This Is a Rescue?

By Christine Gorman

The rescue seemed bold and sweeping. Only 17 days after taking office last year, President Bush presented a plan to clean up the devastated savings and loan industry once and for all. By August, Congress turned that proposal into law. A new agency, the Resolution Trust Corporation, was formed to sell the assets of hundreds of failed thrifts. Cost to taxpayers: an estimated $166 billion over ten years. Against all odds, the Government was tackling the worst financial disaster since the Depression.

Seven months into the cleanup, however, the rescue effort has barely got off the ground. Only 50 of the 386 thrifts taken over by the RTC have been closed or sold. Seized assets are piling up faster than the Government can sell them or even assess their value. By one estimate, the RTC owns 26,800 homes, 773 office buildings, 158 hotels, 205 resorts, 51 restaurants, 236 industrial facilities and 43 mines, among other properties. And the backlog will only get worse, since the agency may need to bail out another 600 institutions. That would bring the total to 1,000 thrifts, twice as many as Bush's plan estimated. "It's blowing up in our face," says an Administration official. "It's one of those things that's so bad that nobody wants to talk about it."

The slow start is costing the U.S. an estimated $14 million a day in operating losses and other expenses. Moreover, as seized property slowly deteriorates under Government ownership, its market value is ebbing. The RTC's commitment to sell several hundred billion dollars' worth of real estate hangs over the market, depressing prices and even harming the loan portfolios of the remaining 2,600 S&Ls. And since the Government is counting on proceeds from the property sales to offset some of the costs of the bailout, sluggish disposal of the real estate could help push the total cost of the rescue to more than $300 billion during the next 30 years. "The cost of carrying that stuff is going to kill you and me as taxpayers," says Richard Kneipper, a Dallas thrift lawyer.

One reason for the delay is the enormous task of building a new bureaucracy. Many RTC offices have only just opened and are operating far below capacity. About 2,300 staffers have been hired and trained so far, but the agency will need thousands more, and finding talented employees has been difficult. "They do a lot of clock watching and bean counting," says a Houston real estate agent. "Everybody's so afraid of making a mistake that you can't get an answer. It's a mess."

Many thrift experts attribute the near paralysis to the way Congress -- at the Administration's insistence -- split responsibility for the rescue between two groups. The RTC's operations are supervised by William Seidman, head of the Federal Deposit Insurance Corporation, an independent agency that polices the banking industry. But a separate panel called the RTC Oversight Board, which is chaired by Treasury Secretary Nicholas Brady, decides RTC policy and controls its funding. Congress agreed to give the Treasury a role so that the Administration would have a major stake in the bailout, but dividing responsibility has prompted feuding between the Treasury and the FDIC. "It is a perfect setup for blaming someone else," complains Seidman.

Real estate experts argue that the bailout law is fraught with overcautious rules, largely designed to prevent the appearance of a gigantic giveaway to developers and financiers, that have slowed the process unnecessarily. To avoid setting fire-sale prices in shaky markets, the Government is bound to sell assets at no less than 95% of their appraised value. That restriction has scotched many deals, since buyers can often find better prices elsewhere. Another drawback is the agency's refusal to fix up old properties or provide loans for potential buyers. With enough troubles of their own, many banks and thrifts refuse to grant mortgages on such tainted properties. "If the RTC won't pay for a new roof and fresh coat of paint, and no one will lend on it, how am I going to sell it?" asks Dallas real estate agent Jenny Capritta.

Many of the Government's properties are white elephants of the most unwanted breed. One such mammoth is the 24,000-acre Banning-Lewis Ranch, situated just outside vastly overbuilt Colorado Springs. A developer paid $200 million for the parcel in the mid-1980s as the future site of several planned communities, but now the land is virtually useless because the city has de-annexed it. As a result, anyone who wishes to develop the former ranch can no longer count on municipally priced water.

Sorting out the assets would be hard enough if they had been in the hands of honest businessmen, but many failed thrifts were ruined by larcenous schemers who took advantage of lax S&L rules and poor supervision during most of the 1980s. Testifying before Congress last week, Seidman said criminal fraud had been discovered in 60% of the S&Ls seized by the Government during the past year, almost triple the rate in commercial bank failures. Some of the wrongdoing may even be traced to the CIA. According to the Houston Post, the intelligence agency had connections with 22 now failed thrifts, whose officers used depositors' funds for loans to CIA operatives involved in "gunrunning, drug smuggling, money laundering and covert aid to the Nicaraguan contras." The House Select Committee on Intelligence promised last week to look into the charges, which the CIA has denied.

The bailout's credibility is also being hurt by the Government's problems in finding and keeping top talent to lead the rescue, which many potential candidates view as a thankless job. Daniel Kearney, a real estate expert with Wall Street and Washington experience, seemed an ideal choice for chief executive of the Oversight Board. But Kearney quit in February after just four months on the job, citing a lack of authority "essential to be effective in this process." At the same time, the Treasury Department is having trouble replacing M. Danny Wall, the head of the Office of Thrift Supervision, who oversees the surviving S&Ls. Wall resigned in December but has been asked to stay on, even though he was sharply criticized last year for giving overly generous Government guarantees to buyers of crippled S&Ls.

At least two Democrats are already calling for an overhaul of the bailout. Minnesota Congressman Bruce Vento and Nebraska Senator Bob Kerrey proposed bills last month that would scrap the Oversight Board and concentrate all responsibility for the rescue effort within one agency. Says Kerrey: "This is the No. 1 domestic problem, and it isn't being given the attention it deserves. Bush has dropped the ball." Even so, Congress and the Administration are likely to avoid returning to the S&L problem this year. Almost no one wants to admit defeat on a much applauded plan so soon after enacting the original legislation. As they look the other way, the meter is running higher and higher on a faltering campaign.

With reporting by Gisela Bolte and Hays Gorey/Washington and Richard Woodbury/Houston