The MacNeil/Lehrer NewsHour

MR. MacNeil: Good evening. Leading the news this Thursday, President Reagan sent a cabinet level team to assess firefighting needs at Yellowstone Park, the House passed an amendment calling for the death penalty in drug-related murders, an estimated million people demonstrated for an end to one party's Socialist Government in Burma. We'll have details in our News Summary in a moment. Judy Woodruff is in Washington tonight. Judy.

MS. WOODRUFF: After the News Summary, we first examine the sweeping charges leveled yesterday by the Securities & Exchange Commission against the Wall Street firm Drexel Burnham Lambert. Next Congressional arguments over plans to bail out the savings & loan industry and a NewsMaker Interview with the man at the center of the crisis, Danny Wall of the Federal Home Loan Bank Board, and finally excerpts from speeches by Michael Dukakis and George Bush before the Jewish Organization B'Nai Brith.NEWS SUMMARY

MR. MacNeil: President Reagan ordered a cabinet level team to go to the West to assess what additional federal help is needed to fight forest fires in the region. The President met with Agriculture Secretary Richard Lyng, Interior Secretary Donald Hodel and Deputy Defense Secretary William Taft. The three officials will leave tomorrow to visit Yellowstone National Park and other fire sites. Presidential Spokesman Marlin Fitzwater said that 2500 military personnel are now among those fighting the fires and that this number may very well be increased. At Yellowstone overnight, huge wind blown fires destroyed at least 17 structures in the tourist complex around Old Faithful Geyser. The buildings burned to the ground were rustic guest cabins. Judy.

MS. WOODRUFF: With election day just two months away, the House of Representatives wasted no time getting back on the day today. The center of attention was a proposed measure to permit death sentences for criminals convicted in drug-related murders. By a 299 to 111 vote, the House approved a death penalty provision supporters call the ultimate weapon against drug dealers. This is a part of the debate.

REP. JAMES TRAFICANT, [D] Ohio: Congress has dealt with this problem with a conscience. We have turned the other cheek. The truth is that drug dealers who kill have no conscious. As a former sheriff, I stand today voting 99 percent of the time with everybody, every Democrat on this side. I say this today. It's time to fight fire with fire. The American people are fed up and they're tired of Congress simply talking. Just saying no is not enough.

REP. CHARLES RANGEL, [D] New York: The truth of the matter is we already have a death penalty, 36 states have a death penalty, and if anyone believes in states rights, they've got it, and 14 others, if they want it, they can get it. The bums aren't afraid of the death penalty that are dealing in drugs. They live under the fear of death every day, but they're driven by motivations of greed, and so they don't give a darn whether there's a death penalty or not.

MS. WOODRUFF: Also in Congress today, efforts by the Federal Home Loan Bank Board to rescue dozens of failing savings institutions were the center of attention of a House Banking Committee hearing. Bank Board Chairman Danny Wall asked Congress to place full faith and credit behind notes issued to shore up financially troubled savings institutions. Critics like Democratic Congressman Charles Schumer of New York said the use of the promissory notes which will obligate the institutions and the savings industry to pay back billions of dollars a year for the next decade would simply reshuffle debt for a temporary period.

REP. CHARLES SCHUMER, [D] New York: The Southwest plan seems to be nothing more than a massive shell game in which insolvent institutions are reshuffled and the names are changed but little, if any, real capital is injected, resulting in thinly capitalized, weak institutions.

M. DANNY WALL, Federal Home Loan Bank Board: The Bank Board's position has consistently been that Bank Board and government agency obligations are not and have not and will not be defaulted and even for an instant, for a microsecond, to think about the government permitting FSLIC's obligations to be abrogated or violated or to default without having significant concerns about the domino effect immediately to FDIC and the Credit Union Share Insurance Fund is pure folly.

MS. WOODRUFF: The Federal Home Loan Bank Board has pledged more than $3 billion over the last three weeks to rescue or close 48 separate savings institutions.

MR. MacNeil: In campaign news, George Bush and Michael Dukakis have agreed on two debates, the first tentatively set for Sunday, September 25th. Dukakis Campaign Chairman Paul Brountas said the second debate would be October 13th or 14th, depending on how the American League playoffs go. A debate between the Vice Presidential candidates is expected to be during the week of October 3rd. On the campaign trail, Gov. Dukakis spoke today to the American Legion Convention in Louisville, saying that the U.S. could not have military might without economic might.

GOV. DUKAKIS: Today America is powerful and we are well defended, but we will not maintain our leadership in the world if we rest here. We cannot rest here, because we know that military might cannot be sustained without economic might, that we cannot build a strong national defense on a mountain of debt, that we cannot build a strong national defense without a foundation of good schools and productive factories and world class technology that is essential if America is to be No. 1 and to stay No. 1 on the battlefield and in the work place.

MR. MacNeil: Dukakis was endorsed today by the National Education Association, the teachers union with 1.9 million members. NEA President Mary Futrell said ballots mailed to 8500 convention delegates were returned by 6200 of them, of whom 86 percent chose Dukakis. Futrell said the NEA wanted to end what she called eight years of teacher bashing by the Reagan Administration. On the Republican side, Vice President George Bush was in Texas today, witnessing the destruction of two U.S. nuclear missile rocket motors, the first U.S. weapons eliminated under the INF Treaty with the Soviets. Bush called the fiery destruction a step for peace. On another subject, Bush Press Secretary Sheila Tate said that the Vice President had changed his position on minimum wage and now supports an increase. She did not say how much he would raise the present $3.35 an hour.

MS. WOODRUFF: Astronauts were back in the shuttle at Cape Canaveral today. The crew of the shuttle Discovery, dressed in new protective gear, took part in a practice countdown. Today's test which experienced minor communications problems between the shuttle and ground controllers was regarded as the last major milestone in the program to get the shuttle back in space after the Challenger accident 32 months ago. NASA officials said they hoped to launch the shuttle later this month.

MR. MacNeil: In Burma, hundreds of thousands of people, one estimate said a million, filled the streets of the capital Rangoon today, demonstrating for democracy. The demonstrators want to bring down the government an end 26 years of one party rule by the Socialist Party. Organizers plan to repeat the protests on Monday when the ruling party holds a special congress to decide Burma's political future. Seventeen people were wounded when police opened fire on looters at a cigarette factory.

MS. WOODRUFF: And finally today the appointment of a new Commissioner of Baseball. He is National League President A. Bartlet Giamatti. He was unanimously picked by baseball owners to succeed Peter Ueberroth when his term ends next April. Giamatti is the former renaissance scholar and President of Yale University who earned the nickname "The Dean of Discipline" for his tough penalties against managers and players who broke league rules. That ends our summary of the day's top stories. Ahead on the Newshour, the insider trading charges against one of Wall Street's biggest trading houses. We talk with the official responsible for the federal bailout of ailing savings & loans and we go on the stump with candidates Bush & Dukakis. FOCUS - INSIDE TRACK?

MR. MacNeil: First tonight the latest insider trading scandal to hit Wall Street. Yesterday the Securities & Exchange Commission charged the Wall Street firm of Drexel Burnham Lambert and four of its employees with 18 counts of securities violations, including 4 counts of insider trading, stock manipulation, parking of securities, false disclosures in SEC filings and fraud. Drexel said the firm and its employees expect to be vindicated. In a moment, we'll talk with two reporters who followed the case and a client of the firm, but first, Paul Solman takes a look at Drexel and at Mike Milken, the head of Drexel's junk bond department who was charged yesterday by the SEC.

PAUL SOLMAN: Drexel has changed the face of American finance and this one man did it almost singlehandedly, Mike Milken, business super star. To appreciate Milken's success, it might help to think of lending in terms of risk and reward and here's one way to visualize it. Let's start with an absolute guaranteed investment, no risk at all, a U.S. Government Bond. Now the United States is supposedly the world's safest debtor because it will supposedly pay the money back and so it gets a risk free investment rate, about 8 percent these days, on a bond that's got to be paid back in one year. Now for each added bit of risk, borrowers have to pay a slightly higher rate of interest. America's top corporations, for example, are a little riskier than the government so they have to pay 8 1/2 percent these days to borrow money. A super high risk like Mexico has to pay about twice that, around 16 percent, and up near Mexico, around 13 percent, are the IOU's of America's smaller supposedly high risk corporations. These are the so-called junk bonds. But to Drexel and Milken they weren't junky at all. These bonds were pure gold. It's with junk bonds that Mike Milken and Drexel made their fortune. Consider a smaller, high risk company such as Kinder-Care, for example, which runs day care centers. Companies like Kinder-Care used to have a problem borrowing money at almost any price. Either a bank gave them a loan or they didn't get any money at all and couldn't make their business grow. [Drexel Commercial]

MR. SOLMAN: But Mike Milken and Drexel changed all that, encouraging small companies to issue bonds, that is, IOU's, that could be sold to individual investors, thus bypassing the banks entirely. In the late 70's, Mike Milken opened a Drexel office in Beverly Hills on Rodeo Drive and began selling these high yield bonds by the barrelful. In the process he raised money for companies that are now famous but were then obscure. This meant lots of debt, but everybody was happy. Small companies got their money, investors got the high interest rate, Drexel got huge fees, more business, and a great sales pitch. [Drexel Commercial]

MR. SOLMAN: Drexel could claim it was financing the most dynamic sector of our economy, our smaller firms. In 1983, Milken applied his junk bonds to big business. T. Boone Pickens was attempting to take over Gulf Oil, a corporate giant that Pickens claimed was wasting money. Pickens' argument was that a new owner could make Gulf far more profitable by cutting back expenses, maybe selling off parts of the company. But who would supply a maverick like Pickens with the money to purchase a multibillion dollar pillar of the corporate community like Gulf? The reclusive Mike Milken. He would help Pickens issue high interest bonds, sell them to his network of buyers and deliver the proceeds to Pickens minus the usual hefty fee for Drexel and Milken, himself. And so Milken and Drexel began hooking up with America's corporate raiders. Milken had worked a miracle, taking Drexel from relative obscurity to preeminence by providing corporate America with lots of new borrowed money. Drexel became spectacularly rich and increasingly an active investor in takeovers, with Milken and his colleagues sharing in the deals and the profits. As corporate America big and small became increasingly leveraged, that is, indebted, Milken became "the" super star of modern finance, controlling a fortune estimated near $1/2 billion. But for the past year and a half, the government has been investigating whether at some point in the empire Milken and Drexel crossed the line between laissez-faire and the law. No one can indict Milken or the firm just because they bankroll the mavericks, the enemies of traditional corporate America, the Boone Pickens, Sir James Goldsmiths, Ivan Boeskys and Rupert Murdochs seen here as they gathered at Milken's annual junk bond convention. Some of these mavericks like Boesky or tax evader Victor Posner have also been guilty of serious white collar crimes, and in addition, observers on and off Wall Street question the incestuousness of many Milken deals even if they haven't violated any laws. Ethics aside, however, Milken has established a place for himself in the history of finance. He is largely credited with what's been called the leveraging of America. American companies have taken on some $100 billion in high interest debt in the 1980s. Many of these companies can barely make their interest payments. The next recession could put them under. But that's not the issue at the moment. What Wall Street is wondering today is how did Drexel and Milken manage the leveraging of America and were their tactics legal.

MR. MacNeil: Here to tell us more about Mike Milken and Drexel and the impact of the SEC's charges are Seymour Zucker, Senior Editor of BusinessWeek, Connie Bruck, Senior Reporter for The American Lawyer, and the author of a recent book on Drexel, "The Predator's Ball". Harvey Eisen, President of Integrated Resources Asset Management is a client of Drexel's. Mr. Zucker, describe in a little more detail what it is the SEC is charging Drexel with. What did they do and who allegedly suffered from it?

SEYMOUR ZUCKER, Businessweek: Well, basically they're being charged with insider trading, that is, they worked hand in glove with Boesky, Ivan Boesky, who's a convicted felon.

MR. MacNeil: Now serving time.

MR. ZUCKER: Now serving time. And informed him of certain deals that were cooking, certain takeovers that were in the works, and he was given this information, acted upon it, and, in fact, was trading, therefore, on inside information and both Boesky and Drexel benefited. In terms of the companies that were affected, the allegation is that Drexel defrauded companies and that Boesky was asked or at least signaled to go into the market and bid up the price of certain stock. For example, Maxam back in 1985 was a Drexel client who -- now this is an allegation -- who was disputing a certain fee with Drexel and the end result, claims the SEC, was that Boesky went into the market, bid up the price of the stock and, in effect, had the effect of forcing Maxam to pay more in the deal than it originally thought it would have to pay. So there's basically a charge of insider trading and defrauding certain companies. Another one was Stone Container in which Stone Container had agreed with Drexel -- now again this is an allegation -- had agreed with Drexel to do a deal at about 46, 48, that is, Drexel would manage a deal if the stock price got that high. What happened was that Boesky was alleged to have come into the market and bid up the price of the stock above 46 and the deal, the Stone Container/Drexel union was then formed, so it's basically insider trading and defrauding companies.

MR. MacNeil: So some companies claim or the SEC claims some companies suffered but the implication would be that individuals suffered because the stock prices were being manipulated by this alleged insider trading.

MR. ZUCKER: Well, that's basically the whole idea of not allowing insider trading, the justification for having laws which say, in effect, you can trade. As an insider, if you have certain information, you cannot use that information to profit. We want to have a level playing field. The stock market has to be open to all investors and so by trading inside, you eliminate this level playing field and you put the small investor at a disadvantage. Now that doesn't mean that people shouldn't have information. It means that if you are an insider, you cannot act on information which is perfect.

MR. MacNeil: Connie Bruck, you know Drexel very well from your book. Can you add to the kinds of things that the SEC is complaining about here?

CONNIE BRUCK, Author: Well, I can give an example of something. There was an instance in my book which I wrote about which is not part of the SEC's case, but it's the same kind of thing. Milken was working with a company called Caesars World on doing an exchange offer for some of -- they're offering new bonds for some of the bonds that were outstanding in the marketplace -- and once that exchange offer was announced, the price of the bonds would go up. Well, before the exchange offer was announced, but once Drexel had discussed it with Caesars World and knew they were going to do it, Milken bought for his own profit sharing account at Drexel a lot of the Caesars World bonds. He bought them, in fact, from a client of Drexel's so that when the exchange offer actually was announced, he made, the client who would have had the profit didn't make it, Milken personally did, and that client was Mark Shankman of Shankman Capital. Shankman said to me -- Milken's profit for that was I think $635,000 -- Shankman said to me, that's the kind of money that most people don't make in a lifetime and Mike made it in a three minute phone conversation.

MR. MacNeil: What's wrong with what he did? Is anything wrong with it?

MS. BRUCK: That would basically be trading on inside information since Milken, if I have the story right, Milken would have known that this exchange offer was coming. Similarly, in a takeover, if you know before it and you know the stock price is going to go up, then you are profiting ahead of your trading --

MR. MacNeil: And you published the story in your book?

MS. BRUCK: Right.

MR. MacNeil: And Drexel has not come back and challenged you on the accuracy of that story?

MS. BRUCK: No.

MR. MacNeil: You haven't been sued or anything on the accuracy of that story?

MS. BRUCK: I haven't.

MR. MacNeil: Are criminal charges going to follow the SEC complaint?

MR. ZUCKER: That's a very interesting question. I think that the SEC by filing, by charging the civil complaint, really undermined to some extent the ability of the U.S. Attorney to bring a stronger case and the reason for that is remember, generally, if there's a question of civil and criminal, generally, you go criminal first.

MR. MacNeil: There are reports today that Rudolph Giuliani, the U.S. Attorney, had been pleading with the SEC to delay announcing its case until he had his ducks in a row. Are you familiar with that?

MR. ZUCKER: Yes, I'm familiar with that. I also have some information that the SEC had this case prepared months ago and was pleading with Giuliani to move quickly. So obviously there are two good government agencies here who have something and each was waiting for the other to move and I think that, remember, if the civil case goes first, then the defendants can stonewall a grand jury and say, look, we have charges to answer in a civil suit, we cannot give you certain information.

MR. MacNeil: Before we move on to the impact of all this on the trading and Wall Street and junk bonds, let me just ask you one more question, it's apparent that a good deal of the information on which the SEC is basing its case and on which Giuliani would base his case, if it comes to a criminal case, is evidenced by Ivan Boesky, a convicted felon now serving time. Does that mean that the government, the SEC, has not got a strong case because juries don't like evidence by convicted felons?

MS. BRUCK: I think it's the case's greatest handicap I'm sure and I know that Drexel has been spending millions of dollars ever since Boesky took his plea back in November of '86 to uncover every last little thing that they can about Ivan Boesky so the first thing they would do in a trial would be to seek to discredit him utterly.

MR. MacNeil: What do you think about the reliance on Boesky's evidence?

MR. ZUCKER: I think that, and again I don't know, the SEC has not confided in me, Robert, I must say that, but I think that, at least they're claiming that they have corroboration from other witnesses, other documents. So it's doubtful that they would just rely on Boesky. I think this is going to be one tough case.

MR. MacNeil: Okay, let's move on to the impact. Harvey Eisen, you're a client, you run an investment fund. You're a client of Drexel's. Is this going to undermine your place in the company?

HARVEY EISEN, Drexel Client: Well, first I think a lot depends on the outcome. My experience as has been with many others that I know of my contemporaries has been very positive with Drexel. We've never had a serious business problem with them. We've never felt that they did anything to us or our clients that we were uncomfortable about. I mean, clearly the allegations that are being made are very serious and if proven are very difficult but we have not had that problem.

MR. MacNeil: What do you think the impact on not only you but other people like you is going to be in Wall Street of this insider trading case, allegation, charge, indictment, if it turns to that, coming a year, year and a half after the other huge Ivan Boesky one and all the other sort of lesser fry who were also charged?

MR. EISEN: Well, I think it's very important because it's clearly, all of these things have undermined public confidence in the marketplace and I think that's very very important. Secondly, I think it's broadened the base of business within the whole high yield/junk bond area. There are a number of firms that have viewed this as an opportunity to penetrate this market which historically Drexel has really dominated. As a client, we have found that for appropriate accounts that these are very good pieces of paper to use.

MR. MacNeil: Doesn't scare you off junk bonds?

MR. EISEN: Of course not. I mean the first thing they tell you in business school is caveat emptur. Let the buyer beware. I'm the buyer and I have to watch out for myself and my clients.

MR. MacNeil: What do you think the impact is going to be on Wall Street?

MS. BRUCK: Well, I think that the junk bond market is no longer just Milken's private domain and so many other firms have been trying so hard to get into it, so I think that even if Michael Milken were gone tomorrow, the market would continue.

MR. MacNeil: Do you agree with that?

MR. ZUCKER: Well, I think Drexel is such a good firm, Drexel with a broken leg and one arm tied behind its back can outdo most firms on Wall Street, and I think that the impact is mainly in their image and right now clients do not seem to be leaving Drexel. Remember, these are only allegations, only allegations. Nothing has been proved. It is true that Josephs had said or has said that he thought that something could be settled out of court, which means that there may have been some technical violations. The rest of the case I think is going to be very tough and it's going to be tied up for years.

MR. MacNeil: What about the impact on the small investor who has been staying away ostentatiously from the stock market, what does this kind of case do to -- you presumably deal with him --

MR. EISEN: We do and I think its enormously negative. I think there is a tremendous sense of distrust in the public market. I mean, you see it in mutual fund sales, in the revenues of retail- oriented --

MR. MacNeil: Even in mutual fund sales where an investor could feel relatively protected compared to the individual investor?

MR. EISEN: Sure, but the truth is that the investor doesn't differentiate. The investor just thinks to himself, oh, this is a rigged game and why should I have my hard earned money involved? I don't have a chance.

MR. MacNeil: Do you have a comment on that?

MR. ZUCKER: Yes. Businessweek took a poll when the initial insider trading cases started to break in Boesky, et cetera, and asked people would they act on inside information, and the answer was generally no, and the reason was because they didn't trust the information being correct, not because they thought it was that illegal. I think that most people think that somehow there are people on Wall Street who have inside information all the time. So the question of whether their confidence will be further undermined I think is very very debatable. It's very easy to say, well confidence is going to be undermined. The fact of the matter is that most people think that this is a game for the big boys and they've been thinking about it that way for a decade. That's why they buy mutual funds. That's why they go to Harvey's firm. He's a big boy, hopefully.

MR. MacNeil: Finally, Rep. Ed Markey, who chairs a House Subcommittee, and I think is going to have hearings with the SEC and others tomorrow on this, said today that this case ensures that there will be legislation on President Reagan's desk before the end of this session of Congress on insider trading. Now what is that going to do to the business? Is it needed? Is it going to be a real downer for Wall Street? What do you think?

MR. EISEN: Candidly, no. I think insider trading has been around since the beginning of time. There have always been penalties and when people get caught they pay the price. I mean, clearly, this is an area that is incorrect, that is wrong, but it's gone on and it will continue to go on.

MR. MacNeil: What if, as Markey's bill proposes, supposes that becomes law that firms would be held responsible and legally liable for insider trading committed by their employees, whether the heads of the firms knew about it or not, what impact will that have on the business?

MR. ZUCKER: Well, I think there's always a danger that some Congressman will get up perhaps because he wants to be elected or perhaps because he wants publicity and rams something through the legislature and the nation suffers for decades from some of this kind of legislation. I think we have to think very very carefully about it. I agree with Harvey. There are a lot of insider laws on the books already. I don't think that we should act hastily. I don't think that our Congressmen should try to seize the moment and push through legislation. I think we've got to think -- remember, we live on information and we don't want to cut off legitimate information by enacting so many laws that everything becomes inside information.

MR. MacNeil: Do you, quickly, think there's a case for Congressional regulation, more regulation?

MS. BRUCK: I'm not so familiar with what Markey is proposing but I do think there is a case for greater regulation and I think that the SEC should be applauded, in fact, maybe public confidence instead of being undermined will grow stronger, because the SEC has obviously done such a sort of monumental effort in framing such a broad case and one that I think was important for it to bring.

MR. ZUCKER: But under existing legislation.

MR. MacNeil: In other words, you don't need additional legislation in your view.

MR. ZUCKER: I don't think so.

MR. MacNeil: Okay. Seymour Zucker, Connie Bruck and Harvey Eisen, thank you very much for joining us. Judy.

MS. WOODRUFF: Still ahead on the Newshour, the savings & loan crisis, a NewsMaker Interview with Federal Home Loan Bank Head Danny Wall and George Bush and Michael Dukakis's speeches to the B'Nai Brith. FOCUS - SAVINGS & LOAN - THRIFT THREAT

MS. WOODRUFF: Next tonight we focus on the continuing problems in the savings & loan industry. In the past three weeks, the Federal Home Loan Bank Board has arranged six separate mergers and bailouts of 48 insolvent savings & loans. The merger activity is part of what is known as the Southwest Plan, a plan devised by the Federal Home Loan Bank Board to merge insolvent thrifts, cover the bad loans, and sell them to new investors. It is a plan that was described as a shell game by Congressman Charles Schumer at a hearing today before the House Banking Committee and defended by the Chairman of the Bank Board, Danny Wall. We will talk with Mr. Wall in just a moment after this excerpt from this morning's hearing.

REP. CHARLES SCHUMER, [D] New York: I am frankly scared by what's going on here, because I don't see any light at the end of the tunnel and I see $22.9 billion in outstanding obligation. What have we gotten for it?

M. DANNY WALL: What have you gotten for it?

REP. SCHUMER: Other than several months times.

M. DANNY WALL, Federal Home Loan Bank Board: I think we have eliminated 97 problem institutionsthat were bidding up the price of money every day in the marketplace. So you have stronger institutions that have been put into the marketplace and they are not acting at an advantage and causing disadvantages to the healthy competitor.

REP. SCHUMER: They're not stronger in capital; they're just bigger. I mean, you could theoretically, hyperbolically, take the 900 troubled institutions put them in 1 huge mammoth institution, say we've solved the problems of 899 institutions, but in reality the problem is just as big as it was before.

MR. WALL: I would disagree, Congressman. We have put that basket of liabilities and assets that had previously existed in eight institutions in the hands of -- not in the case of Southwest, I'm sorry -- in the case that had existed in four institutions -- we have put it the hands of competent, capable, experienced, knowledgeable management. We own 90 percent of that institution. We aren't kidding anybody. They put 25 million dollars' worth of subordinated debt for which they may get 10 percent of that institution.

REP. SCHUMER: I understand that. Let me ask you --

MR. WALL: That is a very important qualification on the point you're making.

REP. SCHUMER: Why is not big institution with new management, why is that any different than four or eight little institutions with management that you can put it?

REP. FERNAND ST. GERMAIN, [D] Rhode Island: Daniel Wall just said that at Southwest they put it into competent management. My understanding is that the four that were joined together were all belly up. I mean, they were all problem institutions.

REP. SCHUMER: They were.

REP. ST. GERMAIN: Now did the Hunt lady bring in some new competent management?

MR. WALL: Mr. Chairman, that was a fifth institution. Southwest was not of the four. Southwest was a solvent institution.

REP. SCHUMER: Southwest itself was in trouble.

REP. ST. GERMAIN: Southwest is a problem institution.

MR. WALL: It was not a problem institution in the sense that we had any authority to bring action against it. It was wrap solvent. It was wrap solvent.

REP. ST. GERMAIN: It was a weak institution, was it not, just about on the line?

MR. WALL: No. Look at the terrain in Texas, and by Texas standards, it was a healthy institution.

REP. SCHUMER: Mr. Chairman, 30 million insolvent, that is the kind of management we hold up and that is worth, getting them is worth $2 billion? I don't see how in the private sector, even in perhaps the less way we in the public sector operate that that can be justified, and that's the whole problem with the Southwest plan. You're getting a pig in a poke.

MR. WALL: Do you want an answer, Congressman --

REP. SCHUMER: I do.

MR. WALL: -- or do you want to talk? I'm sorry.

REP. SCHUMER: I want an answer but I'm trying to get an answer. When you tell me that that's good management, the Southwest plan, and that's what we spent $2 billion for, I'm not satisfied with that answer. It doesn't persuade me.

MR. WALL: You asked what the alternatives were and I'm telling you there weren't any. The alternatives were we liquidate the institution, we take all of those institutions out of existence.

REP. SCHUMER: So we're paying $2 billion in the Southwest Plan to keep four additional institutions in competition, even though they may not be here a year from now?

MR. WALL: We aren't keeping four institutions in competition; we're keeping one. There were five; today there is one.

REP. SCHUMER: Right. We kept one. That's right.

MR. WALL: That's right. We're reducing --

REP. SCHUMER: Is that worth $2 billion in your book? Is that the raison d'etre of the Southwest plan?

MR. WALL: The alternative is to spend a lot more money to liquidate that institution, a lot more money, and that is an instant cost.

REP. SCHUMER: What do you estimate it would have cost us to liquidate those institutions?

MR. WALL: I would say about 25 percent more than that.

REP. SCHUMER: 25 percent more?

MR. WALL: And that's a certain cost, where this isn't.

REP. SCHUMER: Is it 25 percent more in cost to say do the Southwest deal by liquidation, No. 1? And No. 2, why the Home Loan Bank Board and the FSLIC think it's better to do it this way, given that increase in cost.

MS. WOODRUFF: With us now to respond to those questions and others is the Chairman of the Federal Home Loan Bank Board whom you just saw, Danny Wall. Mr. Wall, thank you for being with us. First of all, let's just clarify. We kept referring to the Southwest Plan. What specifically, briefly does that refer to? M. DANNY WALL, Federal Home Loan Bank Board: Well, it refers to a strategy that we've identified in terms of dealing with the problems that are concentrated in the oil patch states, commonly referred to as the Southwest. Our attention -- .

MS. WOODRUFF: Primarily in Texas.

MR. WALL: Our attention is focused on the State of Texas, but there really are five states, Texas, Oklahoma, Louisiana, Arkansas, and New Mexico.

MS. WOODRUFF: Let's go back to Congressman Schumer's last question there. Why not, even though as you said to him the cost would have been what, 25 percent greater perhaps to liquidate these savings & loans, why not do that rather than take the uncertain route of doing what you have done, and that is having other companies buy out these companies?

MR. WALL: Well, there are a number of reasons as to why we've chosen the course that we have. One of them is that that's a certain cost as the film clip has indicated I stated. What I mean by that is if you liquidate an institution, you pay out the money. It's gone, and the chance of recovery on that is very slim in terms of the assets that you would recover. As opposed to keeping a going business in place, taking what had previously been four insolvent institutions, a solvent institution, combining them into one, cutting out the overhead, and the redundancies in branches and so on that existed and putting them into the hands, as was indicated, of a new strong competent management team, they then are a competitive force in the marketplace, so you have done a number of things and there you have every prospect of costing not just 25 percent less, but perhaps even significantly better than that.

MS. WOODRUFF: How can you be confident of that though when the regulations that exist are the same as they have been? In other words, these new entities will be able to go out and invest the money the same way that the old institutions did.

MR. WALL: The laws perhaps exist the same way that they do, but the regulatory structure, the supervisory structure, the examination force that's in place is now better than it was. It's better in the sense of numbers. It's twice the numbers of professional staff --

MS. WOODRUFF: Are you talking about in your own --

MR. WALL: In our own agency, yes, at the federal level, as well as the State of Texas are making improvements, as are the other states where these kinds of problems occurred among state chartered institutions, so that the regulatory structure is significantly enhanced from what it was.

MS. WOODRUFF: But you don't deny that there is a certain amount, a great deal of risk involved in this?

MR. WALL: A certain amount I would agree with, a great deal, no. Clearly, it is the kind of risk that the thrift industry, whether they be an insolvent institution, being made a part of such a combination or whether it be someone who's currently operating in a solvent institution and managing, that is the kind of risk they have to deal with every day. It is not unusual or untoward kind of risk considerations for them. It is a competitive kind of a marketplace they have been historically involved in and in this case will be involved in and we will have an ownership position in that institutions.

MS. WOODRUFF: Let me paraphrase another question I guess that came from Congressman Schumer and others. Is it really a good deal for the government that the group buying out this biggest S&L that was in trouble, the American Savings & Loan, put up $500 million, itself, while the government, the Federal Home Loan Bank Board, through its auspice put up $2 billion, why is that a good deal for the government?

MR. WALL: Well, I think that in the ratio of the estimated cost of FSLIC versus how much capital was brought from the outside, that's one of the better deals that we have been able to bring about and it is much better than as of late the FDIC has been able to bring about. You have a situation where you have a troubled entity, be it a bank or a thrift. It is in trouble. It is in significant trouble, and in this case it is a significant sized institution. There is, on the other hand, a value there. In the case of American Savings of Stockton, California, it has over 180 branches in the California market, a very valuable franchise. If we were to liquidate that institution, we lose the value of that franchise, so in this case we have someone willing to come to a negotiating table with $550 million on their side of the table and we will come away from that agreement with 30 percent of the ownership of that institution.

MS. WOODRUFF: Now that --

MR. WALL: So we get from day one in a sense, 30 percent of their $550 million is ours.

MS. WOODRUFF: And that's a sure thing?

MR. WALL: Yes.

MS. WOODRUFF: This particular deal that I just referred to where FSLIC puts up 2 billion and the company that's doing the buying put up 500 million, this has also been criticized because this company, the Bass Group, is going to be able now to go out and get involved in potentially risky corporate takeovers. Should the government be involved in backing up this sort of activity?

MR. WALL: First of all the limitations, the restrictions on the merchant banking activity, as it's been identified, will not permit them to be involved in any kind of hostile takeover activity. So merchant banking activity in the classic sense would be permitted this undertaking. Every merchant bank, whether they be domestic or international merchant banks, and that is a very sophisticated and a very confident business and professional undertaking in many places in the world, not well known in this country typically, but there are many merchant banks here, but every one of them have to one degree or another financing by federally insured institutions if they're in this country, be they bank financed or be they S&L financed. In this case there will be not just a financing but an ownership relationship as well. Again, we get an ownership position as far as the improvement, the dividends that that merchant bank will produce, as well as in this case, we get a share, 75 percent, of the tax credits that come from profits made by that merchant bank.

MS.WOODRUFF: At the same time, it's been pointed out, I'm going to quote from something I read in the New York Times, and this is what they said, while the situation doesn't cripple your bank board's immediate ability to bail out troubled S&L's, they point out that eventually the cost of the agency's interest payments may force it to dip into resources that it could have otherwise spent rescuing bankrupt thrifts. What about that?

MR. WALL: I don't understand the analogy that's been made. I haven't had a chance to read the article, but let me say that there is $550 million worth of capital that that merchant bank would have to go through and we would have to be sitting on the sidelines doing nothing in order for us to have to bring more to the table, which is to say we have 550 million worth of cushion that at any time early on we can say that's enough, that's it, and we're taking over this operation, so that's what capital is for. It's an additional cushion in this case for the insurance function that we have.

MS. WOODRUFF: Another point they make is that the very -- you know, as you mentioned, much of this is going on in the State of Texas, which has had a very troubled economy. Couldn't that very well, the economy of the State of Texas continue to stay in trouble, perhaps get worse, doesn't that put you in an even riskier position?

MR. WALL: Well, now we're shifting. That is not of course related to the American savings institutions.

MS. WOODRUFF: No, that's correct. This is another deal.

MR. WALL: There are a number of consolidations, perhaps even more to come this week, that have and will occur in the State of Texas. The State of Texas had too many S&L's, had too many commercial banks. That has proven in the market sense that those institutions have failed. The economy in Texas has had its very severe problems. Some of the areas of Texas, Houston, Dallas, are indicating significant recovery, measurable recovery. Some of the areas of the State of Texas have not yet begun to show signs of recovery. Will the economy in Texas get worse? It's hard to imagine it worse than it is. Is the recovery underway? Without question.

MS. WOODRUFF: How much do you think it will take eventually to straighten out the health, the fortunes of the savings & loan industry? As you know, the estimates have gone up to 80 billion, 100 billion dollars. What does it look like to you?

MR. WALL: Well, I would make an observation to your viewers almost all of whom are outside the beltway as we refer to it here in Washington, and it has been observed by a reporter here in Washington that the hottest political game in Washington this summer has been estimating the size of the FSLIC hole. Note: Political game. We have the responsibility under what is called GAAP, or Generally Accepted Accounting Principles, to make our estimates and to document those estimates, because they are going to be looked to by the accounting profession, they're going to be looked to by the investment bankers. At the end of 1987, we provided a number to the Congress. As of mid year we provided a number to the Congress and we will provide a number coincidentally as of the end of this month, it being the end of the fiscal year. So we have not made an update from the number that we reported to the Congress in July.

MS. WOODRUFF: Which was --

MR. WALL: Which was $30.9 billion for the total problem in the country. The size of the problem is greater, no question. We will, as I say, as of the end of this month provide an update on that.

MS. WOODRUFF: Should the American taxpayer be worried about this? I mean, is there the potential down the road that the Treasury is going to have to get involved and dip into taxpayer funds to help?

MR. WALL: I think the other witness of the panel this morning, who is George Gould, the Undersecretary of Treasury, shared a recent experience that he and the Treasury Department had had which was in 1985, the Farm Credit Administration came to the Treasury, said we need $10 billion now. To make a long story short, it has ended up that a billion and a half dollars have been necessary, certainly not all of the ten billion dollars that they asked for and that certainly on the part of Treasury taking a more conservative approach and taking a more deliberative approach has made it possible for the experience to have occurred and the real loss to be determined. And that was what this hearing was all about this morning as a matter of fact, that is, the question of our using shorter-term maturity notes, FSLIC notes, instead of longer-term bond authority, or going to Treasury bills or some other option.

MS. WOODRUFF: How would you describe right now the health of the savings & loan industry and the prospects?

MR. WALL: Nearly 90 percent of the industry is doing very very well. We within a week or so will be making our regular report on the second quarter numbers, and they are going to be I think much better than has been the case previously, the early indications are. 90 percent of the business is doing very well. There is a 10 percent or slightly more that is a drag on the industry and we are eliminating them as quickly as we can, 97 this year, more to come even tomorrow.

MS. WOODRUFF: So the talk that the industry is in crisis you're saying is a great deal of exaggeration.

MR. WALL: It is when you realize that 10 percent and a shrinking portion of the industry is what we have on our plate and are dealing with.

MS. WOODRUFF: Danny Wall, we thank you for being with us.

MR. WALL: Thank you. SERIES - '88 - ON THE STUMP

MR. MacNeil: Finally tonight we continue our series of extended excerpts from the candidates' speeches on the campaign trail. Tonight we have back to back speeches delivered yesterday to a B'Nai Brith Convention in Baltimore, Maryland. The conventioneers heard from Vice President George Bush first and so shall we.

VICE PRESIDENT GEORGE BUSH, GOP Presidential Nominee: Eight years ago strategic partnership with Israel was a dream of many of those who came into the Reagan/Bush Administration and today we have translated it into reality and this is my pledge. The American/Israeli strategic partnership is going to be even stronger tomorrow. We all know that the peace process is at a difficult stage and no one can foretell where the tragic events of recent months will lead and yet, I believe that we can make progress toward peace if we follow these principles. First, U.S./Israeli cooperation is fundamental to our strategic interest, no threat, no stone thrown is strong enough to divide us, no wedge will be driven between us. Second, peace will be achieved through direct negotiations between the parties. It cannot be imposed, it cannot be evaded. The United States stands ready of course to help such a negotiation as we've done on a bipartisan basis since the early 70s, but we shall not be party to a proceeding by the United Nations or any other international group to deny Israel's legitimacy or to force her to accept a bad deal. We are not going to do that. And if you want another strongly held conviction of George Bush, as far as I'm concerned, when it comes to the Middle East, the United Nations' General Assembly renders itself irrelevant when it passes outrageous resolutions like Zionism is racist. It is irrelevant to the real world that we're living in and wrong, wrong as it can be. And third, the purpose of a negotiation is real peace, peace for Israel, and of course peace for her neighbors, and that's what it's all about. We've stood together for too long through too many crises, with too many lives sacrificed, to settle for an armistice or a temporary truce or a false peace. Egypt has shown the way. It is time for other countries in the area now to follow the lead of Egypt, and fourth, as George Shultz has said, the Palestinians must be involved at every step in the negotiation, there will be no peace without them. It's their choice to help end the misery into which this region has been plunged. And you heard recent statements on this from both Mr. Shamir and Mr. Peres, but as for the PLO, unless they accept United Nations Resolution 242, recognize Israel's right to exist, abandon terrorism, and change their covenant calling for the destruction of the Zionist entity, we will neither recognize nor have discussions with that organization if I am President of the United States. One other thing, I've made it very clear that I am opposed to an independent Palestinian state. Anyone who has trouble making up his mind on this issue or who proposes to leave it open just doesn't understand the dangers to Israel and to the United States. We're on the way to a new century, just twelve years short of a new century, two of a whole new decade. It's time to leave the tired old bigotry baggage behind us. There is no room in this country for racism or anti-Semitism, not in New York, not in Chicago, not anywhere in this great country. It is the duty of every American, especially those who aspire to leadership, to condemn it wherever and whenever it appears, and I condemn anti- Semitism now and I will always condemn it.

MR. MacNeil: Two hours later, Gov. Michael Dukakis addressed the same B'Nai Brith Convention in Baltimore.

GOV. MICHAEL DUKAKIS, Democratic Presidential Nominee: The United States has a special relationship with Israel. I want to strengthen that relationship. I want to build on it. I want to work together with the leaders of Israel and with Arab leaders who are willing to protect democracy and further the cause of peace throughout the Middle East. As President, I will strengthen our strategic partnership with Israel, a partnership that makes both countries stronger, a partnership that provides a very strong democratic presence to counter Soviet influence in the Middle East. As President, I want to work with the leaders of the Congress, with all members of Congress, and with the leaders of Israel to maintain Israel's qualitative military edge. We will not sell weapons that would threaten the security of Israel to any nation and we will work to persuade our NATO allies to join us in that policy. We're going to continue to help Israel defend itself by providing generous levels of military and economic aid. The Republicans have sold AWAC's to Saudi Arabia, Mavericks to Kuwait, Stingers to Bahrain, and billions of additional dollars' worth of sophisticated arms to Arab countries that refuse to make peace with Israel. Mr. Bush has supported those sales. Dan Quayle has voted for them. Lloyd Bentsen and I are going to say no to Arab shopping lists that endanger the security of Israel. Mr. Quayle has voted repeatedly against foreign assistance to Israel. Yesterday he told the Washington Post that George Bush was leaning on him for foreign policy advice. I'd rather listen to Lloyd Bentsen, and I'm sure you would too. The Republican ticket doesn't acknowledge Israel's sovereignty over its capital, an undivided Jerusalem. We do. The trade representative in this Administration has turned common sense into nonsense by threatening Israel's trade with the U.S. and placing Israel in the company of Syria and Haiti and Burma, because of alleged violations of labor rights. That's absurd. In a Dukakis Administration, we're going to have a trade representative who can tell the difference between right and wrong, and my friends, there will be no trips to Bitburg. Beginning on January 20th, we're going to have a President who will work for peace in the Middle East from the day he takes office until that long awaited dream is fulfilled. One of my first acts as President will be to appoint a special envoy with my instructions, use every ounce of your energy to convince Arab leaders to negotiate peace with Israel. My friends, there can never be a role in negotiations for the PLO unless it denounces terrorism in word and deed, unless it accepts Resolutions 242 and 338, and unless it clearly and explicitly renounces its own covenant, which states that peace can only come at the price of Israel's right to exist. The Dukakis Administration will never recognize a unilateral declaration of the Palestinian state or a government in exile. And it is up to all of us, public officials and private citizens, to speak out forcefully against anti- Semitism and racism and every fault of bigotry, whether it occurs in Boston or Chicago or Los Angeles or New York, or anywhere else in the United States of America. That is a responsibility we all share but it is especially the responsibility of the President of the United States, because silence is no substitute for leadership in the Oval Office.

MR. MacNeil: Throughout the campaign we'll be bringing you regular speeches by the Presidential candidates and their running mates. RECAP

MS. WOODRUFF: Again, the major stories on this Thursday, the President sent a cabinet level team to assess firefighting needs at Yellowstone Park. The House passed an amendment calling for the death penalty in drug-related murders and an estimated 1 million people demonstrated for an end to one party rule in Burma. Good night, Robin.

MR. MacNeil: Good night, Judy. That's the Newshour tonight and we'll be back tomorrow night. I'm Robert MacNeil. Good night.