Congressional Budget Expert Rejects Treasury FSLIC Plea

By Naylor, Barlett; Easton, Nina | American Banker, July 9, 1986 | Go to article overview
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Congressional Budget Expert Rejects Treasury FSLIC Plea


Naylor, Barlett, Easton, Nina, American Banker


Congressional Budget Expert Rejects Treasury FSLIC Plea

Treasury Department officials have failed to convince Congress' independent budget expert that a bailout plan for the thrift insurance fund is not a new government expenditure.

The issue is a crucial one, because of an overriding mandate to cut the federal budget.

In a related development, the Federal Home Loan Bank Board has finally signed a contract with the newly chartered Federal Asset Disposition Association, also known as the 406 Corp. The contract opens the way for the association to begin managing the troubled assets that the Federal Savings and Loan Insurance Corp. inherits each time a federally insured thrift fails.

Rudolph Penner, director of the Congressional Budget Office, said in an interview Tuesday that he would not overrule an earlier staff position. He said he continued to view the Treasury-authored plan, which would raise about $15 billion in the bond market for the FSLIC, as an obligation of the federal government.

"I'm going to tell Treasury that the obligation of the government is clear,' Mr. Penner said. The Treasury Department had designed the plan specifically to avoid any effect on the federal budget.

Sen. Alan Cranston, D-Calif., a member of the Senate Budget Committee, will not vote "for something that has a $12 billion price tag,' said an aide. And the committee's ranking minority member, Sen. William Proxmire, D-Wis., defends the Congressional Budget Office opinion, said an aide.

Meanwhile, the thrift industry is now voicing new concerns about the plan.

One reason, industry officials say, is the threat to the thrifts' real estate business embodied in congressional tax reform initiatives. "Yes, there is a change in tone' from the industry, said Gerald J. Levy, chairman of the United States League of Savings Institutions.

These developments spell trouble for the recapitalization plan and for the FSLIC, which at the end of 1985 had reserves of only $4.6 billion, down $1.1 billion from the previous year. The fund now has 41 insolvent thrifts under conservatorship, many of which it is anxious to sell off; however, turning those institutions over to buyers would require substantial financial assistance from the FSLIC.

Failure to pass the bailout plan also may stifle the effort to win new banking powers from Congress this year. Mr. Penner's ruling "could derail the whole Garn bill,' said an aide to a highranking Senate Banking Committee member.

Sen. Jake Garn, R-Utah, chairman of the Senate Banking Committee, on June 24 introduced sweeping legislation, a key section of which contains the plan to recapitalize the FSLIC.

Contributions from District Banks

Essentially, the Treasury plan calls for the 12 district Federal Home Loan banks to contribute $3 billion to an intermediate corporation. This corporation would purchase zero coupon bonds with maturity value of $12 billion or more. With the bonds as backing, the corporation would then float new bonds, creating an immediate source of cash. This money would be used to liquidate the proliferating number of ailing thrifts.

To repay all this debt, the FSLIC would use its income from insurance premiums and its special $1 billion-a-year assessment on the industry to pay the interest on its debt. The principal on the debt would be paid off by zero coupon bonds once they mature.

Bank Board Chairman Edwin J. Gray was in Japan this week talking to Japanese investors who buy many of the bonds issued by the 12 Federal Home Loan banks. Uppermost on Mr. Gray's agenda, according to sources, was to pitch the FSLIC recapitalization plan.

Mr. Penner's office issued a preliminary report June 4 stating that the bailout plan must be considered a budget item since the FSLIC would be ultimately responsible for repaying the bonds. In an unusual departure from its usually staid tone, the Congressional Budget Office called the plan "accounting gimmickry.

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