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

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Bankers were miffed too about being tied up with the S & Ls. The symbolic point of contention was the trusted FDIC decal that banks display prominently on their premises and in their advertising. The Administration at first told thrift owners that they would be able to display the symbol under the new plan. To many depositors, the seal represents greater safety and security than the thrift industry's own logo. Bankers therefore vociferously oppose sharing the FDIC seal, maintaining that it would be effectively tarnished if given to the thrifts and would lead to the complete merging of the two insurance funds. By week's end, the Administration had backed away from its promise of the seal to the S & L industry.

The FDIC wasted no time in wielding its new authority over the thrifts. Within a day after the Bush announcement, the Government agency took charge of four insolvent S & Ls and three days later assumed control of six more. The agency intends to take over the 224 most hopelessly insolvent S & Ls within the next month. The FDIC also decided to freeze temporarily all negotiations for the sale of ailing thrifts. Last year the FSLIC completed a flurry of deals -- 34 in December alone -- in an effort to offer investors tax breaks that expired on Dec. 31. Because of the rich payoffs guaranteed to investors in those deals, they were highly controversial. Said L. William Seidman, chairman of the FDIC: "Before we go forward, we are going to evaluate, along with the FSLIC, where we stand."

Seidman said talks with investors will resume after the FDIC takes control of the remaining insolvent S & Ls. But since the FDIC said it would then allow only deals that were supported by the cash of the FSLIC -- a fund that is currently bankrupt -- more Government-assisted sales would seem unlikely. The FDIC might also try to renegotiate some of last year's sweet deals.

When the huge cost of the cleanup hit home last week, so did a strong sentiment in favor of pursuing the fraudulent thrift owners who made off with the loot. Regulators have estimated that at least one in every four S & L failures has been the result of fraud. In fact, the Bush rescue plan proposes to give the Justice Department an additional $50 million a year for probing S & L fraud, a sum that would pay for 200 new investigators and 100 more prosecutors.

Even so, in testimony before the Senate Banking Committee last week, Attorney General Richard Thornburgh said most of the lost money is long gone. "In many cases, the assets have been dissipated through laundering schemes or taken out of the country, and are beyond the reach of federal authorities," he said. "We'd be fooling ourselves to think that any substantial portion of these assets is going to be recovered." Besides the money that was simply stolen, billions of dollars were lost on high-risk investments and frittered away by paying excessively high interest rates to attract depositors.