are not borrowing as much as the system had hoped.

The net effect is that, barring a dramatic turnaround in loan demand, the system's income in future quarters is likely to decline sharply. The decline, in turn, will reduce the yield on the stock of each Home Loan bank, leading to a flight of members from the system and a precipitous loss of income and net worth for the S&Ls that do not have the option of leaving under federal law.

The Chicken Little role, played in Part One by former Federal Home Loan Bank Board chairman Edwin Gray, is split this time between two players: George Barclay, president of the Federal Home Loan Bank of Dallas; and Herbert Sandler, chairman of Golden West Financial Corp. in Oakland, Calif., one of the country's most profitable S&L companies.

Just Band-Aids

Both claim that steps by the Home Loan banks' regulator, the Federal Housing Finance Board, are too modest to head off a collapse within two to three years.

In their view, Housing Board chairman Daniel Evans is acting with the caution of a Mikhail Gorbachev in a situation that calls for the boldness of a Boris Yeltsin. (Mr. Evans and his board have not yet been confirmed by the Senate, which partially explains their caution.)

At one extreme, Mr. Sandler proposes slashing expenses by shrinking the beleaguered system. A study financed and circulated by his company claims more than $100 million a year in operating costs could be trimmed by reducing the number of regional banks from 12 to three or four.

Mr. Evans' staff believes the Sandler study overstates the savings.

At another extreme, Mr. Barclay proposes letting the system grow out of its problems by allowing mortgage bankers tobuy stock and become members. Until recently, only S&Ls, savings banks, and a few life insurance companies could join. The 1989 thrift-bailout law opened it up to commercial banks and credit unions.

The S&L industry opposes Mr. Barclay because it fears losing control of a system that has served it well.

"If you lend to Bankers Trust, like Mr. Barclay wants to do, 95 cents of every dollar will go to a nonresidential loan," said Mr. Sandler. "If that happens, maybe you don't need the system at all."

Other More Sanguine

Other bank presidents believe Mr. Barclay's view of the system is twisted by his negative experiences in Texas.

"He is dealing in an environment where one would naturally be pessimistic," said Robert E. Showfety, president of the Federal Home Loan Bank of Atlanta, who claims his bank is performing very well.

David Cates, chairman of Ferguson & Co., a Washington consultant, said consolidation of the banks is inevitable and faulted the Home Loan Bank presidents for failing to recognize it.

"I don't think any of them is doing more than having nightmares about it," Mr. Cates said.

Mr. Evans and his board are pursuing a middle course, pressuring each of the 12 banks to reduce expenses and encouraging them to aggressively recruit commercial bank members.

Consolidation of Home Loan banks is expected, but not for several more years. The topic is not pursued with the bank presidents, some of whom would lose cushy jobs. There is no reason to upset them now. And the degree of shrinkage will depend on the number of stockholders at that time.

One of their hopeful assumptions -- that housing markets will rebound sharply -- is not universally shared by economists.

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