Mark Zandi, director of U.S. financial services for the WEFA Group, a Bala Cynwyd, Penn.-based consultant firm, said the government's effort to bail out the more than 500 insolvent savings and loans is one of three important risks to the U.S. economy.
The legislation passed last month outlined new requirements for capital, created a method to raise money expected to resolve the insolvency problem and restructured the federal regulators of thrifts.
Thrifts, following the new legislation's 3 percent tangible equity capital guidelines and using their current dollar amount of capital, could have $650 billion in assets.
But the 3,000 S&Ls operating in the country at the end of 1988 had about $1.2 trillion in assets, Zandi said.
Even their pre-bailout regulator-approved capital levels supported oly $1.17 trillion in assets, he said.
"This is a fictitious capital standard," Zandi said.
"FSLIC (the Federal Savings and Loan Insurance Corp.) really had no money to solve the problems of the insolvent institutions, and so what they did is they granted institutions FSLIC notes.
"They're really FSLIC funny money. They (the regulators) said `Consider this as capital', " Zandi said. "It really didn't mean anything, all it meant was institutions could continue to operate.
"So even under this fictitious standard, the industry was too large," Zandi said. "They would have to shed roughly $25 billion worth of assets to be in compliance with this fictitious non-existent regulatory capital standard."
Using generally accepted accounting principals, the capital levels for these S&Ls could have supported $999 billion in assets, he said.
Had these institutions been banks, their capital levels would have supported only $833 billion in assets, Zandi said.
The options available to the undercapitalized thrifts include putting retained earnings into their capital account or shrinking the institution's assets to lower the amount of capital necessary, he said.
If S&Ls choose to shrink their assets, they must sell assets that can be sold at a premium or at par value - their mortgage loans or mortgage-backed securities, he said.
The other non-traditional assets such as office space and commercial construction projects acquired after deregulation in the early 1980s, may be worth only half their book value, Zandi said. …