Troubled Temples of Thrift

• Share

A frantic support operation was going on in Washington last week, but it may not be enough to prop up a large part of the $1.1 trillion U.S. thrift industry. By a 402-to-6 vote, the House of Representatives approved a $5 billion cash infusion for the Federal Savings and Loan Insurance Corporation, backstop for the country's 3,200 federally insured savings and loan associations. That would almost, but not quite, bring the FSLIC back to being merely broke; last year the fund was $6 billion in the red by normal accounting methods. Normal accounting, however, has long since gone by the boards in managing the ugly thrift crisis, which after years of alarmed attention is still getting decidedly worse. So bad is the problem, warns Lowell Bryan, a director of the McKinsey & Co. management-consulting firm, that "our entire credit system has become unsound."

Bryan may overstate the case, but there is no denying the horrendous plight of the thrift institutions -- or rather of the one-quarter or so of the industry that is foundering by normal accounting standards. Last year the profits of all U.S. thrifts totaled $895 million, down from $3.85 billion in 1985. A year ago the 370 or so weakest institutions were hemorrhaging at the rate of $2.2 billion a year. Now those losses are running closer to an estimated $3.8 billion annually.

Yet, astonishingly, U.S. legislators have been helping keep the red ink flowing. Reason: Congress has withheld from the FSLIC the amounts of cash needed to pay off the depositors of the insolvent S and Ls and thus wind down the problem once and for all. Though the FSLIC has shut down, merged or taken over 108 institutions since the beginning of 1986, the agency has had to allow some of the sickliest thrifts to stay in business through the device of lenient accounting practices. Complains William Black, deputy director of the FSLIC: "We are the only shop that keeps insolvent institutions open."

The latest round of the thrift fiasco began in 1980, when Congress last tried to make life easier for the savings institutions. At that time the industry was still reeling from the inflationary spiral that sent interest rates soaring and left the thrifts with billions of dollars of low-interest 30-year mortgages on their books. Congress tried to remedy the situation by allowing the thrifts to expand their business far beyond those traditional instruments into stock and bond investment as well as business loans, particularly in commercial real estate. At the same time, thrift deposits continued to receive federal guarantees. The result was that even though numerous thrifts were weak, the industry was encouraged to grow madly rather than face a shake-out.