Creature From Jekyll Island by G. Edward

Keeping the S&Ls in business was costing the FSLIC $6 million per day. By 1988, two years later, the thrift industry as a whole was losing $9.8 million per day, and the unprofitable ones—the corpses which were propped up by the FSLIC—were losing $35.6 million per day. And, still, the game continued.

By 1989, the FSLIC no longer had even two-tenths of a penny for each dollar insured. Its reserves had vanished altogether. Like the thrifts it supposedly protected, it was, itself, insolvent and looking for loans. It had tried offering bond issues, but these fell far short of its needs. Congress had discussed the problem but had failed to provide new funding. The collapse of Lincoln Savings brought the crisis to a head. There was no money, period.

THE FED USURPS THE ROLE OF CONGRESS

In February, an agreement was reached between Alan

Greenspan, Chairman of the Federal Reserve Board, and M. Danny Wall, Chairman of the Federal Home Loan Bank Board, to have L "Fillin g FSLIC," by Shirley Hobbs Scheibla, Barron's, Feb. 9,1987, p. 16.

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74 THE CREATURE FROM JEKYLL ISLAND

$70 million of bailout funding for Lincoln Savings come directly from the Federal Reserve.

This was a major break in precedent. Historically, the Fed has served to create money only for the government or for banks. If it were the will of the people to bail out a savings institution, then it is up to Congress to approve the funding. If Congress does not have the money or cannot borrow it from the public, then the Fed can create it (out of nothing, of course) and give it to the government.

But, in this instance, the Fed was usurping the role of Congress and making political decisions entirely on its own. There is no basis in the Federal Reserve Act for this action. Yet, Congress remained silent, apparently out of collective guilt for its own paralysis.

Finally, in August of that year, Congress was visited by the ghost of FDR and sprang into action. It passed the Financial Institutions Reform and Recovery Act (FIRREA) and allocated a minimum of $66 billion for the following ten years, $300 billion over thirty years. Of this amount, $225 billion was to come from taxes or inflation, and $75 billion was to come from the healthy S&Ls. It was the biggest bailout ever, bigger than the combined cost for Lockheed, Chrysler, Penn Central, and New York City.

In the process, the FSLIC was eliminated because it was

hopelessly insolvent and replaced by the Savings Association Insurance Fund. Also created was the Banking Insurance Fund for the protection of commercial banks, and both are now administered by the FDIC.

As is often the case when previous government control fails to produce the desired result, the response of Congress is to increase the controls. Four entirely new layers of bureaucracy were added to the existing tangled mess: the Resolution Trust Oversight Board, to establish strategies for the RTC; the Resolution Funding Corporation, to raise money to operate the RTC; The Office of Thrift Supervision, to supervise thrift institutions even more than they had been; and the Oversight Board for the Home Loan Banks, the purpose of which remains vague but probably is to make sure that the S&Ls continue to serve the political directive of subsidizing the home industry. When President Bush signed the bill, he said: This legislation will safeguard and stabilize America's financial system and put in place permanent reforms so these problems will never happen again. Moreover, it says to tens of millions of savings-and-loan depositors, "You will not be the victim of others'

HOME, SWEET LOAN

75

mistakes. We will see—guarantee—that your insured deposits are secure.

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secure.

THE ESTIMATES ARE SLIGHTLY WRONG

By the middle of the following year, it was clear that the $66

billion funding would be greatly inadequate. Treasury spokesmen were now quoting $130 billion, about twice the original estimate.

How much is $130 billion? In 1990, it was 30% more than the salaries of all the schoolteachers in America. It was more than the combined profits of all the Fortune-500 industrial companies. It would send 1.6 million students through the best four-year colleges, including room and board. And the figure did not even include the cost of liquidating the huge backlog of thrifts already seized nor the interest that had to be paid on borrowed funds.

Within only a few days of the announced increase, the Treasury again revised the figure upward from $130 billion to $150 billion.