Political Shots Fired Over Cleanup

A LOT of battles can be fought on the turf of the savings and loan industry crisis if Democrats make that an election-year issue, White House spokesman Marlin Fitzwater has warned. Indeed, one battle - intentional or not - may have started already over the performance of the Resolution Trust Corporation (RTC).

The RTC is charged with using as little money as possible to get taxpayers out of the S&L fiasco, the United States costliest financial mess ever.

Mr. Fitzwater took exception to a review of the RTC by Donald Riegle (D) of Michigan, chairman of the Senate Committee on Banking, Housing, and Urban Affairs.

Sen. Riegle found that the pace of business at the 10-month-old corporation is starting to accelerate, but the RTC's progress on selling off failed thrifts and disposing of leftover, shrunken-value assets was still disappointingly small.

Riegle was particularly concerned that for the thrifts merged with stronger institutions or liquidated as of May 18, the RTC was stuck in each case with all the problem assets: repossessed real estate, bad loans, junk bonds, and so on.

``That fact is important: When the RTC has `resolved' its entire caseload in this manner, most of its work will still lie ahead of it,'' he said in the report presented to Congress earlier this month.

``It's something that we hear from all sides,'' Nancy Schertzing, an RTC spokeswoman, says of remarks like Riegle's. The issue is a favorite one for politicians in this, an election year, she adds.

Riegle's term lasts until 1994, but he is one of the ``Keating Five,'' a group of senators who intervened with S&L regulators on behalf of Charles Keating. Subsequently Mr. Keating's Lincoln Savings and Loan in Irvine, Calif., was declared insolvent, at an estimated cost to taxpayers of more than $2 billion. The other four senators are John McCain (R) and Dennis DiConcini (D) of Arizona, John Glenn (D) of Ohio, and Alan Cranston (D) of California.

Riegle was anxious for his report not to be viewed as a partisan attack, according to a Senate aide. After it was criticized as such by Fitzwater, the aide says, Treasury Secretary Nicholas Brady came to its defense, calling the report constructive criticism.

Mr. Brady, also the chairman of the RTC oversight committee, stuck up for the corporation when giving testimony to the House banking committee a few days after the Riegle review.

Acknowledging a ``great deal of discussion'' about the RTC's slow start, Brady noted that it had resolved nearly 100 cases in the last 11 weeks, ``by any measure, a tremendous accomplishment.'' He added: ``I am surprised by those who so readily dismiss the difficulties of creating in just 10 months an organization that is roughly the size of Citicorp.''

The RTC has 3,000 employees nationwide. Ms. Schertzing calls it ``an entire new branch of government.''

The Senate aide says that Riegle views the RTC staff as hard-working and putting in its best efforts, but still sees room for improvement.

``Everything we have is for sale,'' Schertzing of the RTC responds. The agency is doing what it can to get the best price for thrifts and their assets, she says, but is limited by what the marketplace will accept.

``You just have to be reasonable,'' Schertzing says. After all, ``the problem took many, many people many, many years to create.... No one wants to take the responsibility.''

The trouble with the nation's thrift industry began in the 1970s, when depositors wanted higher interest rates than S&Ls, with their low-interest, long-term home loans, could profitably pay. The industry's tangible capital, $28 billion in 1978, was drained to $4 billion by 1982. Tangible capital is the owners' equity.

Then the federal government and some states relaxed control. Thrifts were freed to pay higher interest rates and make riskier investments. Imprudence and fraud took a toll. The economic downturn on the heels of the boom in the southwest hurt even prudent S&Ls. Meanwhile, the government's exposure increased when deposit insurance was raised in 1982 to $100,000 per account from $40,000.

State-chartered thrifts in California and Texas, where virtually all restrictions on investments by that type of institution were removed, together accounted for 70 percent of the losses that government insurance covered in 1988.

Seven hundred thrifts have failed since 1985. So could another 300 to 800 of the 2,520 that remain open, according to Riegle. The Bush administration's latest estimate of the cost of the bailout is $129 billion to $182 billion. That's $516 to $718 for every American. Those figures exclude 40 years of interest payments on bonds that are being sold to raise the money.

Those S&Ls that fold will wind up in the hands of the Resolution Trust Corp. Unfortunately, notes Riegle, those institutions continue to incur losses, and their assets tend to diminish in value after they enter direct government management. In short, he says, the faster the RTC gets rid of them, the better. As evidence that the corporation is moving slowly, Riegle notes that 108 cases (assets: $26.1 billion) were resolved from October to mid-May. But the number unresolved grew from 256 to 302 cases, with assets of $162.5 billion.

Whatever the means of resolution - sale of deposits, direct payoff of depositors, or sale of the thrift - the RTC winds up either with all the assets or all those the buyer doesn't want or later exercises its option to return to the RTC. Riegle says the RTC might ultimately control $100 billion in real estate in areas where values are depressed and an overhang of unsold properties exists.

So far the RTC has sold $41.9 billion in assets, reducing those under its control to $173 billion as of March 31. But Riegle says those numbers are misleading.

``The RTC has concentrated on making easy sales first,'' he states, referring to performing loans and other still-valuable assets. ``Thus, the unfortunate truth is that the RTC has barely started on its real asset disposition job.''

Whether or not it would be possible for the RTC to sell ``whole banks'' as opposed to ``clean banks'' is a subject of controversy, the Senate aide says. ``Why would you buy a $2 debt? I'd have to throw $2 on the table to make it a wash for you.''

In his testimony, Treasury Secretary Brady confirmed the point. ``The major problem faced by the RTC in trying to resolve cases,'' he said, ``is that there simply have not been many interested buyers for the assets taken over, especially for whole thrifts.''

Riegle is not so much criticizing the ``clean bank'' sales practice as pointing out that this kind of resolution doesn't mean that the problems are behind, the aide says. ``We've expressly kept all the problems.''

Brady said that the Oversight Board was involved in ongoing discussions with the RTC about projections for case resolutions during the third and fourth quarters of 1990. Talking in terms of asset values rather than number of savings and loan institutions, he said it ``seems reasonable'' to expect the RTC to resolve thrifts with assets of $20 billion to $40 billion per quarter.

As for getting rid of the assets, the RTC plans an auction in September that will be transmitted by satellite to 10 US cities, Tokyo, and London. The plan is to sell 100 properties worth more than $1 million each. These auctions may be held every four months.

The RTC is also working to sell packages of assets worth as much as $500 million.

Riegle had other criticisms beyond the RTC. He said that the Office of Thrift Supervision has demonstrated ``a disturbing reluctance to share what data does exist'' about the condition of the remaining thrift institutions. He called for ``an extraordinary effort to collect that data and distribute it freely and widely.''

Riegle also urged ``more aggressive pursuit of those who have looted the thrift industry.'' By the attorney general's estimate, fraud and insider abuse contributed to 25 to 30 percent of S&L failures. Riegle complained that President Bush had only asked for and received $50 million for civil and criminal cases, but since then Mr. Bush had proposed doubling that amount.