Last year, the Bush Administration fought on Capitol Hill for a reform bill aimed at tearing down laws that shelter the banking industry from market forces. This year, the Administration has done a surprising and some say perilous about-face. Indeed, Bush-appointed banking regulators are doing their darnedest to keep banks open -- and lending -- even when the institutions are close to collapse.
What's changed? Some lawmakers and banking experts suspect it's the looming
Presidential election. With George Bush's halting stewardship of the economy a
top campaign issue, Administration officials are hardly in the mood for a big
bank failure that would jolt consumer confidence, increase unemployment, and
shrink available credit. Instead, keeping ailing banks on life-support, a policy known as forbearance, could avert the politically ticklish possibility of a bank collapse in a key state.
CASH SWEETENER. The new regulatory policy first became apparent in January, when the Federal Deposit Insurance Corp. took direct control of Crossland
Savings FSB in Brooklyn, N.Y. (table). Regulators claimed that the two bids
they received were far too low. It was cheaper, the FDIC argued, to take control of Crossland and try to sell it later. Then in February the agency chipped in $34 million to buy preferred stock in New York-based Emigrant Savings Bank to
ease its takeover of Dollar Dry Dock Bank in White Plains, N.Y.
Now the agency is pressing for yet another bailout, this time for the
failing First City Bancorp of Texas. The government, seeking $ 400 million from prospective buyers, will guarantee repayment on an undisclosed share of the Houston bank's loans. First City was first propped up by regulators in 1987 with a $ 1 billion capital infusion.
Nor will the policy of forbearance end there if regulators have their way. On Mar. 25, banking regulators will hold a public hearing on proposals that would allow the government to pay shareholders in troubled thrifts a sweetener to accept a shotgun marriage with a healthy savings and loan. "If it's done right, we could save significant amounts of money," says Office of Thrift Supervision Director Timothy Ryan. Analysts speculate that thrifts in California, a big electoral prize, would be the first recipients of such aid. Several, such as GlenFed Inc. in Glendale and CalFed Inc. in Los Angeles, need fresh capital.
Regulators insist that their recent actions are designed to protect
taxpayers, who pay the tab for cleaning up the country's battered banks and
thrifts. Officials hope to revive institutions for later resale to private
investors at higher prices. "The trick is to figure out which ones are fatally wounded," concedes FDIC Chairman William Taylor.
DEJA VU. Take Crossland. Regulators note that Republic National Bank, the leading bidder, had offered just $ 17 million for Crossland's good loans and $5.5 billion in deposits. The FDIC instead is setting aside $ 1.2 billion to shore up Crossland's capital and reserve for loan losses. The FDIC predicts Crossland can ultimately be sold for $ 437 million, even though many analysts believe the franchise has no real value. Says investment banker Gerard Smith of Salomon Brothers Inc.: "The market has said there is no need for Crossland."
The regulatory actions have met a hail of criticism on Capitol Hill. "I
thought that capitalism meant that stockholders and management assume the risk
-- not the taxpayers," House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) told regulators at a Feb. 25 hearing. Even those who favor early government assistance worry about this strategy. It puts regulators "in the position of picking winners and losers," notes a senior Federal Reserve staffer.
Even more worrisome to lawmakers is that the government's lenient approach is frighteningly similar to Washington's disastrous thrift experience. In the 1980s, weak institutions were kept alive through accounting gimmickry and other means that postponed their day of reckoning -- and vastly inflated the cost of the S&L cleanup.
Yet with a Presidential campaign in full cry, an economy struggling to recover, and some very large problem banks teetering on the edge, regulators are apt to forget their history lessons -- and roll the regulatory dice one more time.