Editorials
Steinfels, Margaret O'Brien
Thrifts on the slide Forget the cozy picture of Jimmy Stewart and Donna Reed in It's a Wonderful Life. Forget their struggle against Lionel Barrymore, the greedy banker, to build up their community...
...Today, a more pertinent formula might be "What a difference a day makes...
...Moreover, in its rescues of ailing commercial banks (like Continental of Chicago) the government paid off virtually all investors, even those with deposits above $100,000...
...Many economists call the collapse of S&Ls the nation's biggest domestic crisis, one likely to require a government bailout of over $100 billion-even with the sale of the thirty-four insolvent thrifts rushed through before the end of the year...
...Too many managers brought on the crisis through a combination of bad investments, greed, and fraud...
...Third, the market does not regulate itself- as taxpayers will find out when they have to foot the bill for its excesses...
...Gorbachev was not greeted warmly when he arrived in Armenia...
...First, deregulation cannot mean "no rules at all" (it must be clearly defined and its limits patrolled by adequate government supervision...
...Second, sufficient government scrutiny and oversight require money and political support for the investigators-money that must be provided despite the political influence of PACs...
...The upshot was too few investigators to go round...
...Every month that the remaining weak or insolvent thrifts stay "in business" they add more than $1 billion to the federal deficit...
...But three points can be drawn from the crisis and should be taken into account by policymakers...
...Its break with the past can be seen in the stiff resistance it met from the Soviet military and the subsequent retirement of Marshal Akhromeyev as Chief of Staff...
...For years things went well...
...On that day, a devastating earthquake sent thousands of poorly constructed buildings tumbling like children's blocks in the Soviet Republic of Armenia...
...as well, where the price of a single Stealth bomber is now estimated at over $550 million...
...For Mikhail Gorbachev and the Soviet Union, and perhaps much of the rest of the world, December 7, 1988 may have been such a day...
...The cost of the earthquake to the Soviet economy will be staggering, and the political price may well equal it...
...Thrifts, too, bore little risk and counted on bailouts...
...Some have suggested that deposit insurance be taken over by private business, and investments be restructured so that depositors wanting insurance accept lower interest rates, while depositors willing to risk their money without insurance receive higher rates...
...But Reagan failed to add that the shoe fits the U.S...
...Second, Gorbachev proposed that the UN become the watchdog/whistle-blower for the world's environment...
...As thrifts became insolvent, the board didn't have the funds to pay off depositors and shut the thrifts down, a situation still true today...
...In a series of illegal deals in which a condominium complex was bought and resold- sometimes by subsidiary companies of North American owned by Christensen, and each time for a higher price-North American was able to inflate its assets on paper...
...Its laxity was encouraged by the Reagan-Bush three commandments: (1) deregulation is sacred...
...Savings banks and building societies date from the early nineteenth century...
...FDIC now has a surplus of funds...
...the quick announcement of the disaster in Armenia and the readiness to accept international assistance...
...Today's thrifts (also called savings and loans or S&Ls) are on the skids...
...The USSR would help man an orbital space station for that purpose, and offer its controversial Krasnoyarsk radar' station to the UN to monitor environmental studies from space...
...This leaves taxpayers with both the risk and the bills...
...The real crisis began in 1982 with federal deregulation...
...California was founded in 1982 by a dentist-turned-entrepreneur, Duayne Christensen...
...Still, the relative new openness implicit in allowing Rosen-thal 's visit...
...Business Week (October 31, 1988) argues that thrifts have outlived their usefulness as home-mortgage lenders, that other lenders have entered the mortgage market, and that healthy thrifts would best convert to commercial banks...
...They in no sense offer parity, but they do offer promise...
...Premiums for FSLIC insurance, now paid by the thrifts themselves, could be raised to increase FSLIC funds-a proposal that penalizes healthy thrifts for the misdeeds of the unscrupulous...
...I. Most recent proposals tinker with insurance...
...Then, during the seventies, inflation, oil price drops, and serious declines in real estate values began to take their toll on the industry-particularly in the Southwest...
...President Reagan's statement that Gorbachev"recognizes that their massive [military] buildup has been responsible for the great economic crisis that he faces" is no doubt true...
...Meanwhile, President Bush and the new 101st Congress are about to come face to face with the problem, and there are no cheap or easy answers...
...The Warsaw Pact will still retain a 4 to 1.5 advantage in tanks alone over NATO...
...In 1986, according to the New York Times, she bought $97,000 worth of jewelry, ran up bills of over $247,000 at Neiman-Marcus, and bought Rolls-Royces for herself and Christensen...
...Gorbachev dearly needs such capital...
...Some members of Congress-sluggish in reacting to the board's warnings and dependent upon the industry's PACs for campaign funding- ignored reports of dubious accounting practices used to conceal bad investments...
...Deregulation in and of itself might not have brought the S&Ls to their current fiscal malaise had there been adequate supervision by the Federal Home Loan Bank Board (FHLBB...
...But by 1986, FSLIC itself ' was bankrupt...
...Congress has since appropriated funds to revive FSLIC, but has not provided enough to cover the insolvent S&Ls...
...Third, he announced that the Soviet Union plans to enact new laws that rule out any form of persecution for political or religious beliefs, and he further proposed that the jurisdiction of the International Court of Justice be binding on all states...
...After widespread failures of S&Ls in the late 1920s, New Deal reforms set ceilings on the rate of interest they could pay and individual depositors were insured by FSLIC (Federal Savings and Loan Insurance Corporation...
...However, with commercial banks facing third-world debt defaults and other problems, FDIC may have other calls on these funds...
...The third key element in this debacle is the thrifts themselves...
...What can be done...
...In the early eighties, when the FHLBB's chairman, Edwin J. Gray, tried to scrutinize those S&Ls engaged in heavy speculation, he was hampered by the administration's cuts of FHLBB staff and by Congress's refusal to allocate enough money for the board to do its job...
...8,500 artillery systems...
...On December 7, New York Times columnist A. M. Rosen-that was in the Soviet city of Perm, a thousand miles east of Moscow...
...Half a world away and but half a day before, Gorbachev had addressed the United Nations General Assembly...
...Whereas Ronald Reagan was inaugurated declaring a hyperbolic window of vulnerability vis-a-vis the Soviet Union, George Bush assumes the presidency with a very different and real window of opportunity.nd real window of opportunity...
...A DAY TO REMEMBER The lightning speed with which significant historical events now transpire has rendered antiquarian Robespierre's observation that a single week of a revolution is "often richer in historical events than a year in normal times...
...North American Savings and Loan Association of Santa Ana...
...Meanwhile, it was forced to pay hundreds of thousands of dollars in fees to the consultants whose bad advice had left the thrift in tatters...
...It also generated exorbitant fees for Janet F. McKinzie, Christensen's top aide, who acted as a broker...
...and a reduction of "assault crossing units...
...Forget the thrift industry of yesteryear, which helped millions of Americans buy their own homes...
...Another key element in this scenario is the FSLIC itself...
...First, Gorbachev addressed the world debt situation by announcing that the Soviet Union was prepared to institute a lengthy (up to 100 years) moratorium on debt repayments from its least-developed debtor nations, and in some cases to write off those debts altogether...
...At the same time, capital requirements would be increased and a contingent of accountants hired, both of which would help prevent future insolvencies...
...But next day in visiting labor camp 35, he found that that message had not yet arrived from Moscow...
...A House investigating committee in the mid-eighties reported that 80 percent of insolvent thrifts Were involved in fraud...
...FSLIC coverage could be either reduced or limited to $100,000 per individual...
...2) the market regulates itself...
...a bad investment that lost it millions in a few months...
...3) government, oversight is a brake on market forces...
...While news reports in this country concentrated on the unilateral troop and weapon reductions the Soviet leader promised to carry out over the next two years, the scope of the speech was much farther ranging...
...Merging FSLIC and FDIC (Federal Deposit Insurance Corporation- which underwrites commercial bank deposits) is one idea...
...3. The most radical solution being debated is to close the entire thrift industry...
...2. Some economists propose that the government quickly allocate enough money to the Federal Home Loan Bank Board to expedite closure of the hopelessly insolvent thrifts, thereby plugging the leaks in the system...
...Although Wichita Federal Savings & Loan Association had been making a profit for several years in home-loan repossessions, it let itself be talked into the futures market in 1985...
...It also cut back on capitalization requirements, i.e., the amount of cash reserves the thrifts were required to hold...
...Nevertheless, his quick arrival on the scene of the disaster gained him stature in the sight of many Soviet citizens...
...The disorder of the government's response underscored the divisions, shoddiness, and incompetence that are endemic to Soviet society and that Gorbachev is struggling to change...
...10,000 tanks...
...800 combat aircraft...
...It allowed S&Ls to diversify, to make investments in addition to home mortgages...
...Forget their struggle against Lionel Barrymore, the greedy banker, to build up their community through fair home-mortgage lending...
...He also called for a strong framework in international law to prohibit weapons in space...
...Finally, there was his announcement of the unilateral withdrawals from Europe: 50,000 troops...
...Thrift officials, however, insist that individuals cannot compete for loans with corporations and need separate lending institutions, especially for housing...
...The number of immediate victims was catastrophic, but the ineptness of the Soviet rescue effort further deepened the tragedy...
...That action signaled to investors that they could go for the highest interest rates without any risk to themselves...
...But the boldness of Gorbachev's initiative should not be lost or belittled...
...If these reductions take place, the world will be better off...
...and Gorbachev's common touch and message in New York-all are further evidence of the sizable changes taking place in Soviet affairs...
...Deregulation removed the federal interest-rate ceiling and permitted higher interest payments to depositors...
...Their twentieth-century descendants, S&Ls, were long the nation's major source of loans for home mortgages...
...That amount (over $ 15 billion a year) grows as sick thrifts steadily hike up interest rates in order to attract new investors, thereby increasing the government's insurance liability...
...During the previous ten months of ethnic unrest in the region, he had stayed away...
...He watched Gorbachev give his UN speech over Soviet TV, and was moved by the statement that in the USSR "no longer are people kept in prison for their religious and political views...
...The content and character of his speech may make it one of the more remarkable addresses before that forum...
...In 1980, the federal government raised FSLIC deposit insurance coverage from $40,000 to $100,000 to help attract new investors...
...Of course, there are still healthy S&Ls around, but fully one-third of the industry-1,000 institutions-is operating at a loss or is hopelessly insolvent...
...As it is now, individuals can deposit a dollar less than $100,000 in multiple accounts and be insured for all...
...Even the current sales of insolvent thrifts to healthier institutions are so heavily government-subsidized-the 1988 tax breaks equal the capital they are investing-that the buyers face little risk in exchange for possibly high profits...
...While the amount of such debts ($40 billion) is relatively small, the gesture might be seen as an important acceptance of reality...
Vol. 116 • January 1989 • No. 1
