Federal regulators are preparing a new strategy of investing in some failing banks and savings and loans rather than taking them over and closing or selling them.
The regulators, whose goal is to find a less expensive way to deal with ailing institutions, are being prodded by a law passed by Congress last year that requires the authorities to step in earlier when lending institutions are troubled.
But the plan carries high financial and political risks because it would also bail out the owners of troubled institutions.
"The bottom line is we want to save taxpayers money in a reasonable way and perpetuate rather than liquidate institutions," said John E. Robson, deputy secretary of the Treasury. "This is being offered as an alternative to liquidation."
The new approach, to be outlined this week in the Federal Register, was developed in several high-level meetings last week between the regulators and top administration officials.
By investing in weak institutions, the government hopes to nurse them back to health and make them attractive to buyers. This approach might also ease the nation's tight credit by keeping the banks and savings associations operating and under government supervision.
When some institutions have been shut or merged, outstanding loans have been called in, and some experts say that has contributed to the tight credit.
Under the new plan, the government would get a substantial stake in an institution in return for its investment. Whether the government would hold voting rights in these companies and how the plan would work is still being discussed, but it is clear that existing shareholders would have the right to decide whether to accept the investment.
A government investment would dilute the value of existing shareholders' stock, but at the same time would strengthen the company, helping to protect private investments.
The financial risk, some critics say, is that the government stake in the future of such institutions could ultimately prove more costly than traditional bailouts if the economy slumped further and if already shaky real estate holdings brought down even more banks and savings institutions.
Government protection of shareholders is also expected to encounter sharp political challenges on Capitol Hill and from some presidential candidates, who might argue that taxpayer money should not be used to protect investors from what may have been their own poor judgment. Other critics might be healthier institutions and those already seized.
But senior regulators say there is already significant momentum for the new approach, which is known as "early resolution assisted mergers." Congress laid the groundwork for the approach when it approved legislation in November directing regulators to intervene more quickly to rescue weak institutions.
The plan is still at least a few weeks from being implemented, with some details to be ironed out. In recent days, an agreement in principle appears to have been reached.
"I think you can now say it's a likely approach," said T. Timothy Ryan Jr., director of the Office of Thrift Supervision, which oversees savings associations and has advocated the plan for many months.
Ryan said the program would be for institutions that "are heading south" but not yet insolvent. He said the regulators were motiviated to adopt the new approach by a looming deadline. They are required to clean up the industry by September 1993, when the cost of the cleanup switches from Treasury borrowings to the savings and loan insurance fund, which is financed by premiums paid by the industry.
While none of the officials planning the new strategy have expressed objections to it, some have privately expressed concerns about the political fallout of rescuing shareholders in an election year. The fear is that some shareholders of troubled institutions could be involved in wrongdoing that contributed to the problems.
Other experts are clearly troubled by the new strategy.
"It's obviously difficult for the regulatory authorities, but their short-run goals are competing with their long-run goals," said James R. Barth, a former government economist who has written extensively on the bailout and now teaches at Auburn University.
"What they are trying to do is prop up institutions and keep existing credit arrangements intact," he said. "But many people think there are too many banks. How is this supposed to faciliate an exit from the industry if the government is pumping money into them?"
Variations on the government investment approach are already being experimented with. Last month, regulators decided to put $1.2-billion of capital into the Crossland Savings Bank of Brooklyn, N.Y., rather than sell or shut it, with the hope that its plight would improve in two to three years and it could be sold. In that case, however, the shareholders lost their investment because the institution was already insolvent when the government stepped in.
While regulators say the new approach could be applied to scores of institutions that are solvent but ailing, they are looking first to several of the nation's largest savings associations, all in California, that have fallen below the regulatory requirements for adequate capital.
Outlining how the program might work, Ryan said the government would provide infusions of capital and give existing stockholders either "hope certificates" or stock warrants that would enable the stockholders to enjoy any profits if the institutions were turned around by allowing them to buy more stock at a lower price.
Ryan said the new capital would make shaky institutions attractive to prospective buyers, which have preferred to wait until institutions fail and then pay less for them and have their worst loans taken off their books.