The Savings And Loan Crisis: Finally, the Bill Has Come Due

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In his budget speech on Thursday night, Bush called on Congress to approve his proposal within 45 days. "We must not let this situation fester," he said. "Any plan to refinance the system must be accompanied by major reform." For the most part, his proposal found bipartisan support. Said Iowa Republican Jim Leach, a member of the House Banking Committee: "In his first inning, Bush has stepped up and hit a home run." Another member of the committee, New York Democrat Charles Schumer, said that Bush deserves "a heck of a lot of credit for bellying up to the bar and putting a real plan on the table." Most Washington insiders think the bill will move quickly. "This package is a speeding bullet. The lobbyists will try to put a few of their own nicks in it, but really it is just a blur," said Kenneth Guenther, executive vice president of the Independent Bankers Association of America.

One widespread early complaint was that Administration officials, notably Budget Director Richard Darman, were using sleight of hand to downplay the bailout's true cost. Darman originally seemed to say that the cost to taxpayers would total about $40 billion in the first decade, but that number in fact described only how much the plan would aggravate budget deficits. The actual spending from general revenues would be closer to $60 billion. But purely from an accounting standpoint, its impact will be offset by $20 billion in increased insurance-premium fees to be collected from the banking industry -- even though the funds will be earmarked for future banking bailouts rather than for cleaning up the thrifts.

Moreover, financial consultants pointed out that the Administration was projecting the cost of the rescue based on the rosy scenario of a robust economy, declining interest rates and fast-growing thrift deposits. Over the next decade, taxpayers may have to shoulder rescue costs that are tens of billions more dollars than now expected. Yet even those who recognized the Bush plan's shortcomings praised it as the best and boldest solution so far.

A primary objective of such a sweeping rescue was to restore the confidence of thrift depositors, some of whom have withdrawn their savings in fear of the system's insolvency. In fact, the Administration secretly feared a long-shot possibility that the drama of its bailout might spark a run on S & L deposits. To prepare for that dire prospect, senior White House officials and Federal Reserve Board Chairman Alan Greenspan met in the Roosevelt Room of the White House the night before Bush's plan was made public. Greenspan agreed that the Fed would stand ready to pump billions of dollars in emergency loans into threatened thrifts.