Not since the Great Depression had any new president inherited a situation so potentially dangerous to the economy as the savings and loan scandal that Ronald Reagan left to George Bush. Bailing out the hundreds of dead and dying thrifts would add many billions of dollars to an already unacceptable budget deficit. But without swift and forceful action, the entire banking system might collapse. Indeed, Mr. Bush acted swiftly and forcefully. The $159-billion rescue legislation went to Capitol Hill only three weeks after his inauguration and was signed into law in August after less than the usual congressional dithering. Some warnings were heard that the up-front money - $50-billion - wasn't enough, but most observers thought the job well-done.
It wasn't. One of the key provisions was the creation of a new bureaucratic wonder called the Resolution Trust Corporation (RTC) to take control of dead and dying thrifts and get as much money as possible back out of them. Where possible, it would sell S&Ls and their branches to healthy institutions. Where not, it would sell their foreclosed real estate and other assets in open markets. To keep the bailout going, it was critical that the RTC move quickly.
It hasn't. Congress burdened the RTC with an impossibly bureaucratic oversight board representing three other agencies including the Treasury, whose determination to micro-manage the RTC has been blamed for the surprise resignation last Friday of the Oversight Board's president and chief executive, Daniel P. Kearney. Kearney said there had been a "mutual misunderstanding of the scope of the position I accepted." In other words, he found he had no power to make anything happen.
The Bush administration, meanwhile, has failed to fill the two public seats on the Oversight Board, a vacant seat on the board of the Federal Deposit Insurance Corporation (FDIC), and six other positions important to the bailout. And though the White House scarcely could have been unaware of the bureaucratic web snaring the RTC, or of Treasury's excessive interference, it did nothing about either.
Kearney's resignation is widely - and rightly - seen as a reproof that George Bush can not afford to ignore.
Though the Oversight Board has a new acting chairman, the organizational morass is unchanged. The RTC itself is run on a day-to-day basis by the FDIC under Chairman William Seidman, but the administration is doing its best to chase him off, too,for alleged failure to be a team player, and the RTC Oversight Board, dominated by his enemies at the Treasury, is unlikely to delegate any decision-making authority. The Oversight Board still represents the often conflicting interests of the Treasury, theDepartment of Housing and Urban Development and the Federal Reserve. Sick thrifts continue to pile up, losing at latest report some $14-million a day.
"The existence of the Oversight Board diffuses responsibility," says William Isaac, a former FDIC chairman. "There is no one to blame because it is a committee. It allows the Treasury to blame the FDIC and the FDIC to blame the Treasury, the Fed to duck responsibility and all of them to blame the Congress."
This is happening on George Bush's watch. He can't blame Ronald Reagan or the Congress. A word from him to Treasury Secretary Nicholas Brady could have cut through much of the red tape at the Oversight Board. He leaves Congress little choice but to abolish it. The sort of bureaucracy Isaac describes is what government creates when it wants a pretext to do nothing. When it comes to the collapsing savings and loan industry, to do nothing is to steer a course toward disaster.