S and Ls Send Out an S O S

Threatened by younger, more alluring and higher-yielding money-market funds, the long marriage between investors and the American savings and loan associations is in trouble. This year S and Ls may lose $5 billion of their $32 billion in net capitalization. To stem the flight of depositors, they have had to offer new savings instruments with higher and higher interest rates. The conundrum: at the same time that they carry huge portfolios of old mortgages, including some that were made in the 1960s and yield 6% or 7%, S and Ls must pay 15% or more for new deposits. As a result, earnings have been squeezed, and more and more once stout S and Ls have become shaky. As of March, the Federal Savings and Loan Insurance Corporation (FSLIC) regarded 246 of the 4,560 S and Ls as "problem cases," vs. 79 in December 1979. Says H. Brent Beesley, director of the FSLIC : "There's a bad period ahead. Some will make it, while others won't."

Help could be some time in coming, if it comes at all. The Reagan Administration is philosophically opposed to helping the S and Ls with transfusions of cash. Deputy Treasury Secretary R.T. McNamar denies that the S and Ls are in any permanent trouble. Says he: "As long as the savings outflow does not create a liquidity crisis, then the problem is an accounting matter. It can be met with accounting changes."

The Administration is against key parts of a bill drawn up by the Federal Reserve staff that would provide rescue plans for troubled banks and thrift institutions, including S and Ls. The proposal would increase from $750 million to $3 billion the line of credit that the FSLIC has available to help thrift institutions. The FSLIC would also be given broader authority to move faster to rescue an S and L before its sores break into open wounds. Currently, aid can be given only when an S and L has almost failed.

The most controversial feature of the bill would permit banks or bank holding companies to take over weak thrift institutions. For that reason the bill is opposed by the U.S. League of Savings Associations, a lobbying group for the thrifts. Says a league spokesman: "It is the camel's nose in the tent that would lead to eventual interstate branching and interindustry combinations."

The thrift industry has mixed feelings about a host of other schemes now being drawn up to keep to a minimum the number of failed S and Ls. Among them:

Tax-Free Accounts. Introduced in the House by North Carolina Republican James Martin, this measure would allow S and Ls and savings banks to issue one-year savings certificates that would give tax-free interest. This would make them much more attractive to savers in higher income brackets and probably start a new flow of money into the thrifts.

Tax-Sheltered Mortgages. This plan would permit private investors to buy old mortgages at face value and then write off their losses against other income. That is how a tax shelter.nor-mally works. For example, an existing $100,000 mortgage yielding 9 1/2% at a time when new ones are about 16% has a market value of only $67,000. The person who bought the old mortgage would be permitted to use the $33,000 difference to reduce his taxable income, which could put him in a lower tax bracket. One drawback is that since there is at least $100 billion worth of such mortgages outstanding, this plan could cost the Government up to $15 billion in lost tax revenues.

Mortgage Warehousing. This proposal, introduced in the Senate by New York Democrat Daniel Patrick Moynihan, would have the Federal Deposit Insurance Corporation and the FSLIC take over many of the old mortgages from the thrifts and hold them for three years. The Government might purchase about $10 billion of the old loans now earning less than 7 1/2%. Cost to the Government: approximately $2.1 billion. Relieved of the burden of these low-yielding mortgages, the S and Ls could gain a little more profitability and then later buy back the "warehoused" mortgages.

Restrict Money-Market Funds. The S and Ls see the money-market funds as their main competition, since so much cash has gone out of their vaults and into the popular new accounts. The S and Ls, therefore, would like the Federal Reserve to impose the same kind of reserve requirements on money-market funds that it now requires of banks. At present, banks have to set aside a percentage of their total deposits in a reserve account that cannot be lent to customers. If the money-market funds also had to do that, it would increase their costs and cut down on the amount of interest they would be able to pay. The money-market funds have fought the proposal with mailing campaigns to politicians, who are not likely to hinder the popular accounts.

The only fix in place for the S and Ls is an innovative money-market instrument called a repurchase agreement. This allows S and Ls to pay rates comparable to those of money-market funds for small amounts, perhaps as low as $1,000, for up to a maximum of 89 days. That could help the S and Ls' competitiveness in seeking funds, but there is a catch. The accounts, like the money-market funds, would not be insured by the Government.

The new variable-rate mortgages, loans whose interest rates are not fixed for 20 or 30 years but go up or down as general interest rates fluctuate, will help the S and Ls match their mortgages to deposits. But such loans are not likely to constitute more than 25% of all thrift portfolios before the middle of the decade. Some S and Ls will not last that long and will feed the merger trend that has begun. But the survivors will be in a better position than ever to be the country's major mortgage lenders, tending once again to their heartland business of supplying Americans with the means to buy places to live. For now, though, S and Ls can hope for little more than a bandage or two to stop some bleeding.

This file is automatically generated by a robot program, so viewer discretion is required.