The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation

By Lawrence J. White | Go to book overview

CHAPTER NINE
The FIRREA, 1989

As the Federal Home Loan Bank Board was feverishly concluding its transactions with acquirers of insolvent thrifts in late 1988, the newly elected but not-yet-inaugerated Bush administration was gathering information for a new assault on the problems of the insolvent thrifts. As 1988 progressed the depth and extent of the insolvent portion of the thrift industry became increasingly clear. Despite the FSLIC's disposal of 205 insolvent thrifts (and "stabilization" of another 18), the industry ended the year with 243 thrifts (with $74.3 billion in assets) that were insolvent according to regulatory accounting principles. Twice that number (with four times the assets) were insolvent on a tangible net worth basis. One-third of the industry was unprofitable. That third of the industry experienced $6.8 billion in operating losses and $12.2 billion in nonoperating losses (writedowns), swamping the $5.6 billion in after-tax profits earned by the profitable two-thirds. The "chickens" of the 1983-1985 period were still "coming home to roost."

In this light, it was increasingly apparent that the Competitive Equality Banking Act of 1987 had been inadequate. The CEBA's borrowing mechanism had provided little in the way of new resources; it was primarily a means of telescoping future insurance premiums into the present. With the continuing deterioration of the Southwest real estate markets and the unabated sliding of thrifts into insolvency, the FSLIC's net resources -- primarily, its future insurance premium revenues -- were increasingly seen as inadequate to handle its obligations to the insured depositors in these insolvent thrifts. A new plan was necessary.

On February 6, 1989, President Bush announced his new program, which he would subsequently send to the Congress for legislative enactment. The program called for an additional $50 billion in borrowing authority to clean up the remaining insolvent thrifts. General revenues would explicitly be used to cover a large fraction of the necessary costs; the healthy part of the thrift industry would be

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