GAO Blasts Proposed Easing of Banking Rules : Finance: Agency warns that changes in accounting would result in a disaster similar to that in the thrift industry.

WASHINGTON —  Federal banking regulators are courting a potential disaster similar to that of the savings and loan debacle by trying to “lighten up” at a time accounting rules should be toughened, the General Accounting Office said Thursday.

Comptroller General Charles A. Bowsher warned that a proposal to allow banks to record profits on loans in arrears will “open the door for additional abuses.”

The accounting loophole could have “disastrous consequences,” he said in a stern letter to heads of major regulatory agencies. He compared the accounting proposal for banks to the special treatment given savings and loan associations in the early 1980s, enabling them to claim profits when they were virtually broke.

Bowsher also chastised the regulatory agencies for suggesting that bank examiners should consider the long-range value of outstanding real estate loans rather than for their immediate price in a distressed market.

The “implied loosening up on valuation of real estate loans will only serve to temporarily gloss over existing problems,” said the GAO chief.

Bowsher’s warnings are significant because the GAO was an early voice of skepticism in the savings and loan crisis. It forecast that the cost would mount far above the optimistic numbers offered by the Reagan Administration.

Bowsher, whose agency is the investigative arm of Congress, is now signaling the legislators that the dangers are rising for a taxpayer bailout of the banks.

If accounting rules are eased for the banks, Bowsher said in his letter, the “consequences are extremely serious,” considering the weak state of the federal insurance fund and the rising tide of bank failures.

Currently, a bank cannot record a profit on a loan on which payments are overdue 90 days or more. The bank may be forced to write down the value of the loan, taking a loss.

Under the new plan, the bank could contend that it is still making a profit on the loan.

For example, a $1-million loan might have payments of $10,000 a month. But the borrower can make payments of only $8,000 a month. Under current law, the entire loan is considered nonperforming.

The proposal issued by regulators would allow the bank to split the loan into two sections--for example, $800,000 and $200,000. The $800,000 would be considered a good loan, and the partial interest payments would be recorded as income. The $200,000 would be written off as a loss.

“Loan-splitting could give the impression that loans with demonstrated weaknesses have somehow improved,” Bowsher said. “In reality, the borrower is in the same position as before, and the so-called performing position of the loan is still tainted.”

“Previous regulatory accounting forbearances for the savings and loan industry resulted in a false picture of the health of thrifts and contributed to the major financial crisis facing the taxpayers,” he added.

Bowsher’s opposition to the plan was strongly endorsed by Rep. Frank Annunzio (D-Ill.), chairman of the House Banking subcommittee on financial institutions.

“The new proposals for accounting changes are steps by the bank regulators down that same disastrous road” followed by S&L; regulators in the early 1980s, Annunzio said.