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Bush Unveils S&L Bailout Plan

February 7, 1989

WASHINGTON (AP) _ President Bush on Monday called on taxpayers to pay for about half the $90 billion solution to the savings and loan crisis, with banks and thrift institutions paying the rest.

He recommended no direct fee on individual depositors.

″We intend to restore our entire insured deposit system to health,″ the president told reporters in outlining a series of regulatory changes. He vowed to prosecute any wrongdoing at S&Ls that have failed thus far.

″In all the time since creation of the deposit insurance, savers have not lost one dollar of insured deposits and I am determined that they never will,″ Bush added.

Under the Bush plan, which must be approve by Congress, the government would sell $50 billion in 30-year in bonds as needed over three years to finance the cost of closing or selling about 350 failed institutions. That’s in addition to the $40 billion pledged last year by regulators to rescue and prop up 223 institutions.

Budget Director Richard Darman said higher insurance premiums from the savings and loan industry would pay part of the interest on the bonds, but that tax money would also be needed. Taxpayer money would also be needed to meet last year’s commitments by regulators, he said.

Darman estimated the cost to taxpayers at $1.9 billion in 1990, $28.1 billion during the first five years and $39.9 billion over 10 years. Over the 30-year life of the plan, the public would shoulder about 54 percent of the burden, he said.

The banks and savings and loans likely would try to pass on at least a portion of their costs to consumers, possibly in the form of lower interest rates on savings accounts.

″I would hope that wouldn’t happen, but there’s no guaranteeing what the institutions will do,″ Bush said. ″... Nothing is without pain when you come to solve a problem of this magnitude.″

Treasury Secretary Nicholas F. Brady said competition from money market mutual funds and other investments would prevent S&Ls from passing on much of the cost of higher premiums. He acknowledged that some banks and S&Ls may get into trouble because of that.

″There may be some (failures) but in the long run we’ll have a much sounder system,″ he said.

To pay the principal on the government-issued bonds, the government would take more than $2 billion in retained earnings from the regional Federal Home Loan Banks, which are owned by the S&L industry. Money from the sale of assets from failed S&Ls will also be used toward the principal.

But Bush said, ″I will not support any new fee on depositors.″ He thus rejected a proposal floated by his own senior aides to charge depositors a fee to help raise funds for the bailout, an idea roundly criticized by members of Congress.

Sen. Donald W. Riegle Jr., D-Mich., chairman of the Senate Banking Committee, said Bush’s plan was ″by and large a sensible proposal,″ particularly its recommendations for structural reforms. But, he said the complicated bond financing scheme may be more expensive than the simpler plan of issuing the bonds directly through the Treasury.

The announcement marked Bush’s first attempt as president to deal with a major problem, and he appealed for support in Congress.

Bush said the difficulty in the S&L industry was caused partly by economic conditions. But, he said, ″unconscionable risk taking, fraud and outright criminality have also been factors.″

Specifically, Bush proposed:

- Increasing the insurance premium paid by banks from the current 83 cents per $1,000 of deposits to $1.20 in 1990 and to $1.50 after that. The premium for S&Ls would be raised from $2.08 now to $2.30 from 1991 through 1994, dropping to $1.80 after that. Both S&L and bank premiums could be lowered as their insurance funds are brought to full strength.

- An administrative merger of the Federal Deposit Insurance Corp., which insures commercial banks, and the Federal Savings and Loan Insurance Corp., which backs S&L deposits. The staffs of the agency would be combined, but the monies in their respective funds would not be mixed. The new deposit insurance agency would retain the name of the FDIC. It would be controlled by a board composed of the current three-member FDIC board, plus two additional members.

- Regulatory changes, including steps to reduce the type of risky investments that got the industry into difficulty, and an expanded role for the Treasury Department in supervising S&Ls.

- Requiring S&L owners to put up more of their own money. By June 1, 1991, capital requirements would be 6 percent, the same as banks and double the current S&L requirement.

- Placing insolvent savings and loan institutions under the control of the new deposit insurance agency. A separate three-member board would oversee spending on the sick S&Ls. It would be composed of the secretary of the Treasury, the chairman of the Federal Reserve Board and the head of the General Accounting Office.

- Increasing Justice Department funds by $50 million for investigation of wrongdoing within the industry. Maximum civil money penalties against S&Ls and banks would be raised to $1 million a day and criminal penalties against executives would go as high as 20 years in prison. Regulators would get the authority to pay rewards to informants.

Administration officials who spoke to reporters after Bush left the news conference stressed that the money raised by the higher bank premiums would go into the the FDIC and would not directly pay for S&L problems.

However, the money raised by the bank premiums would count as revenue. Thus, in an arrangement envisioned by Darman, the government would be able to spend several billions of taxpayer dollars a year without adding to the budget deficit.

The Federal Home Loan Bank Board, which regulates 3,000 S&Ls, would be folded into the Treasury Department after it loses control of its insurance fund. Brady said the current bank board chairman, M. Danny Wall, would stay on. The bank board chairman would sit on the expanded FDIC board.

S&Ls want to keep their regulator independent of other government controls but critics have accused the bank board in the past of being too close to the S&L industry.

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