The MacNeil/Lehrer NewsHour

MR. LEHRER: Good evening. Leading the news this Tuesday, a retired U.S. Navy man was arrested for attempting to sell secrets to the Soviets. A White House official said tax money will be required to rescue the savings & loan industry, and Surgeon General Koop said there was no conclusive evidence either way about the psychological damage of abortions. We'll have the details in our News Summary in a moment. Robin.

MR. MacNeil: After the News Summary, Surgeon General Koop amplifies his views on the effects of abortion. Then our major focus, an update on the savings & loan crisis. We have a documentary report from Texas, excerpts from today's Congressional hearings, then the views of Congressman Charles Schumer and financial consultant Dan Brumbaugh, followed by the head of the Home Loan Bank Board, Danny Wall. We close with an Anne Taylor Fleming essay on limiting growth in California. NEWS SUMMARY

MR. LEHRER: The FBI arrested a retired Navy chief petty officer today on espionage charges. Thirty-nine year old Craig Kunkle of Virginia Beach, Virginia, was accused of trying to sell classified information to the Soviets. An FBI official in Norfolk, Virginia, this afternoon told reporters about the case against Kunkle.

IRWIN WELLS, FBI: Our investigation was initiated in early December, when we obtained information which revealed that Mr. Kunkle had an intent to sell anti-submarine warfare secrets to the Soviet Union. Mr. Kunkle is a 12 year veteran of the United States Navy and he served in anti-submarine warfare fleets in both the Atlantic and Pacific fleets.

MR. LEHRER: Kunkle retired from the Navy in 1985. He could be sentenced to life in prison if convicted on the charges. Robin.

MR. MacNeil: The Reagan administration and the incoming Bush team today differed on coping with failures in the savings & loan industry. Beryl Sprinkel for the Council of Economic Advisers recommended that deposit insurance be reduced from the present 100,000 to make consumers scrutinize institutions more carefully, but Treasury Sec. Nicholas Brady, who is working on a savings & loan plan for George Bush, issued a plan saying that is not an option. Sprinkel told reporters at the White House that taxpayers would likely have to pay the bulk of an estimated $100 billion to restore the S&L's to health, but just as important was regulatory reform.

BERYL SPRINKEL, Council of Economic Advisers: If we concentrate only on the price to be paid but do not concentrate on reforming the industry, in my opinion it will be a temporary stop gap measure that will lead to repeated losses in the future. So it's the reform that's critical as well as the money.

MR. MacNeil: The Harris Trust & Savings Bank of Chicago agreed to pay $14 million today in back pay to settle sex and racial discrimination charges. It was the largest such settlement ever obtained by the federal government. The Labor Department said the settlement requires the bank to revise its affirmative action policies and to provide training for women and minorities.

MR. LEHRER: President-elect Bush made his first major speech since the election today. He said choice and competition were the best ways to revitalize America's public schools. He said parents should be able to choose the schools their children attend and the President-elect also called for schools to offer different programs to compete for students. He made the speech at a White House conference on education.

PRESIDENT-ELECT BUSH: Choice plans that are intelligently conceived, implemented and then monitored, plans like magnet schools, open enrollment programs and other innovative mechanisms, restore that opportunity to our families. They give parents back their voices and their proper determining roles in the make up of children's education and they give schools a chance to distinguish themselves from one another and a chance to compete for and earn the loyalty of the students and the loyalty of the families that they serve and choice plans do work.

MR. LEHRER: The Surgeon General of the United States said today he remained firmly opposed to abortion but scientific data did not support the anti abortion movement's position on abortions causing psychological damage to women. Dr. C. Everett Koop said he was asked by President Reagan to assess the evidence on the issue and render a report. He said he wrote the President, saying a conclusive report was not possible. He said there was evidence from the other side that in some cases abortions were psychologically beneficial but that evidence also failed to convince him. Dr. Koop explained his views on a Newshour interview that follows this News Summary.

MR. MacNeil: Rudolph Giuliani, the federal prosecutor who put Wall Street's inside traders behind bars, announced his resignation today. There's speculation that Giuliani might run for Mayor of New York against incumbent Ed Koch or join the Bush administration as drug czar. But Giuliani told a news conference he had not been approached on the drug job and did not want to leave New York. In five and a half years as U.S. Attorney Giuliani has become one of the most visible and successful prosecutors in the nation, with a record of convictions from inside trader Ivan Boesky to a Mafia godfather.

MR. LEHRER: The administration today denied a Washington Post report that U.S. Navy pilots fired too soon when they shot down two Libyan fighters last week. The report said the U.S. planes were in a warning yellow alert status rather than a fire at will red condition. Defense Secretary Frank Carlucci and White House Spokesman Marlin Fitzwater said that was not so. Carlucci said, if anything, the Americans could have fired a minute earlier than they did. President Reagan also defended the U.S. pilots. He did so at a White House photo session this afternoon.

PRESIDENT REAGAN: I have said from the very beginning that I would never ask any of our people to go any place without the right to defend themselves if attacked and all the evidence, everything that we have, photographic, sound, and everything, they were justified in what they were doing.

MR. MacNeil: Investigators say one of the engines of the airliner that crashed in Britain on Sunday didn't fail but was apparently turned off for some time before the plane went down. The twin engine Boeing 737 crashed near a highway, killing 44 and injuring more than 80. This afternoon workers began to remove the tail section which remained largely intact. Investigators said there was no sign of fire or mechanical failure in the engine which the pilot shut down before the impact, but the other engine did show signs of fire damage. One official said he had a fairly clear idea of what happened, but he declined to elaborate. Meanwhile, Britain's Transport Secretary said today it appeared that the bomb that brought down Pan Am Flight 103 was planted in the forward cargo hold. Paul Channon told the House of Commons that access to the cargo hold would indicate that the operation was carried out by a highly organized terrorist group.

MR. LEHRER: Both sides today refused to stop fighting in the war between the Moslem factions in Lebanon. Officials from Syria, which backs one of the group, and Iran, which is behind the other, issued calls for a cease-fire, but they were ignored. At least seven people were killed in today's combat, another twenty were wounded. In addition, it was announced today that Israeli troops shot and killed eight other of pro-Iranian fighters Saturday night in a clash near the Israeli security zone in Southern Lebanon.

MR. MacNeil: The Soviet Union may not have its troops out of Afghanistan by February 15th. The Soviets agreed to that date under a UN mediated accord, but the Kremlin's top envoy to Kabul said today that a delay was a serious danger. He blamed the United States and hard line elements of the Afghan resistance for opposing a settlement. The White House said it expected the Soviets to meet the withdrawal deadline. The first Cuban troops to withdraw from the African Nation of Angola flew home today marking the beginning of the end of Havanna's 14 year involvement in the region. We have a report by Roderick Pratt of Worldwide Television News.

RODERICK PRATT: The agreement was signed at Luanda Airport from where the first Cuban troops were due to leave. The chief of Angola's Navy, Major General Dar Conchusal, sat down with the head of the Cuban forces in Angola. They both signed the agreement marking the first stages of troop withdrawals from the country. An observer from the United Nations was present to receive the signed documents. It's all part of an agreement signed in New York in December by Cuba, Angola, and South Africa. The deals means Cuba pulling its troops out of Angola, while South Africa has agreed to give independence to Namibia. Four hundred and fifty Cubans prepared themselves for the journey home. They were the first of 3,000 soldiers expected to leave by the end of the week. The Cubans have been in the country since 1975. An Angolan military band was playing at the airport to see the troops off. They piled onto the plane, one of three due to leave as part of the pullout. United Nations observers were carefully counting the men to make sure that the Cubans were sticking to their part of the agreement.

MR. MacNeil: In Hungary, Communist Party Leader Karoly Grosh said Soviet troops may begin withdrawing from his country within weeks. It would be the first of the promised withdrawal of some 50,000 Soviet troops from the Eastern bloc over the next two years. And that's our News Summary. Still ahead, Surgeon General Koop, the savings & loan crisis and California's growing pains. NEWS MAKER

MR. LEHRER: The surgeon general of the United States is first tonight. The subject is abortion. Yesterday Dr. C. Everett Koop sent a letter to President Reagan saying he could not issue a report on the physical and emotional harm of abortion. He said scientific evidence either way just was not there yet. News of his letter was a big deal this morning because Dr. Koop is an avowed opponent of abortion. He was in his office earlier today when I spoke about this. Dr. Koop, welcome.

DR. KOOP: Thank you.

MR. LEHRER: Why did you decide to issue a report on the psychological effects of abortion on women?

C. EVERETT KOOP, Surgeon General: Well, when the President asked me to do this, he was not interested in the moral issues of abortion, he was not concerned about the unborn, it was a very narrow focus on the health effects of abortion on women, and I set out to do that as best I could with as much help as I could get, 27 different groups of people from all over the various spectra that might be interested in this issue, as well as our own house people, and the conclusion that the data just did not support the premise that you could say that abortion did or did not cause the post abortion psychological syndrome that many people claim it does. Now that doesn't mean that there aren't problems with abortion at both ends of the scale. But I'm a scientist, I try to do it scientifically, and I don't believe that the public wants an anecdotal report from me that could be torn apart by the other side.

MR. LEHRER: And that was the data that existed was just anecdotal information mostly?

DR. KOOP: No, sir, there are really about 250 papers written on the subject but if you have a good statistician look at them, you'll find that methodologically many of them are flawed but surprisingly many of them carry the social bias in reference to abortion of the author. I'm not a statistician and that's not my opinion, but I've had it checked out by people I trust nationally and from five different sources and I believe them.

MR. LEHRER: So the people who would be identified say with the pro life movement, their studies said, in effect, that there was damage and those who were affected with the pro choice movement said there was not. Is that an oversimplification?

DR. KOOP: It's half right. The pro life people say there's lots of damage at one end of the scale. The pro choice people say that the overwhelming effect of abortion is beneficial on the people that they talked to.

MR. LEHRER: And you're saying both of them are not valid, is that right?

DR. KOOP: I think both of them are valid but they're not statistically provable. If you take the whole spectrum of abortion, there are people at one end who say I've never felt so relieved in my life since I've gotten rid of the pregnancy I didn't want. And they say that's a health benefit. At the other end, I know from personal experience women who've had terrible times after abortion, guilt trips. They thought they'd murdered their child and so forth. The great mass in the middle I don't think have many problems, but it's all anecdotal or skewed in some way and I thought the President wanted a report that could not be assailed by anybody and we could not produce that for him.

MR. LEHRER: Now has this had any effect on your own views concerning abortion?

DR. KOOP: No, Jim. I've always been opposed to abortion. I stand just as firmly there, but I think you'll recognize, Jim, that on other issues I have been able to separate my personal feelings from what I think the response of the Surgeon General should be, and I've done it with this as well as with AIDS.

MR. LEHRER: How do you go about doing that?

DR. KOOP: I don't know. It's not hard. You sort of split your personality, say I don't like what's happening, but I report it. I don't like child abuse or spouse abuse, but I report it. I don't like abortion, but I understand when the science isn't clear enough for me to make a flat footed statement.

MR. LEHRER: What are you going to say to those folks who feel the same way you do about abortion, the people in the so called pro life side, who now are going to criticize you because of what you have done in this matter?

DR. KOOP: Well, as a matter of fact of the 27 groups I met with, about half were pro life and I think they understand where I'm coming from. I don't think they like what they heard on the networks last night, because it sounded as though I'd come to the conclusion that abortion had no effect on anything. That is not true. But I think what they should take their marker from now is that in my letter to the President I recommended that he consider going forward with a prospective study that will take several years and lots of people and some money. But if he wants an answer to the question he asked me, that's the only way it can be accomplished.

MR. LEHRER: Do you think that should be done?

DR. KOOP: I do.

MR. LEHRER: Do you think it's important to have that answer?

DR. KOOP: I think it's important for several reasons, Jim. It's hard to believe that as long as women have been having babies no one has ever studied a cohort of women of reproductive age and followed their mating to their eventual outcomes and studied them physically and psychologically. I think it should be done.

MR. LEHRER: How much money would it cost to do this?

DR. KOOP: Well, I gave two outside figures, as much as a hundred million or as little as ten million.

MR. LEHRER: And balanced or put on the scale with other public health priorities in the country right now, you think that would be justified?

DR. KOOP: Yes, I do, when you consider we do 1.5 million abortions a year, you're only talking about $75 per person if you do the high figure.

MR. LEHRER: Doctor, finally, when you wrote that letter to President Reagan, were you conscious or did you realize it was going to kick up the dust that it has?

DR. KOOP: No, I didn't. I thought it could. What I was assured when I delivered it at the White House yesterday that it would be held close until such time as the President could respond to me, and I was assured that he would probably want to respond and get this all out of the way before he left office. I was surprised to get telephone calls from the press almost before I got back to my office.

MR. LEHRER: What happened?

DR. KOOP: The White House released it to the press.

MR. LEHRER: When you were asked to do this study, was there any kind of suggestion, implied or explicit or implicit, that you know what kind of an answer we want here, Dr. Koop, which is there should be, there will be harm as the result of abortions?

DR. KOOP: No, sir. You know if that had been done, I wouldn't have even undertaken it and I might have gone home, but I can tell you what did happen and that is the President was misled. One of his advisers said all you've got to do is ask the Surgeon General to write a report on the health effects of abortion on women and it will be so devastating you can reverse Roe V. Wade. Well, that is just not true.

MR. LEHRER: You didn't understand that that was your mission, but you understood that that's what some people wanted you to do.

DR. KOOP: I knew where the minds were.

MR. LEHRER: I see. Dr. Koop, thank you very much.

DR. KOOP: A pleasure.

MR. LEHRER: A second portion of that issue dealt with tomorrow's 25th anniversary of the first Surgeon General's report on smoking and health and we will broadcast it tomorrow night. FOCUS - SAVINGS & LOANS - THRIFTLESS THRIFTS

MR. MacNeil: Year end clearance sales are a great American tradition, but a flurry of deals involving savings & loan institutions has raised fears that one U.S. Government agency may have given away the store. At issue is the crisis in the S&L industry that could cost $100 billion or more to fix. Today President Reagan's chief economic adviser said the taxpayer will end up footing much of the bill. In December, the Federal Home Loan Bank Board, which overseas the nations savings & loans, arranged the rescue of 75 institutions at a cost to the government of more than $16 billion plus losses that will come with the promise of tax benefits. The private investors who become the new owners of those thrifts kicked in just under $2 billion. Those S&L sales come under what's known as the Southwest Plan, the latest of the bank board's solutions to the enduring problem of insolvent thrifts. In a moment, we'll talk to a Congressman, a financial consultant and the head of the Bank Board, Danny Wall. First we go to Texas, home to the great majority of the troubled thrifts. Dan Gifford of public station KUHT reports from Houston.

DAN GIFFORD: Houston developer T.W. Weston says he's been had by the system.

T.W. WESTON, Houston Developer: After everything that happened to us, my family last Christmas, one of my sons got everybody a big screwdriver that we won't take it no more, we've been screwed very badly so we're going to fight back.

MR. GIFFORD: Weston is fighting against the federal regulators of the savings & loan industry who he claims financially ruined him. The former Hungarian resistance fighter is considered a garden variety developer responsible for a number of successful Houston projects, including this landmark condominium on Houston's West side, overlooking River Oaks, this city's wealthiest neighborhood. His dream project was to build a retirement community for average working people on 327 wooded acres of land by the shores of Lake Houston on the city's North side. It's a place of wild beauty where migrating birds flock to weather the Northern winter, while egrets patiently stock their meals in the shallow water by the shore's edge. T.W. Weston's dream started coming apart several years ago when the savings & loan that was financing part of this project failed and was taken over by the Federal Savings & Loan Insurance Corporation, often called FSLIC for short. Mr. Weston says those officials told him that they would not renew his loan, told him to pay it off. But since all of his own money was in the project, he didn't have any cash to do that, so he had to go shopping for another savings & loan to get money to pay off the first loan. He found one, but then that savings & loan failed and again was taken over by Federal Savings & Loan Insurance Corporation officials. Again they told him to pay off the loan, again he had to go shopping for more money elsewhere. This happened a total of five separate times with five different savings & loans, but on the fifth time around he had run out of places to look by the deadline and wound up losing his property and his dream when the FSLIC foreclosed.

T.W. WESTON, Houston Developer: I'm looking at a 50 to 100 billion dollar loss caused by total ineptitude on the part of regulators. And if they would have just understood that taking the property from me and dumping it on the market destroys everybody else's properties, everybody else's values. This property is now for sale for 40 cents on the dollar than what I have in it and what they have in it. So everything around here has dropped 60 percent in value if not more because of this property being sold for -- that cheap.

MR. GIFFORD: Weston claims to be a victim of the way regulators used to rescue thrifts, calling in loans and foreclosing on properties, raising funds to keep a failing savings & loan afloat. Since last May under a new program called the Southwest Plan, the FSLIC has been combining failed thrifts like this one into package deals and selling them to investors. Heights of Texas is a consolidation of five failed savings & loans now united under one banner. During 1988, 87 of 140 insolvent savings & loans were dealt with under the Southwest Plan. Buyers and investors put up $1.86 billion to buy 42 billion dollars in assets. The government is backing those buyers with 22 billion of its own, dollars that guarantee the new buyers against losses from old loans in the package. Likely buyers include real estate developers and builders who rely on savings & loans to finance construction and mortgages. A recent buyer of this savings & loan was Pulte Homes Corporation of Michigan, a multi billion dollar national developer and home builder that's made a profit every year for the past 10 years, spending $45 million for a combination of five failed thrifts. This reminds some critics of the way the FSLIC tried to solve thrift problems nine years ago when that agency was desperate for cash to rescue failing institutions. Then high interest rates virtually brought mortgage lending to a standstill, seriously threatening the savings &loan industry. Bank and savings & loan consultant Sam Pierce is one such critic.

SAM PIERCE, Banking Consultant: What FSLIC and the Bank Board through the district Bank of Dallas did literally is go out and find developers that had money and haul those guys in literally kicking and screaming to sign them up to buy thrift charters.

MR. GIFFORD: Many of those thrifts are now thought to be the scenes of massive financial frauds.

SAM PIERCE: Almost universally now those institutions that were acquired by those developers have become insolvent and a lot of cases have ended up already in Southwest plan deals,and it seems to me we've done exactly the same thing again with the Southwest plan. We brought people in who have no business being in the industry either because they've demonstrated that fact by other businesses that they've run into the ground, or they have no business being in the industry because they have no idea what the industry is.

MR. GIFFORD: Pulte and other Southwest plan buyers aren't just buying savings & loans. They're also buying tax deductions and will save millions of dollars by deducting losses from old loans that they never made even though the FSLIC is guaranteeing those new buyers against losses from those very same loans. Paul Horvitz also believes the present Southwest plan isn't necessarily any better than public policy. He's a banking professor and director of the Dallas Federal Home Loan Bank, the regulators of savings & loans in seven states. Horvitz says the FSLIC promised too much.

PAUL HORVITZ, Banking Professor: They've over sold it by billing it as a solution to the problem rather than simply a step or tool to deal with the problem. It is not succeeding in bringing in the amounts of new capital that's desired and it's not accomplishing one of the things that should be done with some of these institutions to close them down, get them out of the market completely.

CLIFFORD FRY, Economics Professor: They had to take over the s&l's, in my opinion, instead of close them down because they didn't have the money to close them down. They couldn't leave them in the hands of the people that had them.

MR. GIFFORD: Economics Professor Clifford Fry defends the actions of federal regulators. He's served on the board of several federally controlled thrifts and is very familiar with charges against the FSLIC, but feels the circumstances left no other choice.

CLIFFORD FRY: If the failures had been minor in size with the FSLIC's insurance fund, they could have gone in, paid off the depositors, closed them down and gone on their way. The problem was it was not an isolated incidence of failure. We had savings & loan failures all throughout Texas, into California, and other places in the nation, and they simply had no alternative as far as I'm concerned.

SAM PIERCE, Banking Consultant: In my experience, and I've seen a significant number of institutions in Texas now both before and after they were taken, FSLIC adds nothing to the management of those institutions. In fact, in the case of the shops in Texas, most of them are now part of the Southwest plan deal to be acquired.

MR. GIFFORD: Rescues under the Southwest plan only started in May so results so far are mixed. Figures as of September 30th show Coastal Bank Savings of Houston, the first deal done with a $166,000 profit, almost all of it due to overhead and personnel cuts, Southwest Savings of Dallas, the second deal, losses of $34 million, and First Savings of Brenham, the third deal done, $2.3 million in profits as of September 30th. Clifford Fry says regardless of the results though, the Southwest plan remains the only plan.

CLIFFORD FRY, Economics Professor: The idea in theory is good. We could quibble about the way particular deals are done, but I'm not even sure it's our place to do that. But we have to -- I think it's in our interest for that Southwest plan to work. I don't see too many alternatives to it.

MR. MacNeil: The way in which the bank board has recently put s&l's into the private sector was the subject of a heated hearing today. Federal Home Loan Bank Board Chairman Danny Wall appeared before the House Banking Committee where a number of committee members were critical of deals made in December by the Bank Board.

REP. HENRY GONZALES, [D] Texas: The blizzard of savings & loan deals completed in December underscores in a most dramatic fashion the vast powers that the Federal Home Loan Bank Board and the Federal Savings & Loan Insurance Corporation have assumed for their agencies, yet, the Federal Home Loan Bank Board,without these specific authorizations can go behind closed doors, enter into deals with individuals and corporations, give away tax benefits, and commit the federal government to guarantees reaching long into the future.

REP. CHARLES SCHUMER, [D] New York: In the final waning moments of 1988, the Bank Board left us with a New Year's present, the true nature of which is even now unclear but the magnitude of which is staggering. In the short span of seven days, the Bank Board spent more than $28 billion, all of which was charged to the credit card of Joe Q. Public. This is more than the Chrysler, Lockheed, New York City bailouts combined with the Marshall plan thrown in to boot all done in the dark of night.

M. DANNY WALL, Bank Board Chair: What were the specific principles that guided the Bank Board during these last 18 months? With regard to the area of case resolution, it was to stop the hemorrhage. In the Southwest plan, utilizing the FSLIC staff, we have dealt with 75 institutions containing 24.5 billion dollars in assets. The liquidations, if we had liquidated those 75 institutions, would have cost 22.8 billion dollars. The mergers and the sales of those institutions we show a present value future cost of $16.6 billion, a savings of a little over $6 billion from the estimated cost of liquidation.

REP. JIM LEACH, [R] Iowa: There is room for but one Congress in the United States and that is one elected by the people. By its actions, the Bank Board has declared itself bankrupt and ought to go into immediate receivership of the United States Treasury. One thing I think this committee has to be very cautious of is the assumption that has been presented that this is the least costly way to go. In some instances it may be, but I refuse to accept that as a categorical assumption. There are others that have looked at this from many different perspectives that have a very different conclusion and the conclusion that you have drawn is one that I'm sure you hold but it is not necessarily anything except an opinion.

M. DANNY WALL: As you indicated, anyone else who is commenting on the situation is representing nothing other than their opinion as well. And we have the responsibility. We have all of the facts that are available to the agency, to the regulator, and on that basis we've made the assessment that we have. We've made it in a very sober and a very serious vein and we have and are providing a full accountability for what we have done and why we have done it. We see that we have done what was appropriate to be done under the law within the assignment of the responsibilities that have been laid out by this committee.

MR. MacNeil: As we just saw, one of the members of the House Banking Committee is Congressman Charles Schumer, he joins us from Washington. Dan Brumbaugh is a financial consultant to the savings & loan industry. He spent six years as the Deputy Chief Economist at the Federal Home Loan Bank Board and is the author of Thrifts Under Siege.

MR. MacNeil: Congressman, what's wrong with the deals the Bank Board cut at the end of December under the Southwest plan?

REP. CHARLES SCHUMER, House Banking Committee: Well, there are a whole lot of things wrong, Robin, but to me the most egregious is that tax benefits were given to these corporations that far exceed the amount of capital they put in so there is really no incentive to make the bank, the new thrift they took over, work. Rather --

MR. MacNeil: You're saying they could have driven a harder bargain, you mean?

REP. SCHUMER: They could have driven a much harder bargain. There is no long-term game plan. If things in Texas get worse, we'll be back picking things up again. In fact, one of the banks that they did in December had been previously done, the Vernon Bank, in another Southwest plan deal several months previous. There is no long range, long-term plan, and what the Bank Board is doing is taking a little piece here, a little piece there, giving incredible deals away.

MR. MacNeil: But you just heard the head of the Bank Board say that this was a lot cheaper than liquidating those banks and paying off all the people who have loans in them.

REP. SCHUMER: Well, I don't think it's -- yes, it would be cheaper than liquidating the bank but there are many other alternatives. If you take the very worst alternative you can come up with a pretty lousy alternative that is still a little better than the worst one. Take one of the deals that I was able to study in some detail. It was the deal that's called Utley Ford and it's the Revlon deal that was put together. Revlon is getting $897 million in tax breaks that can be used not only in the thrifts that they took over, but can be passed up and used as a tax break for Revlon and any other part of the Forbes and McAndrew Holding Company, and what they are paying for that is $300 million. In addition to the tax breaks, they get a bank which they can, which the federal government guarantees them against future losses, the FSLIC guarantees them against future losses, and a whole bunch of Texas real estate which may stay at a depressed condition but may do much better. The tax break along was worth far more than the $300 million they put in and when you throw in these other things, you have first a fire sale. The federal government wasn't getting close to what it should have been getting, but even worse than that, you have the very real potential that people went into these deals simply for the tax benefit with no desire, incentive, know how to manage the thrift, because they'll make a hell of a lot of money even if they do nothing with the thrift and let it fail.

MR. MacNeil: Well, let's get another view of this. Mr. Brumbaugh, what do you think of these year end deals and the objections that the Congressman has to the particular one he singled out?

R. DAN BRUMBAUGH, JR., Financial Consultant: Well, first of all I think I have to say that the absence of a long range plan is not the fault of the Bank Board; it's the fault of the Congress. But I don't include Congressman Schumer in this because he's been one of the most articulate spokesman about the problem and the size of the problem for some time. But in the absence of general revenues or some funding mechanism which provides somewhere between 50 and 100 million dollars, the Federal Home Loan Bank Board simply doesn't have the money to do those transactions. Now, I'd like to --

MR. MacNeil: But does it have to make deals that are at least arguably as favorable to the people who bought these assets as Congressman Schumer claims they are?

MR. BRUMBAUGH: Well, with all due respect to the Congressman, as he describes the transaction, he and I see them differently. Here's the way I think it works. When the Federal Home Loan Bank Board does not have all cash, it has to use something as a substitute for cash. One of those substitutes is tax benefits. Now an institution can be substantially, have negative net worth far and exceeding the amount of the capitalization, for example, of Mr. Perlman, but Mr. Perlman should have the right to get the total negative net worth of the institution which shouldbe several times his capital contribution. Now I would think it be better if the Congress made the cash available, but without the cash, the Bank Board has to do something and it's used among other things tax benefits. That's perfectly appropriate as far as I can tell.

MR. MacNeil: Congressman.

REP. SCHUMER: It's appropriate to use tax benefits, that's for sure, but when you give away $890 million of tax benefits for only $300 million and you guarantee the losses of the bank, you've cut a very very bad bargain. If, for instance, the Home Loan Bank Board had announced we have $897 million of tax benefits to give to the public or to give to a company, people would have lined up around the block, but no one knew that they were going to give away such large amounts of money and we were really caught. There was no competitive bidding. There were a number of firms that were involved. Most of them ended up getting deals that they wanted anyway and it's just a giveaway that I have not seen the likes of in a very very long time. I agree with Mr. Brumbaugh. Congress should, as I have been arguing, step up to the plate and say, look, we're appropriating money and that will give the Bank Board a little more flexibility, but even given the rather constrained conditions that the Bank Board is working under, these deals, we haven't seen anything like these deals in decades.

MR. MacNeil: Let's come back to the question of Congress in a moment. Do you agree with the Congressman that Mr. Wall and his regulators could have driven much harder bargains, for instance, letting it be more widely known that they had that kind of tax concessions to make.

MR. BRUMBAUGH: I think there are a number of reasons to be --

MR. MacNeil: They could have had some competitive bidding for those --

MR. BRUMBAUGH: Well, let's just address that issue directly. I talked last night who told me that in the particular transaction that Mr. Schumer referred to that initially there were 26 bidders and then that there were basically quarter finals, semi-finals and finals. So he indicated to me that there was, in fact, competitive bidding. When you do 75 transactions in a month, however, it's very likely that the Bank Board is going to be able to devote the time, the staff, and the appropriate review to dot all the "i's" and cross all the "t's". There are a number of reasons to be worried. The question is, were the estimates of the tax benefits too high? Are the guarantees imbedded in the guarantees too high? Did they have the time and do they do the methods correctly to evaluate all the assets? Those are legitimate questions and I actually think to be perfectly honest not even the Bank Board under the rush of the transactions that they made can answer that question and know it for certain.

MR. MacNeil: Why do they need to be in such a rush?

REP. SCHUMER: Exactly, exactly.

MR. BRUMBAUGH: I think there's a question about why they need to be in a rush but let me tell you in general why. When institutions are insolvent but left open, they have an incentive to gamble for resurrection. We, in fact, have somewhere between 500 and 1000 institutions with approximately $400 billion in assets that are in that condition. There is an urgency and if anything, if these transactions cause the Congress to act faster than it did than they've served the purpose which may, in fact, outweigh whatever excessive costs may be imbedded in them.

MR. MacNeil: Congressman --

REP. SCHUMER: Let me pose alternative strategy.

MR. MacNeil: I want to -- may I just ask you this first?

REP. SCHUMER: Sure.

MR. MacNeil: Why didn't the Congress come up with adequate funding for the regulators to bail out or liquidate those savings & loans which had failed and get rid of them?

REP. SCHUMER: Well, it's a very good question. A number of us had been calling for adequate funds for a long time, but the basic problem is threefold. First, the administration said they didn't need the money. And Danny Wall came to us on July 8th of 1988, just four months ago, and said the Home Loan Bank Board has all the money that it needs. He then estimated it at $23 billion. Finally, Congressmen are political animals. Like most people, we try to avoid tough decisions whenever we can, and with the administration and the Bank Board saying they didn't need the money, Congress wasn't going to then reach into the taxpayer's pockets and demand more money, particularly in an era of scarce resources, so there's plenty of conflict avoidance to go around. It wasn't just the Congress. I think it was the whole political structure of our government that tried to put off these decisions, but let me --

MR. MacNeil: I just -- since Mr. Brumbaugh made the charge that it was the Congress's fault, what do you say to that, that the Bank Board was saying we've got enough and the administration was not coming and arguing to Congress that it needed ore for political reasons?

MR. BRUMBAUGH: Oh, I think he makes a good point. Last year when I was saying that it was going to cost somewhere between 50 and 75 billion dollars, one member of the Bank Board said that there was a California consultant who seemed to be smoking something suspicious. That, however, has changed and now the Bank Board, itself --

MR. MacNeil: You were the consultant?

MR. BRUMBAUGH: Yes, and I can guarantee that I saw nothing suspicious. But at the time they were saying that it was substantially less than that. They've since raised their estimate periodically substantially, so he is right in that respect.

MR. MacNeil: He is right in that respect?

MR. BRUMBAUGH: Yes, and they are still just as a coda, they are still saying to us we don't really need your help. I mean, to this very day they are not -- what they ought to be doing in the strategy, instead of doing these last minute deals, and I think Mr. Brumbaugh is definitely right, that even they don't know what's in a lot of these deals, and no one will know until for a month or two until we can decipher all the documents. I took a huge pile back from the committee hearing today that I intend to look at. But why didn't they say as of December 1st, look, we don't want to give these things away at fire sale prices along with federal government guarantees that could get us in dutch, Congress, President, step up to the plate, give us the money we need, give us the things we need, we will sit down and deal with some of the problems that you've had with the way we've been going over things and together we can make this thing work? That would have been a much better solution instead of in the dark of night just rushing these last minute deals which I think will go down in history as some of the worst deals the federal government has made.

MR. MacNeil: Let me finally ask you in a couple of minutes. What needs to happen now, how urgent is the problem? Everybody, including Beryl Sprinkel, is now talking it's something in the order of $100 billion. How urgent is that to find that? How can the Congress find anything like that amount of money when there is severe constraint on the budget and a fear of increasing the deficit? How urgent and how?

MR. BRUMBAUGH: Oh, I think it's urgent because the cost is growing. Some estimates put it at a billion dollars a month. I actually think it's higher than that, so it's growing and that's why it's urgent.

MR. MacNeil: Every month.

MR. BRUMBAUGH: Every month, every single month.

MR. MacNeil: The cost of these failures in these things is rising by a billion dollars.

MR. BRUMBAUGH: And I think that's a low estimate. Now what needs to be done is the following. We need to do something to get out from under the restrictions of Gramm Rudman Hollings for the purposes of solving this particular crisis.

MR. MacNeil: Gramm Rudman Hollings is the constraint that's placed on the size of the budget deficit.

MR. BRUMBAUGH: That's right.

MR. MacNeil: The requirement that it come down by a certain amount.

MR. BRUMBAUGH: That would be the quickest way to do it, to suspend it for the purposes of raising the funds to solve this problem. If that's not done, there are more complicated and more costly ways to go about funding a solution to this problem and that could be done if we can't somehow get ourselves out from underneath the Gramm Rudman Hollings constraint. If we don't do that, however, this situation is going to cost us more in the future and that is a fact of life that the 1980's has made abundantly clear.

MR. MacNeil: Congressman, what is your prescription?

REP. SCHUMER: Well, I don't think we have to raise the hundred billion at once, but we should certainly try to get the Bank Board the early necessary funds it needs so it has other alternatives, and I think what I would do if I were the President is, I would say, look, taxpayers, public, Congress, it's going to cost us a significant amount now, or it's going to cost us a lot more later. It's better off to save some of the future problems by raising that money now, closing the brain dead thrifts that we can't do anything with, striking with enough money to bargain decent deals with people who want to come in and take over and get rid of the 200 sickest thrifts instead of just combining them together, giving a large number of federal guarantees, and hope that the economy picks up so we won't have to come back and put them back together again in the future.

MR. MacNeil: Well, Congressman Schumer and Mr. Brumbaugh, thank you both for joining us. Jim.

MR. LEHRER: Now and finally reaction to all that has come before tonight from the man who runs the Federal Home Loan Bank Board, Danny Wall. Mr. Chairman, first of all, what about the Congressman's point a moment ago that you have yet to say we need Congress's help, in fact, you say you can still solve the problem, is he right about that?

M. DANNY WALL, Federal Home Loan Bank Board: Well, we've made it very clear. In July of last year before his committee, in September of last year before his committee, in May of last year before the Senate Banking Committee, in October of last year before the Senate Budget Committee, we've made it very clear that the Congress has to come forward together with the administration with additional resources in the alternative that we have to continue to impose a special assessment, an additional premium against the industry for in excess of 30 years. And I think the Congress really made that statement, themselves, back in 1987 when they passed the legislation giving us two-thirds of what had been asked for by the Reagan administration eighteen, nineteen months earlier, giving two-thirds of the borrowing authority had been asked for. When the Congress provided that two-third piece of it, they said we will deal with it in the new Congress and the new administration in 1989. Here we are.

MR. LEHRER: Okay. You are no longer, whatever the record is, you are no longer saying that you can do it by yourself?

MR. WALL: We are saying that the alternative is what needs to be undertaken to provide alternative resources, additional resources, so as, as has been said, so as to further minimize the cost.

MR. LEHRER: Okay. Now on these year end sales, are you having any second thoughts about them yourself?

MR. WALL: Well, I'm having second thoughts in terms of the criticisms that are being made when they're inaccurate, criticisms that have been made that we did not have competitive bidding when, as Mr. Brumbaugh pointed out in his brief conversation with my colleague, Larry White, we had nearly 30 bidders on the one particular case that was identified. That is competition. We hired in that particular case a New York City investment banking firm. Because of the size of the package of institutions, we undertook an unusual course of action for us, to bring in a private third party contractor in a sense to conduct that particular undertaking. And why did we choose the particular contractor we chose? We went to every investment banking firm of any significance in New York City and they were all conflicted out, that is, they had a firm they were doing business with that was an acquirer or a bidder on that or other FSLIC cases so as to say they couldn't be involved on our behalf. So the only firm that we could utilize was a new firm with a good deal of experience of the folks who had left several other firms to come together to create the firm that's called the Blackstone Group, so we undertook an unusual course of action in that case and explicitly pursued the question of competition. The implication further that these deals were done in December is an absurdity. The Stockton, California institution known as American Savings, that institution was in the bidding process when I was named to the Board by President Reagan effective July 1, 1987. The process was underway with the ultimate successful bidder before the turn of 1988, that is, in late 1987. In these cases, we have been involved for months and months in this process. This deadline gave us actually the benefit of telling and forcing decisions to be made.

MR. LEHRER: But why was there this deadline? Why was there this rush to have it done by --

MR. WALL: The deadline was posed by the Congress. The deadline was created by the Congress providing for tax legislation to be cut by 50 percent of the benefit to an FSLIC assisted institution being cut from what had been fully tax beneficial to now after January 1st, 50 percent. But let me point out, additionally, the Congress said we're going to cut it from the full tax benefit to 50 percent, but we're going to add back the FDIC as an eligible assistance provider that should get that same 50 percent benefit.

MR. LEHRER: Meaning what?

MR. WALL: They added the FDIC as also having the ability to benefit from these tax savings, so the Congress knew exactly what they were doing. I understand that Congressman Schumer doesn't like that kind of tax policy and that is certainly his right and he has the responsibility on behalf of his electorate to make his point. But the Congress has decided, the majority of both bodies decided in the initial legislation that created that full tax benefit, and then in legislation late last year that cut it in half but added the FDIC as an additional recipient agency.

MR. LEHRER: But the Congress did not make the decision to negotiate these deals and specifically to make these 75 deals that you all made, you all made that decision. So the question is, are you convinced, as you sit here now, that you got the best you could get in each one of these cases?

MR. WALL: We're as convinced as is humanly possible. Humans can make mistakes. We're not infallible. But to that extent, we are satisfied that we made the best deal that we could make. We had competition in all of those cases.

MR. LEHRER: In every case there was competition?

MR. WALL: There was competition in every case, yes.

MR. LEHRER: Is Congressman Schumer wrong when he says that some of these deals you don't even know what is in them?

MR. WALL: From the standpoint of the problem institutions.

MR. LEHRER: Exactly.

MR. WALL: In the case of the Southwest, we acknowledge that up front. We identify, there is no due diligence, the term of the art.

MR. LEHRER: What's that?

MR. WALL: That means that if you're going to buy something, you have an opportunity to go in and investigate what it is you're going to buy. In the case of the Southwest, we see that our need is to move more expeditiously than that would permit, so as we provide the assurance and the guarantees, those losses are there. It's not like someone can come in and create the losses. The losses are there, so that after the fact, we do an audit, after this transaction takes place, and anyone lines up on the same basis and makes the offer to buy the institutions with the assurances that we provide in the case of the Southwest. Elsewhere the due diligence is provided for.

MR. LEHRER: All right now, what about the general complaint that you all gave away the store by providing tax breaks that were higher than the amount of money that these people put in there? Now that's an oversimplification, but it was a good deal for tax break purposes. It had absolutely nothing at all to do with running a thrift afterwards.

MR. WALL: I think that is an oversimplification, as you acknowledged, and I certainly would repeat and reinforce that. Additionally, I would point out to you that you and I or any homeowner uses tax breaks. They're there. They're not dirty, they're not vicious, they're not evil. When we deduct the interest we pay on our home mortgage, that is a tax break. To anyone else that does not own a home, they could say that shouldn't be done, that's not fair. That is the law. Do you or I say no, I don't want to do it because I don't agree with that philosophy? No, we say that's the law and we're going to deduct it. So we took advantage explicitly of what the Congress had put into place, and as I say, not only extended at 50 percent of the level, but added the FDIC as well.

MR. LEHRER: So it doesn't trouble -- you heard what Congressman Schumer said -- you heard it at a hearing today -- it doesn't trouble you at all that the people who bought these troubled thrifts put up very little capital, very little of their own money compared with the tax breaks they get. That does not trouble you.

MR. WALL: The tax breaks relate to their operating that institution for a period of time, 10 years typically, successfully and profitably in order for them to have made profits that can be sheltered. And to the extent that someone comes in and puts their capital on the line up front and then benefits from tax losses over time that are there, that are going to be experienced by someone, that we see as a net benefit.

MR. LEHRER: So when Congressman Schumer, using the Revlon case, said that Revlon could take this 897 million dollars in tax breaks and use it in their other operations, he's wrong?

MR. WALL: There are some restrictions and limitations as to how you can move the tax losses within a multi-faceted conglomerate, and it takes a tax lawyer much better than I to identify what those are, but those are the law of the land. And if you have a structure that is such that you can up stream tax losses, which is only in certain cases, but if you have such a structure, the law says you can do it.

MR. LEHRER: Do you agree with the $100 billion figure that the White House used today, that's what it's going to take to save this industry or to save the troubled thrifts in the industry?

MR. WALL: No. I think the hundred billion dollar figure that has been utilized over the past weeks by various people trying to get attention or whatever, I think that is an overestimate of the size of the problem at this point. It could become that. It could become that as and if deterioration continues or should there be a loss of confidence or whatever. There shouldn't be a loss of confidence. It's inappropriate for people to be concerned about that, but the size of the problem continues to grow, not at the rate --

MR. LEHRER: Not at a billion dollars a day?

MR. WALL: No way, not at the rate -- no -- the indication --

MR. LEHRER: A month a mean, that's right, a billion dollars a month --

MR. WALL: Let's not lose control here. The losses are not growing I don't believe at any level such as that.

MR. LEHRER: What are they growing at?

MR. WALL: We made an estimate of -- I mean, we made a calculation, not an estimate, a calculation of what the losses had been for a quarter prior to the case resolution of the institutions we resolved in the total of 1988. That was 205 institutions. Our estimate is that $4.2 billion would be an annual savings of what would have been the operating losses. Now that's not non-operating losses. That is to say losses on loans and so on, because they are there. They're going to be experienced by somebody whether they're accounted for in the advance or at the end. But in the operating sense $4.2 billion was lost by that 205 -- or would have been lost over a year -- by that 205 institutions.

MR. LEHRER: All right. Mr. Wall, thank you very much.

MR. WALL: Thank you. ESSAY - GROWING PAINS

MR. MacNeil: Finally tonight, essayist Anne Taylor Fleming on the changing face of California.

ANNE TAYLOR FLEMING: This is my own, my native state, my lanky paradise of seashore and sunshine. This is California into which thousands of people pour daily, some literally crawling across the Mexican border, desperate for a new life, a peace of the dream, and this is also a state in a state of civil war, a state divided against itself. The war is probably not apparent to visitors. They see our bounty, our natural beauty, our energy, our hustle, our characteristic optimism. They wouldn't notice the battle, wouldn't see the battlefields for what they are. But those battlefields are everywhere now, from one end of the state to the other, in big cities and small towns. Here we are, for example, on one of the battle grounds just outside the old City of Santa Rosa and the heart of Northern California's wine country, just an hour up Highway 101 from San Francisco, and this sparsely developed strip of land is what's known as a community separator. Its purpose is to keep Santa Rosa hemmed in by greenery, keep it from jumping its perimeters in all directions and becoming one more urban sprawl on the California map, one of those tract house mini mall blurs that run135 miles from Los Angeles to San Diego. Typical of what's happening around here is Windsor, just up the road, a city virtually being born on country acres about to swallow up the lovely old landmark winery, the first in Sonoma County to fall to developers. In the air around here there is both activity and elegy and that's what the war is all about, how to preserve what's left of the state. It's not a partisan political issue really, nor an anti-development vendetta. It's more of a soul search, an effort by a population to reckon with what it's wrought. The reckoning started in the 70's when people looked around and didn't like what they saw. That's when the so called slow growth movement began. But in the past year or so the movement the movement has really gained steam, become a true populist campaign in which slow growthers all over the state are not actively engaged.

CALIFORNIA RESIDENT: We're against progress now that we found out what they meant by progress. I don't want to stop growth. I want to wind the clock back.

CALIFORNIA RESIDENT: We're frustrated and tired of the traffic, of the commotion, of the way decision are made at city hall.

ANNE TAYLOR FLEMING: It's fair to say that slow growth is "the" hot issue in the state now and not just out here in this seeming country but even in densest suburbia like Los Angeles, where a group of neighborhood activists called Not Yet New York is challenging all kinds of development projects and sometimes winning. It's a matter of just trying to get a little more elbow room or keep it in a state with a population that's already at 28 million and will go to 32 million in just seven years. The activists of feeling their oats, even as they're fending off charges of being elitists who don't want poor newcomers in their own backyards. But the slow growthers argue that boom times have hardly brought housing prices down and that if we continue as is that the entire State of California will be unworkable for poor and rich alike. That's what's underneath all this slow growth bravado, a real sense of loss, a state long ache over what we've become, urban, grimy, gridlocked, Eastern. We were once the wide open spaces state, the West of the West, a place of breathtaking vistas and easy living. Now our views are blocked, the living isn't easy and an edge of mourning hangs over the golden state. RECAP

MR. LEHRER: Again, the major stories of this Tuesday, a retired chief petty officer in the U.S. Navy was arrested by the FBI on espionage charges. He was accused of trying to sell sensitive secrets about U.S. anti-submarine warfare to the Soviets. President Reagan's Chief Economist said tax money will be required to make up part of the $100 billion cost of saving the savings & loan industry, and the Surgeon General Dr. Everett Koop said evidence was inconclusive either way on the health damage abortion causes in women. Good night, Robin.

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