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May 25, 1990
The bond market put in another positive week, and mortgage discounts have trickled down a half point.
The good economic news was easy to find: Durable Goods Orders sagged 4.1%, and the First Quarter Gross National Product has been revised to a weaker level than first reported in April (from 2.1% growth to only 1.3%).
The wild pessimism of April has proven unfounded. The economy is as soggy as it looked in January, and inflation is about the same as last year. The surprise in this week's interest rate improvement was the absence of damage done by another doubling of the S&L bailout cost. Treasury Secretary Brady upped the ante to "a range" of $80130 billion, and warned of "uncertainty" in the numbers. We agree. Brady's outside figure is still $50 billion low, before interest.
If a $60 billion surprise didn't hurt the bond market, it's because the bond market already expected the news. People working on S&Ls in 1986 talked openly of a $100 billion bailout. The only people who haven't known, or wanted to know are the government officials responsible for the bailout (most especially including Congress).
The last, cherished S&L fable was that the industry would survive and contribute to the cost of the bailout. Instead, Brady has had to admit that several hundred maybe a thousand more are failing, and all but a few dozen are shrinking. Fewer institutions, and a smaller deposit base all mean lower income to the FDIC.
Brady's announcement means the end of the S&L industry. Though the execution has not been scheduled, the lights will dim sometime in the next 18 months, and the solvent remains will be converted to banks.
There is a kind of good news in Brady's announcement. Though these new bailout numbers are still a little low, the dawn of the real world has finally arrived at the Treasury, and it's a refreshing sunrise. The delays and deceptions have caused the real costs to grow, and realistic liquidation has been impossible. As the worst financial bungle in American history comes into full view, solutions are posssible. The Silverado story is worth watching. It is already one of the worst management cases, and may include criminal behaviour by regulators, something not yet established in any other case. Neil Bush's role is overplayed in order to embarrass his father; but the young man's testimony indicates he still doesn't have a clue what happened. He has a lot of company, there.
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