In his first presidential test in dealing with a major problem - how to resolve the savings and loan crisis - George Bush appears to have passed with flying colors.
His proposal this week to bail out the struggling S&L industry is not perfect and surely will draw opposition from banks and some members of Congress. But on balance, it seems to be a good plan.The serious nature of the S&L problem, and the obvious billions of dollars needed to protect depositors, will probably prevent the issue from becoming a political football and get Bush the congressional cooperation he appealed for in a news conference to announce the plan.
Basically, the Bush proposal would raise the billions needed to bail out failing S&Ls by:
-Selling $50 billion worth of bonds to bail out failing S&Ls that have not yet received federal help or been acquired by other companies. Payments of the principal and part of the interest on the bonds would be covered by banks and S&Ls. The rest of the interest would have to be covered by taxpayers, but the bonds could be spread out over many years so that cost would not come at once.
-Nearly doubling the insurance premiums paid by banks from 83 cents per $1,000 of deposits to $1.50. The $2.08 premiums currently paid by S&Ls would be raised an unspecified amount.
-Making the relatively healthy Federal Deposit Insurance Corp., which oversees the nation's banks, the insurer for S&Ls as well. This may involve some merger of the FDIC with the Federal Savings and Loan Insurance Corp. The FSLIC has exhausted its reserves in covering the $100,000 insurance on deposits in failed S&Ls.
-Placing an estimated 350 insolvent S&Ls under the joint control of the two insurance agencies.
-Expanding the role of the Treasury, including changing industry regulations to reduce the type of risky investments that got the industry into trouble in the first place and to reduce current, on-going losses.
-Increasing Justice Department funds by $50 million for investigation of fraud and other criminal activity in the S&L industry, which observers say has helped cause the collapse of some S&Ls.
The Bush plan does not include any fees levied against depositors in financial institutions, a trial balloon that was quickly shot down when it was floated a few days ago.
How well the Bush plan will work is unclear, but it has promise. It puts most of the burden on financial institutions and allows for a long-term resolution of the problem.
Given the billions of dollars needed to clear up the mess, it would be impossible to solve the problem without getting banks and the taxpayers involved. This approach at least seems to limit the impact on innocent bystanders while making sure no S&L depositors lose their money.
George Bush has done well in meeting his first challenge. The next move is up to Congress. It needs to follow through just as effectively.