Up to $15 Billion for S&L; Insurance Fund : Regulators Propose Plan to Bolster FSLIC

WASHINGTON —  Federal regulators will ask Congress on Thursday to create a new corporation that would funnel as much as $15 billion to the ailing federal fund that insures savings and loan institutions, Federal Home Loan Bank Board officials said Tuesday.

The $15 billion is needed to bolster the Federal Savings and Loan Insurance Corp., the fund that insures individual accounts at S&Ls; up to $100,000. The fund, with only $6 billion in current reserves, has been drained by record S&L; failures since 1980. It could go broke if forced to handle without additional cash the 216 S&Ls; that are expected to fail in the next three years.

In a worst-case scenario, those rescue efforts could cost more than $20 billion.

The bank board, which regulates the nation’s 3,200 S&Ls; and oversees the FSLIC, will ask the House and Senate banking committees to pass the package soon enough to get the corporation into operation by Oct. 1, officials said.

The bail-out plan was discussed Tuesday by Edwin J. Gray, chairman of the bank board, at the National Council of Savings Institutions conference in Boca Raton, Fla., and by other federal officials in Washington.

The corporation would use an unusual three-step process to raise money for the federal government: First, it would receive cash from the 12 Federal Home Loan banks; then, it would use that cash to buy zero-coupon Treasury bonds, and finally, it would use those bonds as financial backing to float bonds to raise the $15 billion.

New Use for Zero-Coupon Bonds

Zero-coupon bonds often have been used as collateral to raise money for private companies and for state and local governments, but the technique has never been used by the federal government, Treasury officials said. Unlike most bonds, zero coupons pay no interest. Instead, investors purchase them, like U.S. savings bonds, at a deep discount and earn a profit when the bonds mature at full face value.

The proposed bail-out plan involves a complex series of transactions involving the new corporation, the bond markets, the FSLIC and the regional Home Loan banks. The banks, which are owned by member S&Ls; and regulated by the bank board, borrow money for S&Ls; in the open market.

The money that would be used to create the corporation is $1.8 billion in profits that the Home Loan banks have accumulated since being created by Congress 54 years ago. The profits are the difference between the price that the banks pay to borrow money and the price that they charge on loans to member S&Ls.;

The banks also would give the corporation as much as $1.2 billion in additional cash from anticipated profits during the next five years.

Officials said that by using a corporation to implement the bail-out plan, neither the Home Loan banks nor the FSLIC would have any obligation to repay the $15 billion. The corporate shield is intended to preserve the strong credit rating of the Home Loan banks and to appease federal budget cutters.

The banks are permanently funded with about $8 billion derived from the sale of stock to member S&Ls.; That money, which the S&Ls; carry on their books as assets, will not be used in the new plan so that the credit rating of the banks and the S&Ls; will not be hurt, officials said.

The corporation, which will be owned and operated by the Home Loan banks, will use its $3 billion in funding to buy the zero-coupon Treasury bonds, which will be worth the full $15 billion when they mature in 20 years, officials said. The corporation will use the $15-billion future value of the zero-coupon bonds as collateral to issue $15 billion in regular bonds to investors in the open market. The money raised will pass to the FSLIC in two ways.

First, the FSLIC would get $3 billion from the corporation in exchange for newly issued FSLIC common stock. The FSLIC would then pay stock dividends to the corporation, which would use the money to pay interest on the bonds sold to investors. The FSLIC would get an additional $12 billion in cash from the corporation, on which it would pay no interest.

The corporation will use the $15 billion that it will get when the zero-coupon bonds mature in the year 2020 to retire the $15-billion bond issue. Then the corporation will go out of business.

In addition to Congress, the Congressional Budget Office must approve the plan. By shielding the FSLIC from obligation, bank board officials hope to assure the CBO that the $15 billion is not debt and therefore will not add to obligations on the balance sheet of the U.S. government.

The S&L; community, the bank board and congressional banking leaders have been divided for months over whether a rescue plan was needed and, if so, how to devise one that would not harm the Home Loan banks’ credit rating.