WASHINGTON -- The savings-and-loan industry, which financed the homes of generations of Americans, should be abolished, a federal commission urged yesterday, and should be replaced by a financial system that is sure to draw fire from both the thrift and banking industries.
The S&Ls;' link to the American dream of home ownership for every family, in fact, allowed the industry to insulate itself from attempts to curb its worst excesses, culminating in the collapse of hundreds of thrifts and a taxpayer bailout that has already cost more than $150 billion, the commission's report said.
"Market forces have eroded the thrifts' market niche to the point that there is no need" for them to exist separate from banks, the commission's report said.
Yesterday's report maintains that the primary cause of the scandal was a regulatory system that encouraged thrift executives to take enormous risks with other people's money.
The panel was created by Congress in 1991 to examine the forces behind the crisis that will end up costing taxpayers more than $150 billion. Wilbur D. Preston Jr., a lawyer who investigated the causes of Maryland's thrift crisis in 1985, and his partner, Gerard J. Gaeng, both of Whiteford, Taylor & Preston in Baltimore, served as co-counsel to the commission.
The 100-page report calls for a restructuring of the financial system that would require all thrifts to convert to commercial banks. They could still specialize in mortgage lending, and, because many thrifts merely sign up new borrowers and then sell the loans into the secondary-mortgage market, there should be no fear that home loans would dry up, the panel said.
The commission recommended imposing dramatic limits on federally insured bank deposits by creating two new institutions:
* The narrow or core bank, which would offer savings and checking accounts that would be fully insured by the federal government, regardless of how much money a depositor had on account. Deposit insurance today is limited to $100,000 per account in any one bank. They would be restricted to investing their deposits in low-risk short-term debt securities, such as Treasury bills, and offering what are essentially insured money market accounts.
* The other, sometimes called a wholesale bank, could invest in anything the company saw fit -- residential mortgages, business loans, commercial real estate -- with minimal regulation. Deposits in those companies would not be federally insured.
Core banks could be owned by any type of institution, including wholesale banks, but could not engage in any financial transactions with their affiliated companies. The commission recommends a waiting period of several years to allow the industry to phase in the changes.
Splitting the industry this way would prevent banking executives from taking chances with money insured by taxpayers, as the old system encouraged, the commission said. It "would eliminate the perverse incentives associated with the deposit insurance system as it has operated," said John W. Snow, co-chairman of the commission and chairman and chief executive of CSX Corp., the transportation company.
The panel also called for the abolition of all financial regulatory agencies except the Federal Deposit Insurance Corp., and for rules from the legal and accounting professions to address issues like confidentiality, loyalty and proper disclosure.
The two-tiered banking plan was offered in Congress last year by Rep. Charles E. Schumer, a New York Democrat and Sen. Christopher J. Dodd, a Connecticut Democrat.
"I agree with the commission that the best way to guarantee safety and soundness . . . is to limit the type of investments banks and thrifts can make with insured deposits," Mr. Dodd said in a statement. "I think it's a key element to modernizing our financial service industries."
Reactions from the bank and thrift industries ranged from skeptical to dead-set against.
"The commission's proposals on deposit insurance and savings institutions are reminiscent of Mark Twain's remark to the woman who asked what to do about her stuttering child: 'Remove the lower jaw,' " said Paul Schosberg, president of Savings and Community Bankers of America, a trade association for thrifts and small savings banks.
"Our institutions are at the forefront in helping low- and moderate-income families obtain decent housing," he said in a statement.
Some bankers and consultants agreed that the thrift industry has been disappearing anyway, as Congress has made the regulations governing thrifts and banks more uniform in recent years.
But the two-tiered system "will never fly," said Burt Ely, a consultant in Alexandria, Va., who did some work for the commission. The risks, he said, would simply be transferred from the core banks to the companies that offer uninsured deposits.
Even some members of the S&L; commission itself, while agreeing with the recommendations, criticized the final report either for painting with too broad a brush or for toning down what was a shocking national scandal.
One commissioner, Elliott H. Levitas, a lawyer and former congressman, chastised the commission for producing a colorless report whose "drab nature . . . is calculated to minimize the attention of the public."
He said he was outraged by what he had learned. But "not so much at the crooks and the swindlers and the high-flyers. . . ."
"What I did not fully grasp was the way in which the people who were supposed to be the guardians failed us, and failed us in ways monumentally more important than the ways in which the levees failed on the Mississippi," Mr. Levitas said.