Cleaning Up the Thrift Mess

Under great pressure for more concessions, Congress begins marking up legislation this week to bail out the savings and loan industry. Justice for the taxpayer, who already faces an outrageous expense for the disaster, demands that the pressure be resisted.

At the center of the bail-out is a plan put forward by President Bush in the first days of his Administration, proposing a strategy that will cost taxpayers at least $50 billion. There is no escaping the onerous cost. But there are options, including alternatives in the payment schemes, that Congress needs to study.

One option that Congress should ignore is the demand of the savings and loan industry itself for more time to implement the rigorous new capital requirements proposed by Treasury Secretary Nicholas F. Brady. That is the very sort of stalling that compounded the problem in the past and escalated the rescue cost. The tougher standards almost certainly will force some of the present institutions out of business, but that is preferable to courting further collapses at public expense. The time has long since passed for concessions. Reforms are overdue. Congress must know that its reluctance to control the industry, and its collaboration in allowing inexcusably risky adventures in the decontrol process, played a significant part in creating the present mess.

There is also resistance from some savings and loan institutions to proposals to bring the Home Loan Bank Board and the Home Loan Bank under the Treasury Department. We think that Bush and Brady are correct in demanding the closer control implicit in that change. Those who oppose it on grounds that it would inhibit the traditional independence of the savings and loan institutions and their role in the home mortgage market ignore the irresponsible use made of that independence and the fact that the industry no longer is essential to home finance in the nation.

Congress has two sensitive issues to deal with as well. One is to put limits on federal insurance of deposits for state-chartered institutions, such as some of those in Texas and California, that have abused all trust. If states are to allow reckless and uncontrolled investment by their own chartered institutions, then it is for them, not the federal taxpayer, to provide depositor insurance. The other issue, perhaps the most difficult of all, is to devise the most equitable and cost-effective way to pay off this staggering obligation.

Three schemes to cover the funding are under consideration. The President, anxious to minimize the budget impact, has proposed a new entity that would issue bonds so that only the cost of the interest on the bonds would have to be shown on the federal budget. Sen. Donald W. Riegle Jr. (D-Mich.), chairman of the Senate Banking Committee, has suggested there should be a one-time $50-billion charge against this year’s budget, which would then set the stage for covering the costs through the use of Treasury bonds, instead of special bonds, at a saving to taxpayers estimated at more than $4 billion. Yet a third scheme has been put forward by a consumner group that would fund the loss by new taxes targeted at upper-income persons through recreation of a higher income-tax bracket and new taxes on such things as securities transactions.

Congress needs to do some careful evaluation. We find Riegle’s proposal of particular interest even though it, like the President’s proposal, involves some budget deficit slight of hand. Its large saving certainly should help the President overcome his resistance to anything that appears to be a big budget increase in his first year.

The legislative process begins Thursday in the financial institutions subcommittee of the House Banking Committee. The Senate Banking Committee goes to work next week. Both committees are vulnerable to the pressures that the savings and loan industry has effectively used in the past to gain the favors that have facilitated the disaster. So the commitment of Congress to sound policies is now being tested along with the ability of the industry itself to accept overdue reform.