The MacNeil/Lehrer NewsHour

Intro

JIM LEHRER: Good evening. In the headlines today House Democrats offered a budget alternative that is easier on Social Security, harder on defense. A leading New York bank lowered its prime interest rate to 10 . The death toll in the Philadelphia burnout rose to 11, and Israeli Prime Minister Peres said he was not impressed with the latest from PLO leader Yasir Arafat. Robin?

ROBIN MacNEIL: Here's our NewsHour rundown tonight. After the news summary we have a newsmaker interview with the Israeli prime minister on the latest Middle East peace moves. Then a focus section on Maryland's savings and loan crisis and what it says about the health of the system. Finally, an update on the devastation in Philadelphia. Charlayne Hunter-Gault looks at the shattered dreams of the homeless. News Summary

LEHRER: There is now a Democratic version of the 1986 federal budget. It was released formally today by Congressman William Gray, chairman of the House Budget Committee. It would reduce the deficit $56 billion, as does the already passed Senate and White House version. But it does it differently, by cutting defense spending more deeply in order to restore cuts in Social Security and other domestic programs. Cokie Roberts of National Public Radio tells us more.

COKIE ROBERTS, National Public Radio: The House Budget Committee today began work on a fiscal blueprint for 1986 in the hopes of finishing work on the deficit reduction package quickly, but no sooner had the meeting begun than Republicans on the panel made it clear they're ready to use delaying tactics to keep the budget in committee for at least awhile. Republicans are figuring out how to respond to the Democratic package, which Budget Chairman William Gray outlined as the session started.

Rep. WILLIAM GRAY, (D) Pennsylvania: We achieve a deficit reduction of $56 billion without a tax increase and without cutting Social Security.

ROBERTS: Though Social Security payments increase in the Democratic plan, defense spending is frozen. The budget would also preserve some domestic programs eliminated by the Senate, such as urban development and community programs. Gray hoped he could get some sort of bipartisan consensus behind his budget, but Republicans took to the House floor this morning to object to the way the Budget Committee is going about its business, and Congressman Gray now thinks the Republicans have decided not to cooperate on budget matters.

Rep. GRAY: My concern is that there may be those who are not as committed to deficit reduction or who may want to avoid some very tough decisions and thus may see what I call legislative guerrilla insurgency as an option to avoid some of those tough decisions.

ROBERTS: Controversy on the substance of the budget comes over the decision to freeze defense without freezing cost-of-living payments to recipients of Social Security and other federal benefits programs. But it's politically almost impossible for members of either party to argue against keeping the benefits, so for now debate's likely to focus on process rather than policy.

LEHRER: That report by Cokie Roberts of National Public Radio.

On a related matter, the White House announced a week's delay in President Reagan's planned announcement of an income tax reform plan. The President was to have signed off on the final proposal by today, and then announce it in a national television address on Monday. After a 70-minute meeting with Treasury Secretary James Baker and others today, the speech was moved back to May 28th. White House spokesman said the delay was requested by Senate Republican leaders who want to get the budget disposed of first, apparently. Robin?

MacNEIL: On the economic scene the Bankers Trust Company reduced its prime rate of interest on loans to 10 , down from 10 . Bankers Trust is the ninth-largest bank in the country and sometimes sets an example, but today no other large banks followed suit.

The Federal Reserve Board reported industrial production fell 0.2 in April, reflecting a slowdown in manufacturing.

And the privately insured savings and loan associations in Maryland began operating under an order by Governor Harry Hughes limiting withdrawals to $1,000 a month for each account to prevent a run on the thrifts. A million accounts are involved, and most of the depositors are displeased. Here's a report on that from Jeff Goldman.

JEFF GOLDMAN [voice-over]: The governor's announcement to limit withdrawals from privately insured savings and loans apparently had little affect on anxious depositors wanting to withdraw their savings. The lines continued at Old Court Savings and Loan in Baltimore today, as they have since the run started there last week. But the governor's order created some additional concern for other savings and loan customers across the state.

JO EDDIE McCORKLE, savings and loan depositor: I don't think the governor should do that because it's our money. We put it in there at our own risk, you know. So I think maybe that they should just stay out of it. Leave it alone. You know, let the banks handle it, and let us get our money.

JOHN PITCHER, savings and loan depositor: I don't say this is panic. I'd say this is uneasiness, and I've got a little of it now I confess is unnecessary, and I think the governor helped. I think he meant well, but I still think it was a rather hasty decision to spread it throughout the state.

STEVE LEVEN, savings and loan depositor: On a daily basis or a month-to-month basis we can't operate on $1,000 per month. It's the day to day transactions, paying the mortgage, paying the gas bill, things like that.

GOLDMAN [voice-over]: The Maryland legislature has been called into emergency session this Friday to consider a new insurance program to protect depositors. In the meantime, anxious customers remain on line, waiting to make their now limited withdrawals.

MacNEIL: We'll focus on the problems of the privately insured savings and loan associations later in the program.

LEHRER: Five more bodies were pulled from the wreckage of the burned-out Philadelphia row houses today. Police said so far they have found 11 bodies, including those of four children. All are presumed to be part of the radical group called MOVE which had defied police and court orders to vacate their rowhouse headquarters in west Philadelphia. That house and 60 others burned up in a fire that followed a day-long police siege and the dropping of an explosive device on the roof of the MOVE house. Residents whose houses were destroyed in the fire and others continued their criticism of the police action. Charlayne Hunter-Gault will update the story further later in the program.

MacNEIL: Yasir Arafat, the principal leader of the Palestine Liberation Organization, was reported today willing to recognize Israel's right to exist if the U.S. endorsed Palestinian self-determination. Speaking to reporters of The Washington Post and Los Angeles Times, Arafat was asked about the PLO's continued refusal to support United Nations Resolution 242, which affirms Israel's right to exist. The United States has made acceptance of the resolution a precondition "We are refusing 242 because it does not treat us as a people." Asked if he would accept it if the United States endorsed Palestinian self-determination, Arafat said, "Absolutely." Later, in an interview with the NewsHour, Israeli Prime Minister Shimon Peres dismissed Arafat's position.

SHIMON PERES, Prime Minister of Israel: First of all I believe there is something even before accepting 242, and that is bringing an end to the acts of terror which the PLO is still very much engaged with. You know, just a couple of weeks we have intercepted a boat with 28 people trying to reach our shore, terrorize it. Then another boat, then another mine, then another shooting. I mean, the PLO must decide either they're going to talk or they are continuing to shoot. Now what Arafat really demands is that everybody will recognize the need to create an additional Palestinian state, something that I'm not at all sure that King Hussein is in support of it, and surely we are not supporting it.

MacNEIL: We will have the newsmaker interview with Prime Minister Peres in full right after this news summary.

In Beirut today, eight armed men kidnapped the Irish acting director of the United Nations Relief Agency. Aidan Walsh, of the agency which helps Palestine refugees, was abducted in heavy traffic. Meanwhile, the fighting between Muslim and Christian militiamen raged in the Lebanese capital for the 18th day. The death toll for that period rose today to 101 dead and 518 wounded.

LEHRER: Also overseas today, there was more death in Sri Lanka as separatist guerrillas continued their war for independence. Authorities in the Indian Ocean island nation put the death toll at 146. The guerrillas are part of a Hindu minority who claim the Buddhist majority discriminates against them. They want an independent state in the northern part of the island, which was once called Ceylon. And in central England, 37 people are now confirmed dead from Legionnaire's Disease, the largest death toll ever from the pneumonia-like disease that got its name from a 1976 outbreak at an American Legion convention in Philadelphia. Thirty-four people died in that original episode. Officials in Stafford, England, say they now believe it came this time from infected water used in a hospital air conditioning unit.

MacNEIL: He was a grown man who could paint like a child, and he was buried today outside Paris. Jean Dubuffet was, at 83, one of the most influential painters and sculptors of postwar France. A wine merchant who left his business at age 41 to paint. Inspired by art made by the arts world's outcasts -- prisoners, mental patients, amateurs and children. Dubuffet liked his art to be raw, and he used raw materials to make it -- sand, chalk, putty, wool and mud. Both his paintings and sculpture were recognizable for their use of primitive and bold images. He also wrote prolifically. "I am a most unusual tourist," he once wrote. "The more banal something is, the more it appeals to me." Jean Dubuffet was still working when he died on Sunday on two monumental sculpture for Paris and a suburb. View from Israel

MacNEIL: In recent weeks there have been a lot of diplomatic efforts to revive interest in peace talks between Israel and her Arab neighbors, a process that has essentially gone nowhere since the Camp David accords and the Israeli-Egyptian peace treaty. U.S. efforts culminated in a visit to Israel last weekend by Secretary of State Shultz, who came away sounding optimistic. Earlier today in an exclusive interview by satellite from Jerusalem we got the views of Israel's prime minister, Shimon Peres, about the recent activity.

Prime Minister, Secretary of State Shultz said yesterday there now seemed to be a genuine sense of movement in the Middle East peace process. Do you see it?

SHIMON PERES: Yes. I think the opportunity is here, and I can see some priorities in moving ahead toward the renewal of the peace momentum.

MacNEIL: What are those priorities?

Prime Min. PERES: I think the next item on the agenda should be settling the outstanding issues between Egypt and ourselves. I think Egypt as well as Israel must demonstrate to the rest of the Middle East that peace can become a reality and a good example, and that we can follow suit. And if there are some misunderstandings or disagreements, we shall better settle them as quick as possible and in the best possible way.

MacNEIL: Senior Israeli officials met Egyptian officials to start doing that today outside Cairo. Are you hopeful they're going to be able to resolve these differences between you, and that you and Mr. Mubarak, President Mubarak, will have a summit meeting shortly?

Prime Min. PERES: I don't expect that this will be completed in one jump. I think what's happening today is a beginning, and I believe they will have to have another meeting before we shall be able to reach a conclusion.

MacNEIL: Egyptian officials in Cairo are saying that if you could get over these difficulties you and Mr. Mubarak could meet as early as July. Does that sound reasonable to you?

Prime Min. PERES: No. I mean, as far as I'm concerned, I don't see any problem with the timing of the meeting. And personally I would like to see things being settled as soon as possible. I think we should not lose time.

MacNEIL: Is the next step after that a meeting between the United States -- President Reagan and a Jordanian-Palestinian delegation?

Prime Min. PERES: I don't think so. I know that King Hussein is going to be in the United States by the end of this month. He will probably meet with President Reagan. But as far as a Jordanian-Palestinian delegation is on the agenda, the best will be a direct meeting jordan and the United States but between Jordan and Israel, including the Palestinian problem.

MacNEIL: Did you and Secretary Shultz agree on the nature of the Palestinians who would be acceptable in such a delegation?

Prime Min. PERES: By and large, yes. The visit of Secretary Shultz here was, in my judgment, a very successful one. And on basic issues we see eye to eye.

MacNEIL: What are the criteria for acceptable Palestinians?

Prime Min. PERES: Basically that they will not belong to the PLO and, from the American standpoint, at least until and unless the PLO will accept 242, denounce terror and recognize Israel. The PLO as I see it is today an impossible organization. I do believe that we can solve the Palestinian problem. I don't believe that we can solve the PLO problem.

MacNEIL: In that connection, I don't know whether reports have reached you, but Yasir Arafat, the head of at least one faction of the PLO, told The Washington Post and The Los Angeles Times that he would accept UN Resolution 242, which recognizes Israel's right to exist, if the United States endorsed Palestinian self-determination. Is that movement, as you see it?

Prime Min. PERES: I don't think so. First of all, I believe there is something even before accepting 242, and that is bringing an end to the acts of terror which the PLO is still very much engaged with. You know, just a couple of weeks we have intercepted a boat with 28 people trying to reach our shores, terrorize it, then another boat, then another mine, then another shooting. I mean, the PLO must decide: either they are going to talk or they are continuing to shoot. Now what Arafat really demands is that everybody will recognize the need to create an additional Palestinian state, something that I'm not at all sure that King Hussein is in support of it, and surely we are not supporting it.

MacNEIL: What is the significance of the opinion poll just published in the Israeli newspaper Ma'ariv showing almost a precise 50-50 split in Israeli opinion on whether soeace with Jordan? Is that movement, as you see it?

Prime Min. PERES: I know that you are as experienced as I am and you know that polls present two different things; one is a mind and the other is a mood. And for that reason we have different polls at different times. For example, would you have a poll in Israel before Sadat came to Jerusalem, probably the skeptical and reserved view would gain a majority, because I believe the poll includes a guess. Many people in Israel don't feel that the Arab side was forthcoming enough really to make it a practical possibility, or it doesn't create a need of a clearcut decision.

MacNEIL: Well, are you saying that if there were a more positive gesture from, say, King Hussein, as there was from President Sadat years ago, that opinion in favor of a deal would improve in Israel?

Prime Min. PERES: I think so. You see, because, Israel until now did many things unilaterally. At the beginning some of the Arab leaders said that Israel is very hungry for territory. Now, we did withdraw from Sinai. Now, we did withdraw from the Lebanon. Then again they said that we have the settlement policy on the West Bank; we have changed it. Then they say we have to improve the quality of life of the people on the West Bank. We did it. But we don't see really a sufficient response, either in the way of gesture or policy or good will, that will encourage more people in Israel to become believers in an immediate solution to this very complex problem.

MacNEIL: Is an early solution with Jordan over the West Bank more urgent because of the chaos and anarchy in Lebanon -- from Israel's point of view?

Prime Min. PERES: I don't think so. I don't think it affects the urgency. I think it is important to have an early agreement because, you know, in the Middle East over the last five years the Arab countries alone spent $50 billion for the purchase of arms. We also spent billions and billions of dollars. Imagine that all this money would be invested and directed to improve the lot of the people living here. I am sure that we would have a different Middle East. Not only that, but the investment in modern technology increases the danger for Arabs, for us; and the need for non-belligerence, the need for a peace policy in the Middle East, realistically as soon as possible, is really what should stand on the top of the priorities of all of us.

MacNEIL: In that connection of the increased danger from the technology, there's a report here that the United States has asked you to inspect your secret nuclear installations, because it is said that you have acquired through clandestine channels several hundred trigger or switching mechanisms which can be used in atomic weapons. First of all, is it true the United States has asked can it inspect your facilities?

Prime Min. PERES: No, I'm not aware of it, and then I'm not so sure that I can speak, really, because I'm not so sure that I know all the details about it. But, from what I have read in the papers, these instruments or whatever they are, are not necessarily for the construction of, say, nuclear weapons. They are being put to use in many other developments and projects.

MacNEIL: Did Israel acquire them through clandestine or illegal channels?

Prime Min. PERES: I really am not in a position to answer you. It's a very legal, complicated matter. But Israel does not have to and does not work in a clandestine manner in the United States of America.

MacNEIL: It's widely assumed throughout the world that you either already have or could now easily make atomic weapons. Is that assumption correct?

Prime Min. PERES: Well, we are not the only one that things of that nature are being said about them. I don't know what the possibility is, but Israel undertook upon ourself not to be the first country to introduce atomic weapons in the Middle East. This was our policy and this is our policy today.

MacNEIL: Turning to the Israeli economy. Is it true that you've threatened to a Knesset committee to resign unless the Israeli Knesset, the parliament, accepts budget cuts of a billion dollars and a tax increase?

Prime Min. PERES: Yes, it's true.

MacNEIL: You have made that threat. Last October you told us it would be simple to cut a billion dollars from the budget, you could do it in five minutes. But it would mean reducing the effectiveness of Israeli defense forces if you did. What has changed in that six months?

Prime Min. PERES: Well, for that reason it doesn't take five minutes, but it will take us several months. We are very careful not to [unintelligible] seriously our defense posture. You know, this small country, Israel, is spending 25 of its GNP in order to guarantee our security. This is the highest in any democratic country. And we were cutting on other items, including education, health subsidies. These are very painful cuts, but I have told my friends in the parliament that we shall not use a single American penny to maintain our standard of living. We are given American help in order to enable us to survive militarily, to maintain our military balance. We are not going to make any other use of that money or to pay debts, for the very same reason. And we are not going to --

MacNEIL: Has -- I beg your pardon. Continue.

Prime Min. PERES: Pardon?

MacNEIL: Please continue.

Prime Min. PERES: Yes. And then again, we are not going to print money. We have to produce more, to live on our production, to economize, to tighten our belts, and I am sure that the Parliament will accept it.

MacNEIL: Has the Reagan administration given you assurances that if you obey the austerity requirements for additional U.S. aid that they'll make sure that your defense forces' effectiveness does not suffer? Have you got such assurances?

Prime Min. PERES: To be fair, the Reagan administration practically answered most of our goals in an extremely friendly manner, and I appreciate it very much. They did not put any conditions before us. They told us as friends, "Gentlemen, you must put your house in order," and that I agree, but when Secretary Shultz was now last Saturday in Israel, he repeated to me and said, "Look, no conditions as far as we are concerned. Feel yourself free to do so, but do it in a responsible and right way," which I accept as an advice from a friend and not as an order from a superpower.

MacNEIL: Finally, Prime Minister, the Bitburg matter, which of course preoccupied Americans so much and caused a lot of anguish in Israel. What lasting effect will the President's visit to Bitburg have in the minds of Israelis and on Israeli-American relations?

Prime Min. PERES: We didn't change our mind that President Reagan is a true friend of the Jewish people and a true friend of the state of Israel. He was in the past, he is today, and I am sure he will remain so in the future. Now, the mistake was a painful mistake, and we regret it. And I have said already a friend is a friend and a mistake is a mistake, and when a friend commits a mistake he remains a friend.

MacNEIL: Well, Prime Minister Peres, thank you very much for joining us.

Prime Min. PERES: Thank you.

LEHRER: Still to come on the NewsHour tonight, the attorney general of Maryland, a congressional critic and an industry official look at the newest savings and loan crisis. And we have an update report by Charlayne Hunter-Gault on the burnout in Philadelphia that destroyed 60 homes and killed at least 11 people. Shaky Finance

LEHRER: Maryland is not Ohio, the facts are not identical, neither are the results thus far. But there is an eerie similarity between the March savings and loan crisis in Ohio and the one going on now in Maryland. Both have privately insured savings and loan systems that could not contain big doses of consumer panic. For Maryland it began in Baltimore. Public reports of management problems triggered a run on the Old Court Savings and Loan; it then spread to Merritt Commercial Savings and Loan. A conservator was appointed to run both of them, but nervous depositors at other savings and loans in the state started taking their money out, too, $116 million on Monday alone. Governor Harry Hughes stopped the run by limiting withdrawals to $1,000 a month. He also called an emergency session of the Maryland legislature for Friday, the day after tomorrow. A key official working with the governor on the crisis is the attorney general of Maryland, Stephen Sachs, who joins us now from Baltimore.

Mr. Attorney General, is the run over?

STEPHEN SACHS: No, I don't think you can say the run is over. The lines today were, I think, marginally shorter. I think a great deal is going to depend on whether the general assembly, which meets in Annapolis on Friday, passes the series of bills that are being proposed by Governor Hughes which, if passed, ought to restore depositor confidence.

LEHRER: Depositor confidence? The people we interviewed today and other people that we've heard about are terribly upset over this $1,000-a-month limit. Is that fair?

Att. Gen. SACHS: No, it's not fair. It's -- because nothing to cure or correct or stabilize the situation can be said to be fair. The situation is unfair. There's no question it's a hardship. But the effort is to stop the bleeding. The effort is to stop the chaotic hemmohaging of the system, withdrawals that were absolutely out of control and could not be met. It has been necessary, we think, to establish this across-the-board limitation on withdrawal in order to keep the associations alive at all and to give us something to preserve as we go into the special session. So I can't call it fair. I think I can say that it's as fair as we could possibly do under the circumstances.

LEHRER: There was no other option, that if something like that had not been done you're saying the system would have collapsed?

Att. Gen. SACHS: I'm saying that there was every indication that the some $616 or -17 million that have been withdrawn of deposits that have been withdrawn -- from the system in the last several months would have continued at a geometrically progressing pace. And, yes, I'm saying that there was a great danger that, if unchecked, the entire privately insured state chartered savings and loan system may well have come down. I think that will not happen now, however, because of the limitation and because of the special session that will, I hope, pass the legislation being proposed.

LEHRER: Is there legitimate reason for the depositors of Maryland to be concerned with this system, or was there a psychological problem? What caused this?

Att. Gen. SACHS: Oh, it's a series of reasons, obviously. I think at root we've had a mom-and-pop regulatory apparatus put in place some 20 years ago which has not been able to survive a go-go investment and depositor atmosphere, a system that was designed for the small neighborhood thrifts investing only in residential mortgages has been broken, really, wide open by some companies which have really become real estate investment companies. I think that's one reason for it. The Ohio experience clearly was a psychological jolt. One company in particular in Maryland, we now believe, has been -- some of its officials have been responsible of some significant wrongdoing.

LEHRER: That's the Old Court company? The Old Court Savings and Loan?

Att. Gen. SACHS: That's right.

LEHRER: That's the original one, the one that started it, right?

Att. Gen. SACHS: Yeah, that's right. And a criminal investigation of that is underway. And, of course, as these things became known and as the lines began to form and as the media reported it, as indeed they should have, investor confidence began to shake. It must be remembered that some of the savings and loans in Maryland are among those that have been paying the highest rates in the nation. The same investors, the same depositors that wanted to take advantage of that extra point or half point or point and a half have also -- they're sophisticated in the sense that they smell trouble when it's about to happen, and it's a very -- the seismograph began to shake after Ohio.

LEHRER: Yes, Mr. Sachs, what do you say to those people who have suggested in the last few days that, in addition to the psychological impact of Ohio, you and other state officials should have moved quicker to avoid the very thing that's happening in Maryland?

Att. Gen. SACHS: Well, I can say that those of us -- those of us who came into knowledge of what was happening in some of these associations have been moving as quickly as anybody possibly can. I think that among the private insurance group in Maryland the criticism is valid. There should have been some quicker action; there should have been some quicker bringing to the public's attention some things that, quite honestly, I think the private insurance group was afraid of bringing to the public's attention. That might have helped, although one can't be sure. I can only say this, that Governor Hughes and state officials now acting in this matter have been aware of the conditions of these associations for a very short period of time.

LEHRER: Thank you. Don't go away. Robin?

MacNEIL: All right. For a different perspective on the savings and loan crisis we have Democratic Congressman Charles Schumer of New York, a key member of the House Banking Committee. Congressman, how do you think the governor and the state of Maryland have handled this crisis?

Rep. CHARLES SCHUMER: Well, Robin, once you're in this situation you're in the "darned if you do and darned if you don't" situation. And that's because if you act too quickly people are going to complain you're taking draconian measures which may not have been needed. But if you don't act quickly enough you could -- your inaction could result in a run, as we saw in Ohio. The real problem is to stem the problem before it happens. These state insurance systems allow banks and thrifts to do anything under the sun, and what ought to happen in the remaining state systems is that the governors and legislators in charge ought to eliminate those private systems as quickly as possible. So should the Congress.

MacNEIL: What sort of things do they permit them to do that you don't think they should be doing?

Rep. SCHUMER: Well, let's take the two banks, Old Court, the two thrifts, Old Court and Marriott,[sic] that were in trouble in Baltimore. Old Court had over $150 million invested in loans in which the bank was a partner. In other words, the lender and the person getting the loan were the same person. That's outrageous. No bank is going to check and see if it's a sound loan if it itself is the owner of the property to which it is lending. The other bank, the Marriott[sic] bank, had such a huge percentage of its loans in one particular office building in Maryland that the minute that office building had trouble, so would the bank. These kinds of things are just totally outrageous and nobody should be allowed to take depositors' money, tell them that it's insured and then do with it what these two banks did.

MacNEIL: What is the connection between this crisis and the savings and loan crisis in Ohio?

Rep. SCHUMER: Oh, there's a direct connection. The specific detail is always different, and those constant defenders of the system say, "Well, look at the details." But the bottom-line problem is this. State-regulated thrifts are state-regulated because they have -- or, rather, the thrifts that are state-regulated opt into the state system because they don't want to be bound by regulations that exist at the federal level. They want, indeed many of them, not all but many, to invest in the kind of investments they shouldn't be allowed to be investing in, and then when one of them goes bust, the whole system can collapse. What we ought to be doing is saying, "If you want to do these kinds of investments, you can't say you're insured because you're really not."

MacNEIL: And what should the state have done in this case? Forseen it all sooner?

Rep. SCHUMER: Well, it's easy in hindsight, of course, and I realize that the attorney general and the governor of Maryland are in a very difficult situation. But what should be done in all the states before a crisis exists, is legislation to phase out the state system and force these thrifts to either go into a federal system where there's stricter regulation or just go out of business, should be enacted.

MacNEIL: Right. Thank you. Jim?

LEHRER: Mr. Sachs, are you prepared to do that now in Maryland?

Att. Gen. SACHS: Oh, that's exactly what's being proposed at Friday's session, and let me say I agree with just about every single thing the congressman said except the second association is called Merit, not Merritt, and I'm sure the Marriott Corporation would like that correction.

Rep. SCHUMER: Thank you very much.

Att. Gen. SACHS: It was absolutely right. He was absolutely right. And the session proposed for Friday, the legislative session, will be -- is designed to force associations that can qualify into the federal insurance system.

LEHRER: How can you do that? How are you going to do that?

Att. Gen. SACHS: Those that don't qualify because their net worth is not up to FSLIC standards will be, if the legislation passes, will be receiving a short-term state loan which ought to get them up to that standard. If they make it, they then will have 30, 60 or 90 days to repay the state; otherwise the state will take over that association and then sell it to some other bank or to some other potential buyer.

LEHRER: But eventually the state system -- or the private system -- in Maryland is going out of business? Is that what you're saying?

Att. Gen. SACHS: Almost certainly, except for some very, very small -- Baltimore city, for example, has a great many neighborhood, ethnic associations, very small, under $25 million, and we're proposing a new state-backed system, not a private insurance system, a state-backed system for those relatively small associations. It's very important to understand that what we've had here has not been a state-backed system. It has been a state-created private insurance system, and therein lies one of the fundamental fallacies in it. I agree with the congressman. It is a system that, if it ever had any validity, has long since outlived its usefulness.

LEHRER: Congressman, is what Maryland wants to do now on Friday the way to go?

Rep. SCHUMER: Well, I think given the difficult situation they're in it is the way to go. I do think even those little thrifts that they are allowing to exist under a state-insured system, which is better than a private system, could run into trouble. One rumor and there may be a run on those little thrifts, too, and so I would simply say that it probably makes a great deal of sense to just phase out all insured systems altogether.

LEHRER: Mr. Sachs?

Att. Gen. SACHS: Well, I have a slight quibble with the congressman there. It's not very fundamental. Let me just say this. I'm a veteran prosecutor of the Maryland savings and loan scandals in the late '50s and early '60s. And all through that time, when the state essentially had no regulation and high-flyers came in from all over the country and really committed just about every crime in the book, those little neighborhood associations did their jobs, were prudent places for folks to invest their funds, residential mortgages only, no high-flyers. They made it through those periods unscathed; I suspect they can do it again. But that's a matter, I think, of understanding the local conditions here. But essentially the private insurance system has to go.

LEHRER: All right, thank you. Robin?

MacNEIL: Congressman, back to you for a moment. Is the problem as you see it just with the privately insured savings and loans or is there reason to be concerned about the federally insured savings and loans as well?

Rep. SCHUMER: Robin, I'm concerned about all of the savings and loans. The reason that the private situation is worse, the privately insured savings and loans are in worse shape than the federal savings and loans is twofold; first, the private insurance systems are weaker; second, private regulation and limitations on what they can do are weak. However, you have some federally insured thrifts that have huge percentages of their investments in real estate that they own. You have lots of them owning junk bonds. If one of the companies that has issued the junk bonds goes under, those thrifts will have trouble. And the whole problem stems from the fact that we are allowing thrifts, which used to be very traditional home mortgage institutions, to get too quickly and too heavily into much, much riskier type businesses.

MacNEIL: So you think just eliminating private insurance is not going to solve the whole problem?

Rep. SCHUMER: It's a step, and it's certainly the first step I would take because that's the weakest link in the system. But the other thrifts have problems -- or some of the other thrifts have problems -- as well.

MacNEIL: Then what's the next step?

Rep. SCHUMER: Well, there are two other steps that I would take, and I would take them rather quickly. Number one, I would certainly have the federal auditing and examining system beefed up. Right now it's weak. In other words, when a federal examiner comes to your bank,he doesn't look at enough of your loans and he doesn't come frequently enough, so that banks can be very deeply in trouble before the federal system catches them. Secondly, I would not allow thrifts to invest in risky type investments. Thrifts should not own real estate and then lend money to them. They shouldn't own real estate at all. Thrifts should not be allowed to have a high precentage of risky bonds or any other kind of risky investment. Those are the burdens that one must undertake if one is going to have the advantage of federal insurance. And what you're finding is that there are different kinds of people who are coming in and buying out thrifts, whether they be privately insured or federally insured, who want to use that money as they would an investment bank.

MacNEIL: So you're saying that at a time of loosening regulation of the banking industry this is one area where regulations should be tightened; it should be re-regulated?

Rep. SCHUMER: Definitely. I think there should be some re-regulation throughout the banking system. We have a great asset in this country that we're presently squandering. That's confidence in the banking system. For 50 years Americans had supreme confidence in their banking system. Certain regulators, certain legislators have taken that confidence as a springboard with which to deregulate. And the deregulation itself leads to a diminution of the confidence because banks fail under the deregulation and people feel less confident. I don't think we should be squandering that resource.

MacNEIL: All right, well, thank you. Jim?

LEHRER: A third opinion on all of this now from Saul Klaman, president of the National Council of Savings Institutions, which represents more than 200 savings and loans nationwide, including several in Maryland. Mr. Klaman, first of all, is there reason to worry about all of the savings and loans?

SAUL B. KLAMAN: Of course not, Jim. I agree with the congressman when he said that there's quite a difference between the institutions which are federally insured and those which are not. We're looking here at a confidence factor that has been deeply shaken in Maryland, and before that in Ohio. And once the confidence begins to erode, it gets out of hand and there's no way to control it.

LEHRER: Is there no legitimate reason for there to be this shaking of the confidence?

Mr. KLAMAN: Absolutely not. The federal deposit insurance system is in place. It's strong. The federal government stands behind it, and if there's a lack of confidence in the federal deposit insurance system structure, then there's a lack of confidence in the ability of the United States government to meet its obligations. If there's a real lack of confidence suggested to be there, that means that there's no confidence in the United States government securities or anything like that. The United States Congress has said that it stands behind the federal deposit insurance system.

LEHRER: Do you agree that the state or private systems that we've been talking about with Mr. Schumer and Mr. Sachs earlier are dead and should be dead?

Mr. KLAMAN: Well, I might have a slight disagreement on this because I believe that if it's adequately indicated so the depositor knows exactly what he is doing -- I think the attorney general in Maryland indicated as such -- these institutions in the state of Maryland were paying higher rates than were generally available, and there has to be some understanding that there is more risk associated with greater reward. And if there were some confusion due to the lack of actual adequate explanation that it was a private insurance system, then I would hold them accountable. But I think that the depositor community will indicate quickly enough whether a private insurance system can continue to be viable.

LEHRER: You do not believe, then, based on what happened in Ohio and what is now happening in Maryland, that they should be automatically done away with?

Mr. KLAMAN: Because of my belief in the private market system, Neil [TEXT OMITTED FROM SOURCE] I just don't believe that the federal government should come in and say, "You are outlawed, you are dead." I think they should be adequately explained and made very clear to the depositors that they are not a federally insured system and let the depositor decide. And if the depositor loses confidence, then those systems cannot survive.

LEHRER: Even if the depositor not only loses confidence, he also loses his money in the process?

Mr. KLAMAN: No. He's not -- you know, the question is, should the federal government come in say -- and say that money-market funds must be insured? Should the federal government come in and protect every dollar of investment that an individual makes? These are institutions which are clearly not federally insured, and they should be clearly indicated. But individuals make investment decisions and savings decisions every day. And there's a real question of how much involvement you want the federal government to have.

LEHRER: I take it, then, you would strongly disagree with Congressman Schumer's suggestion that the federal government mandate -- or, prohibit risky investments by thrifts, correct?

Mr. KLAMAN: Well, it depends on who's going to define risky. I think the real problem here, Neil [TEXT OMITTED FROM SOURCE] and the real danger is that because of a few institutions -- and I mean a few -- getting in difficulty -- and the institutions in Maryland are not all in trouble at all. They are clearly suffering from a lack of confidence because they're all part of an insurance system in which the depositor has lost confidence. But the real -- the point is that the savings and loan business is going to enjoy more profits this year than ever before in history, that of 4,000 institutions in the country, more than 3,000 are running very strong -- well-managed, well-capitalized and doing an outstanding job. It's the institutions that get into difficulty that grab all the headlines, that get into the news media and tarnish the reputation of the entire industry. Unfair and untrue.

LEHRER: What can be done about that then, Mr. Klaman?

Mr. KLAMAN: Well, I agree solidly with what Congressman Schumer said about more intensive, aggressive supervision and examination. I know that's not easy. It's a budgetary problem. But I think accompanying deregulation in a broader sense, there must be an intensified, more aggressive supervision and examination. They must be beefed up. He's absolutely right. You must have more frequent examination. You must have more intensive examination. And we must find a way to pay these examiners better, to get them out doing the job. He should understand my view on this; we have been together in other forums. I think we basically understand the situation and agree that we're not talking about freeing up individual institutions to do as they wish. Quite the contrary. Safety and soundness is basic. But accompanying broad deregulation it would be most unfortunate if you applied the heavy hand of federal re-regulation at the lowest common denominator, applying very restrictive rules, preventing competition in the free financial marketplace because of a few bad actors in the industry. That's the danger we face, and we have to approach this, you know, with balance and with care, and not be panicked into a situation where we'll be sorry. And the term re-regulation is really not where I'd like to see us go. We're on this path from the Garn-St. Germain Bill and from legislation before that; dangerous to get off it.

LEHRER: Is it dangerous, Congressman Schumer?

Rep. SCHUMER: Oh, no. Not at all. I don't think you can separate, as my friend Mr. Klaman does, the crisis in confidence from the bad apples, because every time another bad apple goes under the basic problem is that the good institutions suffer. And there is no way to predict in advance which bad apples are going to go under. You might say one bank -- that one thrift that has 30 junk bonds is well managed and another thrift that has 30 junk bonds isn't. But when you're dealing with consumer confidence, the only way to be safe and sure is to be very careful and to say we're not going to let one institution invest 30 in junk bonds and not another. You have to just limit them all. Finally, I would say this. Yes, I believe strongly in the free market system. We have uninsured institutions where people can place their money and go into wildly risky investments. It seems to me that it's in the national interest --

LEHRER: You mean like what?

Rep. SCHUMER: Like investment banking firms, like anything that's not insured at all. It seems to me that there is a direct federal interest in having a segment of the financial institution industry limited, insured, so that a widow or orphan can put his or her money there and know that they're not going to become millionaires, not going to become paupers, but they'll make an insured, guaranteed rate of return.

LEHRER: Now, what's wrong with that, Mr. Klaman?

Mr. KLAMAN: Well, I think -- what's going to happen after this program -- that Congressman Schumer and I are going to sit down and talk and I'm sure we can work out our differences because we're both reasonable men looking for the same objective, and that's the safety and soundness of the depository institution system. The problem, I think, with all respect, Congressman Schumer, that you're overlooking is that we're living and workng and competing in a tough new financial structure. And I'm not sure the market, if we believe truly in the market system, I'm not sure the market will permit a trillion-dollar industry, which is what the savings industry is now, to compete freely and openly for funds on the liability side, which we now are mandated to do, and then be seriously restricted on how those funds can be invested. When the insurance industry, when the equities industry, when the investment banking industry is all entering the deposit institution business, the question is, how can we survive?

Rep. SCHUMER: There is one difference, Mr. Klaman, and that is that all of those other industries that you mentioned do not have my backing, the federal government's backing. They're not federally insured.

Mr. KLAMAN: Perhaps so.

Rep. SCHUMER: The advantage of the thrift industry, when it goes out and sells to people, is that you're federally insured. That's what we're giving you on the one hand, but we're limiting you on the other hand and saying if we're going to insure you we want to make sure you have safe and sound, not risky, investments.

Mr. KLAMAN: Remember, Congressman, the days of the money market funds didn't do us very much good at all. We were bleeding when the money market funds took billions of dollars away from our deposit windows. The federal insurance did very little to keep the depositors loyal at our windows. They ran to the highest yield and we lost billions.

Rep. SCHUMER: But, Mr. Klaman, it's the national interest. What's in the national interest is not to make the thrift industry bigger or smaller than the money market interest. That is what you're basically saying. You're saying you must keep the thrift industry very, very large.

Mr. KLAMAN: No. I'm not trying to make the thrift industry --

Rep. SCHUMER: I am saying we must keep the thrift industry very, very safe and very, very sound. And if consumers choose a different alternative, so be it.

Mr. KLAMAN: And very, very competitive.

LEHRER: Let me ask --

Mr. KLAMAN: Because if you're not competitive you'll be counterproductive --

Rep. SCHUMER: Oh, no you won't.

Mr. KLAMAN: -- and not permitting them to survive --

Rep. SCHUMER: No, you won't. There's plenty of competition out there.

LEHRER: Mr. Sachs in Baltimore, how do you come down on this argument?

Att. Gen. SACHS: Oh, I agree with Congressman Schumer a great deal. Here in Maryland we are trying to force the associations into FSLIC. Those small ones that I referred to before will stay in a new system of state insurance. But in any case, I think private insurance is dead and ought to be dead. And I'd like to also say that no one can convince me that the entry into the Maryland savings and loan field of a few -- and I want to repeat, a few -- highrollers shooting craps with other people's money has not been occasioned in substantial part by the deregulatory atmosphere that has broken down the traditional divisions between lending institutions. That go-go atmosphere, that deregulation has helped to create Maryland's crisis as far as I'm concerned, and I think we ought to call a spade a spade.

Rep. SCHUMER: Here, here, Mr. Attorney General.

LEHRER: Mr. Klaman?

Mr. KLAMAN: Well, let's not forget, gentlemen, how the savings industry got into trouble in the first place. In the late 1970s and the early 1980s, when we lost several institutions, it was because we had a very safe and sound but very low-yield mortgage portfolio, which has dragged down the institutions and still keeps them non-competitive because we have billions of dollars of five, six percent mortgages on the books, which were put on the books as a creature of the direct investment in mortgage loans. That didn't keep us safe and sound, either.

LEHRER: All right. Mr. Klaman, thank you very much in New York; Mr. Sachs in Baltimore, thank you; Congressman Schumer here, thank you.

Rep. SCHUMER: Thank you.

Mr. KLAMAN: Thank you. Starting Over

MacNEIL: We are accustomed to seeing the victims of war in places like Beirut bombed out of their homes. But not in this country. What happened this week in Philadelphia was like a war to the families in the neighborhood gutted by fire started when police dropped a bomb. Charlayne Hunter-Gault visited some of those victims today.

VIRGINIA COX, homeowner: I just can't believe it. You see it happen to other people but you can't believe it when it hit home.

CHARLAYNE HUNTER-GAULT [voice-over]: First there was the smoke, then the fire. And then there were the victims. At least eight members of the group that caused it all died in the rubble, and so did the hard work and dreams of the 200 families who remain, families who have lived in this one neighborhood for generations.

MARY JACKSON, resident: My parents left from church, and what they're wearing right now today is what they left from church Sunday night with. And, like I said, I got nine little brothers and sisters and they have no clothes. All our clothes is gone, you know. We have to start over. And, you know, some things cannot be replaced, you know, no matter what a person do.

HUNTER-GAULT [voice-over]: Then there were others who lived very private lives, and wanted them to remain that way even as they share their almost unbearable grief.

UNIDENTIFIED HOMEOWNER: I never thought I would be homeless at 55.

HUNTER-GAULT: Homeless?

HOMEOWNER: I had a very comfortable home. The mortgage is paid off. I wouldn't start over anywhere.

HUNTER-GAULT: What happens?

HOMEOWNER: I don't know. I know that I'm going to leave Philadelphia because it has nothing but bad memories for me now.

Mrs. COX: I come to this country with my suitcase and now I haven't even got a suitcase. I haven't even got clothes to wear. And I worked and, you know, finished paying off on my house and everything, and that's it. I worked night and day to accomplish what I -- my goals. And now it's all gone up in smoke.

HUNTER-GAULT [voice-over]: Many of the victims are coming here to this hastily arranged processing center. They are coming to find shelter, file claims for their losses, counseling and other services. One of the many who showed up here was Mrs. Virginia Cox, who lost her three-bedroom house that she had worked for years to buy on Osage Street.

Mrs. COX: It was very hard.

HUNTER-GAULT: Why?

Mrs. COX: Because I had to raise my kids and save enough money too, so I had to work night and day.

HUNTER-GAULT: Have you been able to think about another day, the day after tomorrow, next week?

LORNA TAYLOR, resident: No, you just -- right now you just have to go, you know, one day at a time.

HUNTER-GAULT [voice-over]: People like Mrs. Cox found that they had lost more than material things. They were on the verge of losing their dignity.

[interviewing] What kind of help are you getting?

Mrs. COX: Well, they sent us to the welfare people to see if we could get some help, welfare department. So I'll go down there now and get another harassment.

HUNTER-GAULT [voice-over]: At this welfare office Mrs. Cox did not meet the harassment, the inefficiency and the long lines she expected. Rather, she was told to come back tomorrow and they would explain whatever benefits she was entitled to.

MacNEIL: Three more bodies have now been reported found in the wreckage of the house that was bombed, making a total of 11 lives lost. Jim?

LEHRER: Again, in the other major stories of this day, House Budget Committee Chairman William Gray laid out the Democratic alternative budget for 1986. It would cut the deficit $56 billion, just like the Senate Republican version, but mainly by cutting more from defense. It would also restore Social Security cost of living and several other domestic program cuts. A large New York City bank lowered its prime lending rate to 10 . That is as low as it has been in 6 years. Other leading banks are expected to follow suit. And Israeli Prime Minister Peres said on this program that he was not impressed with PLO leader Yasir Arafat's new statement that he was willing to accept Israel's right to exist. Good night, Robin.

MacNEIL: Good night, Jim. That's our NewsHour tonight. We'll be back tomorrow night. I'm Robert MacNeil. Good night.