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S&Ls: the sequel

You'd think by now that when Comptroller General Charles Bowsher talks, Congress would want to listen. Had it heeded his early warnings on the savings and loan disaster, damage control might have cost only a few billion dollars. But there was a conspiracy of silence between Capitol Hill and the White House to let the problem slide past another election. Now the bailout may cost as much as $500-billion, which would make even a manned mission to Mars look cheap. Bowsher now says the government's bank insurance fund is going broke, too, and yet another taxpayer bailout will probably be necessary. As if history taught no lessons, the bank lobbies are calling the warning premature and the administration is saying the banks will need nothing more than a government loan to tide them over. Fool me once, your fault. Fool me twice, my fault.

Without another week's delay, Congress ought to act on the advice Bowsher offered two months ago: Levy a special $15-billion assessment on the banks to beef up the insurance fund so that the Federal Deposit Insurance Corp. (FDIC) can shut down insolvent banks before they lose more money. The assessment seems dead in the water because the banks (and the administration) fear it would mean another round of fee increases for customers. But that would be more honest, equitable and efficient than saving up the losses to spring on the taxpayers later.

Even the loan authority the government does want is in danger of getting bogged down with the administration's deregulation bill, which faces a difficult and uncertain future in Congress despite the House banking subcommittee's enthusiastic approval last month. In tune with the Bush administration mantra that competition cures everything, the Treasury Department continues to claim that the banks would not need a taxpayer bailout if they could cross state lines and get into businesses that are now generally forbidden to them, such as securities and real estate. The House bill that would allow this also would permit nonbanking companies, such as industrial or insurance conglomerates, to own bank holding companies.

That is disconcertingly reminiscent of the notion that sick savings and loans could grow their way out of trouble by investing even more government insured deposits in overvalued real estate. One difference this time is that there would supposedly be strict "fire walls" between the banks and their nonbanking enterprises. Nonbanking companies would be allowed to own only healthy banks.

But fire walls and other regulatory safeguards are only as good as the politicians who enforce them. That kind of trust is hard to place in an administration that has turned the antitrust laws into dead letters. What's even more alarming is that the banks would still be playing with the public's money. Such deposit insurance reforms as the banking lobbies let the House subcommittee approve were limited to curtailing the too-big-to-fail doctrine, to mandating risk-based insurance premiums and to preventing pension funds from pyramiding the $100,000 deposit insurance limits for each of their members. Individual bank deposits would still be insured to $100,000, regardless of the wealth of the borrowers.

Interstate banking is an idea whose time has long since come; state lines and other geographical barriers have no more to do with the flow of money than with wind and water. In that one respect, banks need and deserve the same freedom as their competitors in the securities and insurance industries. Letting banks into those and other nonbanking businesses is another matter. If the time has come also to loosen the well-founded restrictions of the Depression era Glass-Steagall Act, Congress should make certain that the banks play the new game only with their own money and not with government guarantees. A reasonable compromise would be to limit government deposit insurance to accounts in banks that are not owned by non-banking companies and which invest only in traditional lines of business. Such accounts naturally would pay less interest, but diminished return is a reasonable price for security. Given what has already happened to the savings and loans, and to some banks, the last thing the banks should ask of the taxpayers is to be staked to new lines of risk.