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IN THE WAKE OF THE $500 billion October stock market crash, real estate industry analysts predict substantial discounting of property values from Manhattan to Midland. This is especially bad news for the state’s troubled banking and savings and loan industries. The vast majority of U,S. real estate buyers have decided to adopt a wait and see attitude. “A friend of mine was getting ready to buy a $10 million condominium in Manhattan,” reports T.W. Weston, a Houston developerbroker. “He’s never going to sign that contract now. How would he pay the note?” Buyers are disappearing, collateral values are being reduced, and real estate values have already started an inevitable shrinkage as the first ripple effects of the crash spread through the economy. “The crash could herald a Texas-style real estate collapse all over the country,” Weston continues. “And that will have an adverse effect on the already battered savings and loan industry, in Texas, and throughout the country.” It may be too late for government action to save the hundreds of Texas and U.S. S&Ls from insolvency, after this latest body-blow to the U.S. economy. In the aftermath of the great crash, it appears that Governor Bill Clements may have been right when he spoke out in August against Administration policy regarding the savings and loan industry. In an interview with reporters at the Amarillo Globe-News, Clements called “forbearance” the practice of propping up failed or ailing thrifts “an absolute fraud on the general public.” Clements appeared to be criticizing Treasury Secretary Baker’s compromise banking bill. The bill provided a $10.8 billion shot in the arm to the Federal Savings and Loan Insurance Corporation provisions sought by well-heeled S&L lobbyists. Curtis Lang is a freelance writer in Houston who specializes in financial coverage. His work has appeared in Investors’ Daily, Venture, Texas Business, and Houston City magazine. Banking and S&L Political Action of dollars in campaign contributions to members of the House and Senate Banking Committees during the last election cycle. The S&L lobbyists got their full money’s worth when Congress passed the Baker-backed recapitalization bill. Key forbearance provisions will prevent regulators from closing down dozens of insolvent thrifts in Texas, and across the Sunbelt thrifts which may or may not have been involved in the widespread looting of S&Ls nationwide, which has prompted a massive FBI investigation in California, Texas, Arkansas, Louisiana, Ohio, and Florida. Thrift managers backed with the “full faith and credit” of the U.S. Treasury were given three more years to try to leverage high-risk loans into the skyhigh profits required to reverse their bankruptcy. Experts expect that these forbearance provisions will create billions of dollars of losses for the FSLIC in the next three years. Losses which the U.S. taxpayer could soon be expected to cover. Clements went on to state that “the federal government is finally going to belly up to this problem, and when they do, they’re going to pay off those depositors like 30 cents on the dollar.” This comment prompted a firestorm of criticism in the media, since the sanctity of small depositors’ monies represents the foundation of the postDepression banking reforms designed to insure that the U.S. will not suffer . another widespread banking collapse. The law requires that the U.S. government remain the lender of last resort behind S&Ls, and it is well known that the government will not allow depositors to lose money in insured accounts. It is also true that if Congress recognized the full extent of losses in the S&L industry nationwide, and if all insolvent thrifts were to be closed at once, the U.S. Treasury and taxpayers would sustain a mammoth loss. In that event, it is conceivable that some in Washington would want to change the rules of the thrift industry game, to the detriment of depositors. So far, there has been no thorough audit of the nation’s thrifts to determine the total amount of currently unrecognized losses in the federally insured system. The “unrecognized” losses are high because the FSLIC only “writes down” bad loans en masse when it closes an insolvent S&L. Since forbearance prevents closings, the total number of bad loans in the thrift system remains unknown to Congress, to the Federal regulators, and to American taxpayers. According to testimony of Federal regulators before a Congressional subcommittee in Los Angeles in June, the FSLIC was $8 billion in the red before the $10.8 billion, three-year recapitalization. In addition, $4.8 billion in FSLIC notes are held in the U.S., which represent FSLIC liabilities. Losses in state-chartered S&Ls in California over the last three years have reached the $5.6 billion mark. Admitted losses in Texas and Arkansas amount to $2.6 billion so far. Presently, the FSLIC is losing $10 million a day to keep ailing thrifts alive across the country. And there are a herd of them. The 281 federally insured S&Ls in Texas posted $1.67 billion in losses during the second quarter of 1987, and only 85 units showed a profit. In July of 1986, S&L Savings Bank Financial Quarterly, which ranks the financial ratios of U.S. thrift institutions, placed 1,043 out of 3,176 thrifts in the U.S. in their lowest categories called “below average” or “lowest ratios.” The total yearly bill to provide “forbearance” comes to $3.64 billion. When you add these recognized losses together with the operating losses, you can readily see that the total liabilities for the FSLIC by year-end 1987 will be approximately $24.65 billion. Yearly capitalization under the Baker plan will total a meager $3.6 billion. Estimates of total S&L industry losses nationwide have varied from $23-50 billion, but experts admitted on the Adam Smith “Moneyline” show that the Federal government has not allocated the manpower and resources necessary to make a full accounting, and that the current estimates are pure guesswork. During the March Congressional hearings on S&L problems in Washington, Jennard Gross, president of United Savings in Houston, Texas’ largest S&L, estimated that unrecognized losses in Texas S&Ls amounted to $23 billion. T.W. Weston, formerly a management consultant for Austin-based Lamar Savings, a Texas S&L whose owner, Stanley Adams, is under FBI investigation for his role in the fall of Lamar, Financial Fault Lines In the S&L Industry, A Whole Lot of Shakin’ By Curtis Lang THE TEXAS OBSERVER 7