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Top auditor foresees bank bailout

The nation's senior auditor said Tuesday the banking industry might be headed for a taxpayer bailout. Although others have made similar warnings, the prediction by the comptroller general, Charles A. Bowsher, is significant because he is widely considered the most credible impartial voice in government.

His early assessments of the problems of savings and loans and later of the huge costs in that bailout have proved prophetic.

Bowsher, speaking to reporters after appearing before a congressional committee, did not suggest how large a bailout might be needed, but even the most pessimistic assessments have not seen the need for the kind of costly effort that is being made to salvage savings and loans.

The administration estimates that the savings bailout will cost taxpayers $130-billion, but Bowsher has said the total could be as high as $500-billion over 40 years.

Bailing out the banking industry would involve replenishing the government insurance fund that protects deposits and is used to cover the cost of bank failures.

The fund has been battered by the growing number of large bank failures and is now at its lowest level since it was created in 1934.

Bowsher's latest assessment, which follows increasingly gloomy predictions and dire numbers about the state of the banking industry and the insurance fund, did not come totally as a surprise because he had previously urged Congress to provide some additional money for the fund.

"The odds are strong that the taxpayers are going to end up having to pay money to shore up the insurance fund," said Rep. Charles Schumer, D-N.Y., a member of the House banking committee. "But most of Congress would prefer to avoid the issue because it is such a tough political issue. Most people just don't want to think about it.

"I think Bowsher has been on target because he doesn't have an ax to grind." Bowsher heads the General Accounting Office, the investigative arm of Congress. Although non-partisan, appointments to the GAO are controlled by the Democratic majority.

The Treasury Department said Tuesday, as it has before, that no taxpayer bailout of the banking industry would be necessary if Congress adopted its plan to reorganize the industry.

Bowsher's prediction was prompted in part by a report issued Tuesday by bank regulators that while 90 percent of the nation's savings and commercial banks posted profits for the first three months of this year, the total size of banks with troubled loans had increased significantly, to $418-billion, from $399.7-billion less than three months ago.

Monday, L. William Seidman, chairman of the Federal Deposit Insurance Corp., again raised his estimate of losses to the fund that protects bank deposits, to as much as $23.1-billion over the next 18 months, up from $14-billion.

Seidman said Tuesday that most of the losses are likely to occur in 1992, but denied that regulators are postponing the closing of ailing banks because the bank insurance fund is so low.

The timing and political content of Bowsher's remarks are noteworthy. In April he called on Congress to impose cash assessments on the banking industry to shore up the insurance fund with $15-billion in cash.

By raising the specter of a taxpayer bailout of troubled banks, Bowsher was reminding Congress and the White House that he sounded similar warnings in the 1980s that taxpayers were going to end up with the multibillion-dollar cost of the S&L bailout.

The fund has been depleted by a growing number of large bank failures, the latest of which was the Bank of New England, whose failure in January could ultimately cost the fund $2.5-billion.

Worried about the imminent insolvency of the bank insurance fund, the Bush administration earlier this year asked Congress to overhaul the system and permit regulators to borrow up to $70-billion to protect depositors and shut down bankrupt institutions.

For the first three months of this year, the nation's 12,246 commercial banks posted profits of about $5.7-billion, compared with $1.1-billion in the prior quarter and $6.2-billion a year earlier.

The 463 federally insured savings banks posted losses of $170-million for the first quarter, compared with a loss of $1.2-billion in the fourth quarter of last year and a loss of $257-million for the first quarter of 1990.

Assets at troubled institutions continued to grow over the first three months of this year more rapidly than the two cushions used to absorb losses _ the amount of capital banks have raised and the amount they have placed in reserve in anticipation of losses.

The FDIC said that troubled loans grew by $7.2-billion at the same time that capital increased by only $4.4-billion and reserves shrank by almost $500-million.

The actual value of the bank insurance fund is in dispute.

Seidman has said the fund was worth about $8.4-billion at the end of last year. But Bowsher has said the fund is "virtually insolvent" because of the likely number of bank failures.

Seidman said there is little sign that the commercial real estate markets will turn around soon, and as a result, he expects 100 more bank failures from now to the end of 1992 over his earlier estimate of about 340 banks.