Congress and Clinton May Be Headed for an S&L Caper

THE saddest lesson of the massive bailout of the savings and loan associations (S&Ls) is that governmental decision-makers seem to have learned nothing from this painful episode.

Both Congress and President Clinton are supporting the idea of setting up a new group of financial institutions that are likely candidates for future bailouts.

I refer to the so-called community development banks that proponents claim will help bring ``distressed communities more into mainstream America.''

The rationale and approach are familiar to anyone who followed the S&L fiasco. Congress is urged to establish a Community Banking and Financial Institutions Fund to assist ``community development financial institutions.'' The fund is initially financed with a modest amount of federal money: $382 million through fiscal year 1997. It provides capital, technical assistance, grants, loans, and deposits to community development banks.

Some supposedly costless federal guarantees are made available to help entice private capital to these new institutions. The community development banks, in turn, are expected to provide credit in poor areas where existing banks and S&Ls are deemed unable to provide adequate funds for consumers and small-business borrowers. The banks are required to encourage ``community input'' through representation on their governing boards.

Some United States senators are also urging a Bank Enterprise Act to promote community lending in ``distressed'' areas. Rather than using taxpayers' money directly (which Congress would be asked to appropriate), they want to go through the back door. The idea is to reduce deposit insurance premiums for institutions that make ``qualified'' loans and invest in ``distressed'' communities. The implications are frightening for the banking system. Banks will be encouraged to increase the number of high-risk loans they make; those who do so will get a break by having to pay less for the insurance to cover those risks.

Who will pick up the tab for these ventures in eleemosynary banking? First of all the other banks, some of which are not in the strongest position to bear the extra cost. Judging by the S&L experience, however, sooner or later reluctant taxpayers will be saddled with the bill.

To those with short memories, the largest and most expensive bailout in American history occurred in the S&L industry in the late 1980s and early 1990s. Fundamentally, the federal government had to pick up the tab because of its responsibility in providing deposit insurance for these institutions. A major portion of the entire S&L industry was liquidated, and the federal government wound up trying to sell the remaining assets of the bankrupt thrift institutions, often under ``fire sale'' conditions.

During the first 12 years of the S&L bailout (1980-1992), the federal government closed down 323 S&Ls at a cost of $30 billion. In addition, 819 thrift institutions were sold to new owners, with Uncle Sam picking up losses of about $100 billion. The Congressional Budget Office estimates that an additional $51 billion will be spent through 1998, for a cumulative bailout of $181 billion.

It is difficult to estimate precisely the total cost of the S&L bailout because one of the ways of financing it increases the likelihood of more thrift institutions eventually going under. In order to minimize the already heavy load on the general taxpayer, Congress requires that a substantial part of the cost of rescuing the troubled S&Ls be paid for through a levy on healthy S&Ls.

Aside from the unfairness of well-run financial institutions having to subsidize their poorly-run competitors, the added cost may push some of the weaker S&Ls over the brink. The parallel is very close to the current proposals being considered by Congress. The S&L experience dramatically illustrates the potential cost of government ``merely'' guaranteeing or insuring or coaxing private credit to politically designated categories of borrowers.

Surely, the most effective way of avoiding another costly bailout is for Congress to be more selective when it tries to do good with other people's money.