Letter to the Speaker and the Minority Leader of the House of Representatives on the Financial Institutions Reform, Recovery and Enforcement Act of 1989

Dear XXXXX:

Today the House of Representatives begins floor consideration of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). This legislation will provide vitally needed funds to restructure or close insolvent thrift institutions. The legislation would also overhaul the existing system of thrift regulation. Inadequacies in capital rules, accounting practices and supervisory oversight in the past were fundamental causes of this disaster.

In addition to protecting depositors, passage of this bill will allow us to begin reducing the ongoing losses in the S&L industry. This program will cost the American public tens of billions of dollars to replace deposits of the public lost through speculation, criminality, fraud and irresponsible risk-taking.

I am determined that in the future federally-insured institutions should have to put their own money at risk before that of the insurance fund and the taxpayers. This is an essential element in protecting against any future repetition of this problem.

The capital provisions of the legislation adopted by the Banking Committee recognize the need for a new core capital requirement to protect the public. Thrifts that fail this capital standard would be required to submit a prudent business plan, and they would generally be subjected to closer supervisory oversight and limitations on excessive future growth.

Unfortunately, amendments have been offered that would allow as much as $20 billion of "supervisory goodwill" to be included in the computation of tangible net worth, even though it has no tangible value. Any such amendment could permit a relatively small group of firms to maintain $600 billion in loans without investing one dollar in tangible capital. Under this approach the American public could be required to carry 100% of this risk for decades.

I adamantly oppose each of the proposed amendments that will be debated on the House floor concerning supervisory goodwill. Giving recognition to goodwill as capital or creating procedural changes that could have the same effect is not justifiable. There should be no mistake. This matter goes to the very heart of my determination to clean up the abuses of the past among the savings and loans, about which every voter is entitled to be outraged. Each of the amendments to the tough capital standards proposed by the Banking Committee would render this bill unacceptable to me.

In financing the thrift plan, the Administration's proposal, as adopted by the Senate and the House Banking Committee, preserves the Gramm-Rudman-Hollings (GRH) process. It properly scores on-budget all Treasury payments, while industry contributions to the financing package are kept out of the budget. The alternative proposal by the Ways and Means Committee requires a waiver of $44 billion to GRH, which is our only statutory bulwark for fiscal discipline. Maintaining bipartisan efforts to control our budget process is a critical objective to continuing a positive domestic and international economic climate.

The legislation I submitted also seeks a number of other important provisions to strengthen our supervisory system. These include a substantial increase in civil and criminal penalties for those who have committed wrongdoing in insured institutions. As the legislation moves forward, I ask each Representative to review carefully the specific items outlined in the Administration Statement of Position as well as my letters of May 22 to the House leadership.

As I stated in today's meeting, I am firmly committed to these principles and offer again my support to your efforts to enact responsible legislation. The United States Government must seek to ensure the safety and soundness of the thrift industry once and for all, as well as to protect the trust of insured depositors and the interest of the American public.

Since I sent my proposed legislation to the Congress, more than $1.1 billion in potentially avoidable losses have occurred. The industry had total losses of $3.4 billion in the first quarter alone, on top of more than $13 billion in 1988. This financial hemorrhage continues to mount at a cost of more than $10 million every day. I urge Congress to complete its work and pass an effective and responsible bill that reflects adequately my concerns, and those of the American public.

Sincerely,

George Bush