Congressional Budget Office Endorses New Plan to Bail out FSLIC

By Naylor, Bartlett; Easton, Nina | American Banker, July 15, 1986 | Go to article overview
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Congressional Budget Office Endorses New Plan to Bail out FSLIC


Naylor, Bartlett, Easton, Nina, American Banker


Congressional Budget Office Endorses New Plan to Bail Out FSLIC

The Congressional Budget Office has agreed to a revised plan to recapitalize the federal thrift insurance fund, paving the way for banking committees in the House and Senate to move ahead on financial legislation.

After a month-long impasse over the plan, the budget office director, Rudolph Penner, and top Treasury officials reached an agreement on a redesigned plan that avoids government responsibility for bolstering the fund. Earlier, the budget office had concluded that the plan would cost the government as much as $12 million, making congressional approval unlikely.

"We hope and believe there will be a fairly quick markup' on banking legislation, said Treasury Undersecretary for Finance George Gould in an interview Monday. The agreement, he said, "removes the added issue of budget treatment and puts it back in the same position as it was prior to CBO's objections.'

Under the new plan, a paper corporation formed by the Federal Savings and Loan Insurance Corp. would be responsible for paying the interest as well as the principal on the $15 billion in borrowings that would be used to recapitalize the fund. As a result, the Congressional Budget Office concluded that the plan would not add to the federal deficit.

The plan is designed to bolster the ailing FSLIC, which had at yearend $4.6 billion, down about $1.1 billion from 1985. It draws on the retained earnings of the 12 Federal Home Loan Banks and on the future earnings of FSLIC.

The original plan called for the formation of a paper corporation that would be capitalized with $3 billion from the 12 district banks. The corporation would then use that money as backing to borrow about $15 billion to inject into FSLIC.

At the same time, the financing corporation would use the $3 billion to purchase zero coupon bonds that, when they mature, would equal the principal on the amount it borrowed. In that way, the repayment on the principal would be assured.

However, under the original plan, the FSLIC was responsible for paying the interest on the bond debt. That prompted the Congressional Budget Office on June 4 to conclude that the FSLIC, and therefore the government, was liable.

"The new plan does not change the underlying economics for the FSLIC, the Federal Home Loan Banks, or the industry,' Mr. Gould said. "The economics remain the same; only the structure has changed.'

Treasury officials will discuss the revisions with industry leaders later this week.

"We need time to study it,' said Philip Gasteyer, executive vice president of the United States League of Savings Institutions.

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