Rushing to Rescue Risks a Panic at S

If President Bush isn’t careful, he may have to declare a bank holiday for the nation’s savings and loan institutions. That is the most likely consequence of the S&L; bill that is rushing through Congress with the momentum of a wartime measure.

Embarrassed by the S&L; crisis and spurred by losses allegedly piling up at $1 billion a month, Congress and the White House are determined to quickly dispose of the issue and “get the crisis behind us.” Consequently, legislation to drastically overhaul our financial system is moving from start to finish in three months.

Such a rushed job leaves the bill’s architects little time to ponder the possible results, which could include the worst financial panic since 1933 and a squeeze on mortgage financing. The bill is trying to do too much at once. It is dangerous because it is applying extreme measures to a delicate financial structure in the absence of public understanding.

Basically, S&Ls; are being forced to rapidly increase their capital base, while other provisions cut their profitability--a main source of new capital--and make them less attractive to potential acquirers.

The bill’s basic goals are sound: to replenish the deposit insurance fund and to beef up S&L; capital. However, the unrealistic deadline for meeting the capital requirements and contradictory provisions could result in an even greater crisis.

Currently there are 430 insolvent S&Ls; including the 200 whose management has been taken over by the government. As of last September, 2,550 solvent institutions remained with assets totaling $1.2 trillion. Last month, the accounting firm of Peat Marwick Main estimated that 870 of these institutions with $450 billion in assets would not be able to meet the new capital requirements by the 1991 deadline. Thus, one effect of the bill could be to triple the number of problem S&Ls.;

Under the bill, S&Ls; have until 1991 to achieve parity with bank capital requirements. Yet, the squeeze put on their profits and on their attractiveness as takeover or merger candidates by other provisions make this timetable unrealistic. The bill requires S&Ls; to pay higher deposit insurance premiums, which comes out of profit. The bill strips away attractive features of thrifts, such as their more liberal branching powers and their affiliated service corporations (insurance and real-estate), in the event they are acquired by bank holding companies. Since these are the very features that would make troubled thrifts attractive to commercial banks, capital injections are unlikely from this source.

To top it all off, the bill puts a huge stumbling block in the path of healthy S&Ls; interested in taking over troubled ones. A provision of the bill known as the tangible net-worth proposal requires any S&L; involved in an acquisition to write down the book values of its own assets to current market values. This difference is defined as “good will” and must be deducted from the acquiring S&L;’s net worth, thus greatly reducing its capital position and, perhaps, throwing it into the “impaired” capital category.

Thrifts that do not meet the new capital requirements are not allowed to grow. This leaves them the options of shrinking in size by selling assets to raise capital or trying to find a merger partner. If the asset sales further depress prices, additional write-downs will follow.

The tangible net-worth proposal applies to “done deals” in which insolvent thrifts have been taken over by healthy ones, in effect turning sound business decisions into unsound ones and allowing federal supervisors to restrict activities.

This is going on while the Federal Reserve’s interest-rate policy squeezes thrift profit margins and cuts the market value of assets, and while members of Congress talk about reopening S&L; deals that were allegedly too favorable to acquirers.

This hasty and ill-considered change may prove indigestible. Depositors faced with rapid disappearance and merger of familiar thrifts, and statements by government officials of impending closures, provide the ingredients for a run on deposits.

This bill may have the effect of nationalizing the thrift industry, as no private party in his right mind would acquire a troubled thrift under the provisions of the legislation slated for a Rose Garden signing in May.