U.S. takes new tack on banks Regulators would invest in, not shut, ailing institutions.

February 18, 1992|By Stephen Labaton | Stephen Labaton,New York Times News Service

WASHINGTON -- 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. "It will be controversial because anything that is new and at all bold in Washington is controversial, and not without some risk."

Mr. Ryan said the program would be for institutions that "are heading south" but not yet insolvent. He said the regulators were motivated 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.

Some officials have privately expressed concerns about the political fallout of rescuing shareholders in an election year.

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