During his first year of law school at Loyola University in Los Angeles, Thomas Spiegel made so much money in the stock market--about $100,000--that he dropped his studies and became a broker on Wall Street.
"I've been trading since I was 16 or 17 years old," he said. "I have always been fascinated by the market."
Spiegel, now 39, remains a market junkie, and he's making more money than ever trading securities. Only now he's doing it in the rather unlikely role as chief executive of Columbia Savings & Loan Assn., a family-controlled financial institution that has emerged from obscurity in recent years to become one of the most aggressive, controversial and profitable savings and loans in the nation.
Columbia late last week reported nine-month net income of more than $104 million, no mean accomplishment for an S&L; that never made more than $1 million a year before 1982. The profits were achieved chiefly because falling interest rates have allowed Columbia to sell assets at a profit.
Outsiders of all stripes--competitors, regulators, investment bankers and financial analysts--are eyeing Spiegel's Beverly Hills-based S&L; with varying degrees of admiration because of its profits;jealousy because of its rapid rise;alarm because of its profitable but risky investments in the junk-bond market; and derision because of its maverick ways.
"They're like the guy who wears a loud suit at a conservative party," says one banking regulator.
To some industry insiders, Columbia Savings is the country's premier example of how a savings and loan association can operate sanely and profitably in a deregulated banking environment.
"His operations aren't any risker--in fact, I think they're less risky--than those of the traditional savings and loan," maintains Richard Pratt, a former chairman of the Federal Home Loan Bank Board, the country's principal S&L; regulatory body.
The more skeptical suggest that Spiegel is simply a shrewd opportunist whose operations are not only highly questionable in the long run, but have run far afield from mortgage lending, the original purpose of the S&L; industry. He is simply running a brokerage house with depositors' money, they say.
"I personally don't think what they are doing is appropriate," says Allan Bortel, a financial analyst with Shearson Lehman Bros. "It's the job of a savings and loan to service the housing industry."
"They have done something very astronomical, but they're not functioning as a savings and loan," adds a lender in Beverly Hills. "They're really in the junk-bond business."
Junks bonds are low-rated or unrated corporate securities that have proliferated in the past two years, often as funding vehicles for hostile corporate takeovers. More than $30 billion in junk bonds were sold last year through public and private placements, a third of which were connected with mergers or leveraged buy-outs.
Columbia Savings has about $1.5 billion invested in low or unrated bonds, a level that's less than a quarter of its total assets but dwarfs what other S&Ls; have invested. The entire S&L; industry owns about $5 billion of these bonds, regulators estimate.
Some money men worry that the junk bonds, which have very high yields, will be vulnerable to default during the next recession because cash-strapped companies will have difficulty meeting the payments.
"A bad roll of the dice (with the economy) and (Columbia) could be in big trouble," one top West Coast investment banker warns.
Junk bonds have also drawn fire from Congress and several top banking industry regulators, including Federal Reserve Board Chairman Paul A. Volcker. Many commercial banks are barred by regulators from investing in junk bonds, while savings and loan associations with a federal charter may only put up to 1% of their assets in these investments.
But Columbia Savings has a state charter, and in California that means an S&L; may invest its depositors' money where it wishes. Such liberal powers were granted by the California Legislature in 1982 as a means of giving struggling S&Ls; more ways to make money.
Columbia has taken full advantage of the statute. Its assets have grown to $6.6 billion on Sept. 30, from $373 million at the end of 1981, an increase of nearly 18-fold that was achieved largely by acquiring bonds and stocks.
Columbia's $173 million in nine-month-operating profits included $105 million from the sale of loans, mostly mortgage securities, and $37 million from the sale of stocks and bonds. But earnings were reduced because of an $8.59-million provision for losses on the investment portfolio, including $4.59 million that was added in the third quarter.
Columbia's assets on Sept. 30 included $2.29 billion in investment securities, $1.07 billion in mortgage loans and $2.48 billion in mortgage-backed securities. The mortgage securities are almost all Ginnie Maes, which are pools of mortgages packaged as bonds and guaranteed by the Government National Mortgage Assn., a federal agency.
The explosive growth has led some industry observers to label Spiegel a budding Charles W. Knapp. Knapp was ousted last year as chairman of Financial Corp. of America, the nation's largest savings and loan holding company. Federal banking regulators forced him to resign because they felt that FCA, then based in Los Angeles but since moved to Irvine, was adding assets at an explosive pace.
The Knapp comparison makes Spiegel uneasy. He points to figures indicating that Columbia has a growth rate that's under control, a stable deposit base and a low mortgage-loan delinquency rate.
Company figures show that more than 97% of the S&L;'s deposits are in amounts of $100,000 or less. Such deposits should be a stable source of funds because they are insured by the Federal Savings and Loan Insurance Corp. and therefore less likely to be shifted at the first hint of unfavorable news.
Columbia has more than $4.5 billion in deposits and a network of only 16 branch offices, all in Southern California. It has raised about $3 billion in deposits through institutional brokers, but these are largely long-term funds that may be withdrawn before maturity only if the depositor dies.
Few Problem Loans
Further, Columbia had only $8.58 million in problem real estate loans at the end of the third quarter, a minuscule amount compared to total assets. In the area of home loans, it specializes in the luxury ($500,000 and up) end of the market.
Spiegel has been making a considerable effort to blend into--and make friends in--California's chummy savings and loan industry--something Knapp never tried to do. Indeed, Knapp was openly critical of his competitors.
Knapp's style eventually returned to haunt him because high-level savings and loan executives in California helped to persuade banking regulators that FCA's policies were reckless. As one Knapp supporter puts it today, "If you're not part of the club, they do a number on you,"
Spiegel seems to have learned that lesson well.
He doesn't criticize competitors in public, and he's active in the affairs of the California League of Savings Institutions, a powerful industry trade group. He goes to industry conventions and he spends a lot of time explaining to regulators how his company operates.
Though Columbia's operations are certainly unorthodox, they appear to be gaining acceptance in regulatory circles, in part because bank examiners haven't been able to find anything wrong.
One federal regulatory official recalls that "when I saw these guys several years ago, I thought: 'Who are these weirdos?' But when I saw what they were doing, I saw they were doing it well."
On Wall Street, however, Spiegel is often lumped together with such controversial financiers and takeover specialists as Victor Posner and Saul Steinberg. The association results from his friendship and business ties to the leading guru of the junk-bond world, Michael Milken.
Milken is the executive from the investment banking house of Drexel Burnham Lambert who is widely credited with creating a viable market for the latest generation of junk bonds. It was Milken who first interested Spiegel in these bonds and it was at Drexel's office in Beverly Hills that Spiegel learned how the market works.
But the Milken connection also landed Spiegel and other junk-bond heavyweights on the cover of Forbes magazine late last year for an unflattering story about the inbred world of junk-bond financing. (Milken, through a spokesman, declined to be interviewed for this story.)
Risk Worth the Reward
Spiegel doesn't dispute that junk bonds are risky; he merely says that the risk is worth the reward. Junk bonds generally have yields as high as 17%, whereas Columbia is paying out between 7% and 11% for its funds.
Columbia has enough capital ($402 million) to handle any losses that might accompany an economic downturn, Spiegel says. In addition, the S&L; is now adding nearly $1 million a month to reserves in order to cover possible losses in the junk-bond portfolio.
"There's no doubt in my mind that we will have major problems in a major recession or depression," Spiegel says. "That's a given. But . . . I feel pretty sure we can ride out any economic environment this country gets into. But that doesn't mean I don't worry about it. I never stop worrying about it."
Spiegel's friends and admirers say he is inordinately bright as well as unusually qualified to invest mega-dollars in the bond market. Part of his background includes three years as a stockbroker for A. G. Becker in New York.
More important, they say, he has a ravenous appetite for work and studied tirelessly in 1981 and 1982 before he decided to jump into the bond market.
"He's a one-man think tank," gushes one business acquaintance. "It's unbelievable. I used to speak with him every night (on the phone) for a couple of hours. That went on for a year. I've had meetings with him at 5 a.m. on Sunday and midnight on Saturday."
He adds, however: "You can only work at that pace for so long. Eventually, you're going to get tired."
Though Spiegel estimates that he works as much as 75 hours a week, he is well compensated for his efforts: he was the second highest paid S&L; executive in the country last year. According to Columbia's proxy statement, Spiegel received a salary of $600,000, as well as a bonus of $750,000, last year, when Columbia earned a record profit of $44 million.
The proxy statement also shows that Columbia loaned its president and chief executive $3.45 million to build a new home. The interest rate was fixed at 10.58%, which represented Columbia's cost of funds at the time the loan was made.
Most fixed-rate mortgage loans made to consumers are several percentage points above a lender's cost of funds. But the proxy statement says the loan was approved by federal and state banking regulators, as well as Columbia's board of directors. Spiegel abstained on the board vote, the proxy says.
Spiegel dislikes personal publicity and lives quietly. According to his friends, he has no use for an active social life and what little leisure time he has is spent with his family.
"It's hard to see him on a personal basis, he works so hard," says Alan Khedari, a Columbia board member.
Spiegel's intensity and seriousness makes him quite a contrast to his ebullient father, Abraham Spiegel, who remains Columbia's chairman but lets his son run the show.
Basking in Glory
"All Abe is doing (now) is basking in the glory of his son's accomplishments," says a banking associate of the family.
The elder Spiegel, who is almost 79, is a story all by himself. He survived two Nazi death camps during World War II before emigrating from Czechoslovakia (where Tom was born in 1946) to the United States. Abe Spiegel was 41 and spoke little English when he arrived in New York with his wife and infant son during during a cold and snowy winter in late 1947.
In the intervening 38 years, the elder Spiegel, after a brief and unsuccessful fling in the liquor business, has become a well-known real estate developer and lender. He built about 10,000 houses, most of them in the San Fernando Valley, and has owned or controlled three different savings and loan associations in the Los Angeles area.
He is a highly influential figure in the Los Angeles Jewish community as well as being well-connected politically. One of Columbia's outside board members, William Elkins, is a close adviser to Los Angeles Mayor Tom Bradley.
The Spiegel family controls about 60% of Columbia's equity. If the family holdings, including warrants and convertible debentures, were converted into common stock, it would have a value of about $170 million. (Columbia, now traded over the counter, has applied for listing on the New York Stock Exchange.)
Even though Columbia is publicly held, the Spiegels are only willing to say only so much about the company's operations.
Balks at Disclosure
Tom Spiegel likes to show visitors charts about how careful Columbia is in managing risks on credit, interest-rate and deposits. But he balks when it comes to disclosing what's in the investment portfolio.
He suggests that disclosing the nature and extent of Columbia's investment holdings isn't worth the effort and might cost him money in trading situations. He also declined a reporter's requests for a first-hand view of the trading activities, an area that Spiegel controls tightly.
"Frankly, I don't want to give a minute-by-minute feel of what happens in my life," he says.
According to the company's annual report, Columbia has an investment portfolio of nearly 400 securities in 166 companies. About 90% of the portfolio is in corporate securities, while the rest is common and preferred stock. Columbia has disclosed a few of its bond investments, the largest one being $67.3 million in Metromedia Broadcasting.
Financial analysts at the nation's major brokerage houses pay limited attention to Columbia's stock because the operations are so difficult to track.
"I throw up my hands trying to determine if those assets are going to be profitable in the long term," says Bortel, the analyst at Shearson.
Can't Predict Earnings
Analysts also complain that Columbia's earnings are impossible to predict because asset sales account for so much of net income. Spiegel agrees, saying, "I can't even predict our earnings."
Despite the doubters, Spiegel believes that it's only a matter of time before Columbia starts getting the full credit it deserves. "Quarter after quarter we are making money," he says. "I think we're finally starting to stand the test of time."
"People used to tell me they thought we were a flash in the pan," adds Seymour Fagan, a board member and executive vice president of Columbia. "I don't hear that anymore."
But Columbia may have to survive a severe economic downturn to satisfy its toughest critics.
"The history of junk bonds hasn't been written yet," says one Wall Street money manager. "Everyone (including Spiegel) is smart in this game. You have to be. But the real question is: How well are you going to do when you stumble?"