U.S. savings and loan associations will
have to shrink to half their asset size to meet new
legislatively-mandated capital requirements, a group of Oklahoma
executives were told Thursday in Oklahoma City.
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, 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,
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
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. …