In the late 1980s, when the nation's banks began collapsing in numbers unseen since the Great Depression, skeptics immediately feared the worst: a slow-motion replay of the savings and loan debacle, which is expected to cost taxpayers $160 billion--before interest. But policymakers in Washington hotly dismissed any notion that banks would lighten Uncle Sam's wallet as they followed the S&Ls' path to oblivion. As recently as April, L. William Seidman, then chairman of the Federal Deposit Insurance Corp., promised Congress: "Taxpayer money is not required."

How times have changed. The fund that insures bank deposits, flush with an $18.3 billion surplus in 1987, is now virtually broke. And the FDIC projects a deficit of as much as $28.9 billion in two years. Battered by bad loans to real estate developers, takeover artists, and Third World countries, nearly 900 banks, with assets of $162 billion, have failed since 1987. To shutter these institutions, the Bank Insurance Fund has paid out $56 billion and expects to recoup no more than a third of that. And as a sign of trouble to come, the size of the ailing institutions is soaring (chart).

On Nov. 25, Seidman's successor, William Taylor, gave Congress a grim prognosis: Anything short of the $70 billion injection of funds the Bush Administration is seeking could boost the costs of bailing out banks even further. "We need the money to do the surgery that must be done," he told the Senate Banking Committee. "Any kind of a piecemeal approach would be a mistake."

NO LOAN. With no end in sight to the banks' woes, a growing number of Democrats and Republicans on Capitol Hill believe a taxpayer bailout is all but inevitable. At the Nov. 25 hearing, Senate Banking Committee Chairman Donald W. Riegle Jr. (D-Mich.) warned his colleagues that they shouldn't vote on the money bill "thinking that it's only a loan to the deposit-insurance fund, when in fact these funds will not be repaid." Echoed ranking Republican Jake Garn (R-Utah): "I do not think $70 billion ultimately will be enough."

How deep is the hole? The sums could be staggering. Cleveland State University economist Edward W. Hill predicts that the tab for reviving the banking system could top $180 billion, even if the economy improves. He calculates it would cost $52 billion to repay depositors and sell assets of failed banks. The nation's 12,000 largest banks would need $128 billion more from the private sector to meet a stiff new capital standard--6% of assets--set by international agreement.

Hill's figures don't include the stunning costs to the public of the banks' past lending indiscretions. As banks try to shore up their profits and capital, they're charging customers unusually high rates of interest, compared with the banks' borrowing costs. From 1988 through 1990, the gap between the prime rate and the banks' cost of money, as measured by the federal funds rate, hovered at about 1.75 percentage points. But throughout this year, the spread has been a full percentage point higher (chart, page 32). For the $600 billion in commercial and industrial loans that are pegged to the prime, that translates into an extra $6 billion in interest annually.

Partly as a result of that fat spread, banks aren't in such dire straits as the S&Ls were when their death spiral began. Moreover, banks have $242 billion in equity capital, whereas the thrift industry as a whole was insolvent as far back as 1982. But a far smaller percentage needs to tumble into insolvency for the bank bailout to approach the thrift rescue's dimensions.

Those insolvencies aren't a mere theoretical abstraction. During the first six months of 1991, the last period for which industry data are available, roughly half of New England's 248 banks lost money.

Nationwide, one in eight banks was unprofitable. What banking experts and regulators fear most is that California, where the recession is hitting late, will be the next disaster area. With the state's key industries--defense and computers--in a funk, banks in the Golden State reported a 42% slump in income through June, in part because of a 68% surge in nonperforming real estate loans. Bumpier roads may lie ahead if the national economy doesn't rebound strongly in coming months. Many banks still haven't fully acknowledged the extent of their real estate lending mistakes. While banks' troubled loans have soared, loan-loss reserves have shrunk to 65% of nonperforming loans, down from 86% two years ago, according to Austin (Tex.) bank consultant Alex Sheshunoff. Clearly, banks are gambling that the recession will end soon, but regulators are in no hurry to declare a turnaround. "I have no idea if things will get better or if they'll get worse," says the FDIC's Taylor.

Washington may not be helping matters. To replenish the bank insurance fund, Taylor has proposed that deposit-insurance premiums be raised to 30~ on every $100 in deposits. That's more than double the 12~ premium levied last year and could cut industry profits as much as 8%, according to bank-stock brokerage firm Keefe, Bruyette & Woods Inc. Even Seidman fears that "the premium rate being discussed is so high that it could damage the entire industry."

Bank executives complain that the hike would squeeze their profits at the wrong time. First Union Corp. in Charlotte, N. C., which has seen profits drop 8% this year, to $230 million, figures the higher premium would increase its expenses next year by $23 million, or 11~ a share. Unwilling to take such a hit, First Union Chairman Edward E. Crutchfield Jr. has ordered his managers to slash their budgets by the same amount.

Some less visible moves by regulators could also add to the bailout's cost. Hobbled by inadequate funds, bank regulators are moving more slowly to shutter troubled banks. As of June 30, more than 40 insolvent banks were still operating, according to Wakefield (Mass.) consultants Veribanc Inc. Similar "forbearance" by thrift regulators, according to the Congressional Budget Office, increased the cost of the thrift bailout by about $66 billion.

ROSIER PICTURE. Bank regulators are using a variety of devices to postpone the day of reckoning. In June, House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) disclosed that the Federal Reserve had been quietly propping up hundreds of troubled banks by extending credit through its discount window. Among Gonzalez' findings: 418 banks received short-term Fed loans whose balance due was continually rolled into new borrowings. Of those, 90% ultimately failed. In the case of Bank of New England Corp., the Treasury Dept. had also increased its deposits of tax receipts. "If we learned nothing else from the S&L crisis, we learned that forbearance did not work," says Clemson University Professor Michael Spivey.

Yet another trick may soon be available to banks--and regulators--hoping to paint a rosier picture of the industry's capital position. Under an expected rule change by the Financial Accounting Standards Board (FASB), public companies could, in effect, report deferred tax credits as current income. But the deferred taxes assume that profits will be earned in future years. For some banks, those earnings may never materialize. The rule change would come as a particular windfall for the big New York banks, which could boost their net capital by as much as 24%, according to Brent B. Erensel, an analyst at Mabon Securities Corp. in New York. The new rule "is going to play right into the hands of bank regulators who want to avoid shutting down banks that are in financial difficulty," says former FASB Director Raymond C. Lauver.

Regulators insist that they will continue to be tough on the industry. They won't ease up on stiff standards for capital, which provides a cushion for loan losses -- and for the Bank Insurance Fund. But much of the damage has already been done. The big question now is how Congress will go about repairing the system. Bankers themselves aren't optimistic. "Congress doesn't do anything in a visionary way, " says First Wachovia Corp. Chairman John G. Medlin Jr. "I think it's going to be a process of running from crisis to crisis for a while."

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