Warning: Further -- and Maybe Bigger -- Federal Bailouts Ahead

By John Greenwald

After more than two troubled years as the Government's top savings and loan regulator, M. Danny Wall fell victim to the nation's spreading S&L scandal. The clamor for his ouster mounted last month after lower-ranking bank examiners told Congress that Wall had unduly delayed for 21 months a Government takeover of high-flying financier Charles Keating's Lincoln Savings & Loan Association, whose collapse could cost taxpayers $2.5 billion. Last week Wall finally bowed to the pressure and resigned as director of the Office of Thrift Supervision. He had been victimized, Wall complained, by "simplistic efforts to find a scapegoat to shoulder the blame for the entire thrift crisis."

That crisis could soon become worse, because new requirements designed to strengthen the thrifts could instead push many of them into extinction. Starting last week, S&Ls must greatly increase their capitalization as a hedge against losses from problem loans, interest-rate swings and bad investment decisions. Among other things, they will be required to maintain "risk-based capital" equal to 6.4% of their risky assets, such as shopping centers and fancy resorts. Because many thrifts are only marginally profitable, raising the funds to meet the standards may prove impossible for them. Some analysts warn that half the nation's 2,900 thrifts could eventually fail or be merged, voluntarily or involuntarily, adding billions to the $300 billion cost of the industry bailout. An early casualty: City Federal Savings Bank, New Jersey's largest thrift, was taken over by federal regulators on Friday, after recording huge losses from real estate ventures.

Before the ominous S&L predictions had a chance to sink in, alarms were going off about other potentially monumental crises. A report by Budget Director Richard Darman warned that careless management at such agencies as the Veterans Administration and the Department of Energy may have allowed scandals rivaling the estimated $8 billion imbroglio at the Department of Housing and Urban Development to go undetected. But the gravest worries were triggered by concerns about the solvency of more than $5 trillion in federal credit and insurance programs that cover everything from bank deposits to student loans and Third World aid. While no one expects all such programs to fail, bad debts and write-offs are steadily increasing. "Losses from these programs have already cost the taxpayers tens of billions of dollars and have had a significant impact on the federal deficit," warns Charles Bowsher, the U.S. Comptroller General. Adds Michigan Democrat John Dingell, who chairs a House subcommittee on oversight and investigations: "It is as if every man, woman and child in this country each co-signed a personal loan for $20,000."

The most disturbing fact is that no one knows how severe the problems may be. In a report to Congress last month, the General Accounting Office described the same pattern of sloppy accounting and slack Government supervision that allowed the S&L debacle to go unchecked. Because many agencies kept such poor books, GAO auditors could not even determine how much of the $5 trillion is at risk of default. "The ignorance, incompetence and corruption in many of the Government loan and loan-guarantee programs are appalling," says Dingell.

Where GAO investigators managed to decipher an agency's accounts, they often found a far grimmer picture than the agency provided. While the Federal Housing Administration, which insures home mortgages, reported a loss of $858 million in 1988, GAO auditors found that the shortfall was actually $4.2 billion.

There is also concern over the Pension Benefit Guaranty Corp., which insures the private pension plans of 66 million Americans and is currently $1.5 billion in the red. Raymond Maria, the Labor Department's acting inspector ^ general, warned Congress last month that lax Federal Government supervision and law enforcement "has created a window of opportunity for those who would embezzle and steal from plan participants." But policing pensions is virtually impossible because the Labor Department has about 300 inspectors for nearly 900,000 plans nationwide. Says Maria: "Our goal is not to frighten people unnecessarily but to stimulate concern where it is needed and to avoid potential future crises. We do not want to be in the position of saying, 'I told you so.' "

No programs have been growing faster than so-called Government-Sponsored Enterprises, which include such entities as the Federal National Mortgage Association and the Student Loan Marketing Association. Taxpayers may be called on to bail out any GSEs that get into financial trouble, as they were when the Farm Credit System amassed huge losses during the rural crisis of the mid-1980s. The Government has also increasingly shifted funds from direct-loan programs, which worsen the budget deficit, to loan guarantees, which don't show up on the budget until borrowers default.

Few critics of the credit and insurance programs doubt their social value. Among other benefits, they have made homes more affordable, enhanced educational opportunities and rescued Chrysler and New York City from bankruptcy. But the sprawling programs are spread over dozens of federal agencies and receive scant congressional oversight. Like the once obscure S&Ls that now make headlines almost daily, these ambitious federal programs run the risk of getting dangerously out of hand -- if they have not already.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Cynthia Davis

CAPTION: THE $5 TRILLION MOUNTAIN OF DEBT

With reporting by Gisela Bolte/Washington