Viewpoints : A Year Into Bailout: The Future of S

T his week’s one-year anniversary of the thrift bailout bill is hardly an occasion to celebrate. Savings and loan scandals continue to erupt, and bailout funds are running dry. Last week, the Resolution Trust Corp., the agency charged with overseeing the cleanup, asked Congress for $100 billion more on top of $50 billion already allocated.

None of this is a surprise to Alexandria, Va., thrift consultant Bert Ely. In the mid-1980s, when many in Congress and the industry were downplaying the thrift problem, Ely was one of the few voices warning that it could become a major debacle costing billions of dollars.

To mark the end of the bailout’s first year, free-lance journalist Sharon Bernstein interviewed Ely about the progress of the cleanup and the thrift industry’s future.

Is the bailout bill working?

It is starting to work, specifically with the sale of the banking segment of the insolvent S&Ls--that; is, their deposits and their good assets. The disposal of the problem assets--the foreclosed real estate and so on--is off to a slower start. The Resolution Trust Corp. is still experimenting and learning how to dispose of these problem assets.

If you could change provisions in the bailout bill, what would you change?

There should be three key changes. First, more funding should be provided for the cleanup. The bill did not contain enough funding. We knew it at the time, and now the Administration is starting to confront that issue. By Treasury Department estimates, the $50 million already provided is $40 billion to $80 billion short. In addition, the RTC needs authority for additional working capital.

The second thing I would change is the organizational structure for the cleanup. It is unnecessarily complicated. The RTC has its own board of directors, plus a separate oversight board. And there are lots of other checks and balances built into the legislation that have created a bureaucratic tangle that, on an organizational chart, looks like a defective computer chip.

I recommend pulling the RTC out from underneath the Federal Deposit Insurance Corp., abolishing the two boards and placing the RTC under the Treasury Department.

The third change is that the legislation should put in motion the melding of the banking and the thrift industries. America no longer needs a separate thrift industry to finance home mortgages. The computer has effectively unbundled the home mortgage into three distinct pieces--mortgage origination, mortgage servicing and mortgage funding. Separate industries have developed among each of those pieces. And many players in each of those industries are nonregulated institutions. This has effectively destroyed the savings and loan industry as a distinct industry. This melding reflects a worldwide phenomenon in which we are seeing that the specialized lenders are less and less viable.

Who should pay the added costs of the bailout?

The taxpayer is the only place where you can get it. The alternative is that we let the mess continue to fester at a very high cost to the taxpayer and the economy. Sooner or later, the taxpayer has to pay for the failure.

We have already imposed on the nation’s banks $20 billion of the cleanup costs, if you count $20 billion as the present value of the after-tax cost of the deposit insurance premium increase that has been levied on the country’s banks.

The banks should not bear the cost. The banks did not cause the problem. The taxpayers, as voters, are ultimately responsible for electing the officials who saddled this country with a defective thrift industry.

What will be the next problems in the bailout?

In the short term, between now and the end of the year, there is a danger that we will run into a stop-start-stop mode that will disrupt the process and add to the expense. The reason is that the RTC will probably bump up against its debt ceiling by the end of September. The danger is that the cleanup process will be stalled until additional money and additional borrowing authority can be provided.

Another problem is that the RTC is still experimenting with how to sell assets, and we may see a continued fumbling along as it tries to figure out the fastest and most efficient way to sell off the huge mountain of problem assets that it’s accumulating.

Have we solved the fundamental problems behind the thrift mess?

Yes and no. There were two underlying causes for the thrift mess. First, the S&Ls; were simply disasters waiting to happen. Well, the disaster has happened, and we are cleaning up the mess.

But the other cause was the fact that federal deposit insurance has always been actuarially unsound. Federal deposit insurance is becoming more and more of a problem for the banking system, and if we’re not careful we’re going to have problems with the banking system.

The whole process imposes excessive costs on the country’s better-run, more profitable banks and acts as a drag on them. They are asked to carry additional weight, weight that subsidizes bad banking and reflects the fact that the regulatory process in this country does not work very well.

Is there any future for the S&L; industry?

As a separately regulated industry, no. However, there is a future for well-run, properly capitalized savings and loans that are subject to the same regulation and capitalization requirements as banks.

My prediction is that five years down the road we may have as few as 1,000 of today’s 2,700 institutions operating as S&Ls.;

How will the successful S&L; of the future have to be managed?

The key in the future is going to be efficiency. The consolidation that is starting to take place now within the S&L; industry and between banks and S&Ls; is going to be squeezing out a lot of inefficiency and excess costs. That is going to mean that all depository institutions are going to have to operate much more efficiently than they do today.

They will have chopped off or shut down or sold off their marginal activities, they will close their money-losing branches. Because if they don’t, their money-making ability is going to decline, and they will disappear. Banking will have to operate with narrower margin spreads.

Are there models for successful S&Ls; of the future?

I think you can look to the big three--Golden West Financial (parent of Oakland-based World Savings & Loan), H.F. Ahmanson (parent of Irwindale-based Home Savings of America) and Great Western Financial (parent of Beverly Hills-based Great Western Bank)--and say each of them represents strategies that should be successful for the next few years. And there are other, smaller S&Ls; that are going to be able to coexist with the big boys.

The key to success is defining a niche that they serve well, particularly when they’re operating in urban areas. The niche might be a certain type of customer or a certain neighborhood.