Regulators already have committed the government to savings and loan rescue deals that will cost the U.S. Treasury $8 billion in tax revenues, federal officials said Tuesday.
In December alone, $4 billion in tax breaks were awarded to a handful of wealthy investors in sales of 34 troubled savings institutions.
The tax breaks, which included a $52.2 million tax benefit for a corporation partly owned by the Pritzker family of Chicago, provoked a storm of criticism at a House Banking Committee hearing on the Federal Home Loan Bank Board`s efforts to deal with the financial crisis confronting the Federal Savings and Loan Insurance Corp. (FSLIC).
The Reagan administration, in its fiscal 1990 budget released Monday, admitted for the first time that the beleaguered insurance fund and the savings industry lack the funds to solve the problems on their own and that government funds will be needed.
But the Reagan budget didn`t specify how to raise the money needed to finance the rescue effort, which could cost up to $115 billion. In a separate report, which was quickly dismissed by Republicans and Democrats on Capitol Hill, the administration recommended that the FSLIC reduce the amount of insurance coverage provided for depositors, now up to $100,000 per account.
At one point during the banking committee hearing, bank board member Lawrence J. White argued that the big tax breaks were required to get outside investors with capital to take financially troubled institutions off the government`s hands.
”You`re approaching this as if the acquirers owed us something,” White said to Rep. Jim Leach (R., Ia.), a member of the banking committee. ”They don`t owe us anything.”
But a red-faced Leach fired back that projections given to him by a Treasury official said that the investors had pledged to infuse only $3 billion in fresh capital into the troubled institutions in return for $8 billion in tax savings. Leach`s figures weren`t challenged by the regulators. ”What has occurred is the United States government didn`t sell assets;
it has paid people to take them over,” said Leach, who added: ”The one point I agree with is that the acquirers don`t owe you anything. They have robbed you blind, and the duty of this Congress is to keep the thievery to a minimum.”
Bank board officials, including Chairman M. Danny Wall, defended the rescue deals as the least costly way of resolving the problems facing the FSLIC because of the financial drain imposed by hundreds of insolvent savings and loans.
That criticism of Wall and the bank board would be intense was evident from the minute Rep. Henry Gonzalez (D., Tex.), chairman of the banking committee, opened the hearing on what the congressman called the bank board`s ”fire sale” of savings and loans in December. Approval of the sales was rushed through because the tax breaks available to investors decreased by 50 percent at year`s end.
”Not even the President of the United States-nor members of his Cabinet- can commit the federal government to billions of dollars of expenditures without prior authorization, prior appropriation and prior votes of both houses of Congress,” Gonzalez told board members. ”To put it bluntly, you don`t have that power. That`s the only way to put it.”
Yet, Gonzalez said, Wall and the bank board made such commitments when they issued notes and subsidies to investors in more than 200 savings and loan rescues last year, at a cost of about $38 billion.
The figures released by Leach and projections made by the bank board confirmed earlier reports that the deals will cost taxpayers billions of dollars because the extensive tax breaks will drain the Treasury of revenue. But earlier estimates of the Treasury`s loss were lower and didn`t include the 34 deals completed in December.
In an interview, Leach said he thought the $8 billion figure was too low because of the size of the deals, and others on the committee echoed his concern.
Rep. Charles Schumer (D., N.Y.) said he found the deals ”astounding.”
He said he analyzed one deal and discovered that the investor put up $315 million in return for a guaranteed return worth $600 million.
Wall and White said it would be more costly for the government to close the ailing institutions and pay off their depositors. But Leach and Gonzalez challenged their position.
Leach said the bank board argument was theoretical and based on many assumptions about future economic activity. ”The possibility that many of these thrifts will have to be bailed out once again is quite real,” Schumer added.
Many of the lawmakers complained that the bank board should have extracted better deals from the acquirers of the troubled institutions, a class of investors that ranged from a unit of Ford Motor Co. to Coast to Coast Financial Corp.
