Ex-State S & L Commissioner Raps Federal Regulators

Federal savings and loan regulators, often criticized by congressional leaders for failing to take strong action against deteriorating S&Ls;, now are coming under open fire from former executives at failed thrifts--largely in California and Texas--and from some industry lawyers and consultants.

A former head of California’s Savings and Loan Department, in fact, has publicly urged industry executives to speak out against the excesses of federal regulators. One such excess, he said, is the tendency to target one group of S&L; owners--those who took advantage of California’s liberal lending and investment policies in recent years.

“Most of the shops taken over in California in the last few years didn’t have to be seized,” Lawrence W. Taggart, a former state S&L; commissioner, said at a recent seminar in Los Angeles.

Some of the larger of the seized S&Ls; were in Orange County, including Butterfield S&L; and American Diversified Savings Bank.

The seminar was organized by a former American Diversified executive.

In his speech, Taggart claimed that federal regulators “sink the ship to get at the captain.”

If regulators don’t like an S&L;’s owners or operators or don’t approve of the institution’s policies, Taggart said, they have the power to replace the board and the management while the institution is still healthy.

Instead, he said, the regulators wait too long to move in and, when they do, they then write down assets--particularly real estate properties--without regard for the time needed to work out problem loans.

Real Estate Devalued

Real estate that some S&Ls; acquired for investment, for instance, was often devalued by regulators during recessionary times, said Taggart, who characterized the action as unreasonable. “Real estate is not there for trading when it’s held for long-term investment,” he said. “Why write it down?”

Regulatory actions, Taggart claimed, often cause or accelerate an S&L;’s failure, resulting in a takeover and creating hardships on depositors, borrowers and other employees.

Taggart’s complaints, echoed by several other speakers during the daylong seminar, are a virtual rerun of the complaints voiced by many independent bankers and independent banking attorneys about the Federal Deposit Insurance Corp. during a spate of closures of small banks in 1983 and 1984.

In a separate interview, William Crawford, California’s current S&L; commissioner, said he holds Taggart partly responsible for the large number of new S&Ls; that have collapsed in the past two years. He said Taggart urged passage of the state’s liberal S&L; investment rules in 1983 and encouraged builders and entrepreneurs to start new S&Ls.;

The meeting was sponsored by a new trade group called the National Institute of Thrift Executives, which is being put together by a former American Diversified executive, Bob Mehta.

Session ‘Controversial’

Mehta and Lester Day, former president of American Diversified, said the seminar was “controversial” because of the topic--how to deal with regulators in a takeover situation--and because of the group’s identity with executives of failed S&Ls.;

Costa Mesa-based American Diversified, which the bank board declared insolvent and put into conservatorship in February, was criticized often by Federal Home Loan Bank Board Chairman Edwin J. Gray Jr. for its unusual direct investments, including a wind farm and an ethanol plant.

Speaking to about 50 former S&L; executives, attorneys and consultants at the Aug. 29 seminar, Taggart said industry executives and directors should stop letting “fear and intimidation” be the decisive factors in how they will run their associations. Most of the members of the audience were from S&Ls; that have been seized by the bank board.

“It’s time for people to speak out,” said Taggart, who resigned his office in January, 1985, and is now an industry consultant based in San Diego.

The story that the former owners and managers want to tell is that of the refusal of the bank board and its Federal Savings & Loan Insurance Corp. unit to help or even work with troubled institutions run by executives whose policies the regulators don’t like.

The bank board consistently has failed to move against traditionally run savings institutions that have negative net worths but is quick to act against still-solvent institutions run by entrepreneurs critical of the bank board’s restrictive policies, Taggart and other speakers at the conference claimed.

Put Blame on Gray

They laid the blame on Gray, who, they charge, has targeted the new associations run by entrepreneurial owners who speak out against his policies.

That complaint has been a longstanding one and bank board spokesmen consistently have claimed that entrepreneurial S&L; owners are not a target or the subject of any vendetta.

But pressure for Gray’s ouster is coming from Congress.

And while most of the dissatisfaction has come from congressmen who believe the bank board has not been diligent enough in stemming the tide of S&L; failures that has swept the country in recent years, some are calling for Gray’s ouster for other reasons.

Rep. Denny Smith (R-Ore.) told the audience at the S&L; seminar in Los Angeles that he has sent a letter to President Reagan asking him to replace Gray.

Smith, whose remarks were made in an amplified telephone call, called Gray a “dictator” who is “not leading a charge anywhere but off the cliff.”

He said Cabinet-level executives also are questioning Gray’s abilities. Gray’s current term expires in June, and he has made no public statement regarding his future plans.

Says Change ‘Inevitable’

Ernest Leff, a longtime S&L; lawyer, said he believes a change in the bank board’s philosophy is “inevitable” because two of the three board members have quit and two candidates mentioned as possible appointees are free-market disciples who would probably oppose Gray.

Still, Gray has been able to sell Congress on his version of regulatory needs, said Durward Curlee, former executive vice president of the Texas Savings and Loan League.

Gray’s story, Curlee said, is that new S&L; owners have put little capital into their S&Ls;, expanded them with so-called hot money--volatile, high-interest deposits--and have improperly underwritten loans.

Curlee, however, argued that it is not necessarily bad management to bring in high-interest deposits to fund high-yield growth and that it is not wrong for an S&L;’s owners to reduce their capital investments when possible.

Banks and S&Ls; should have broad investment powers, Curlee said, and ownership of financial institutions should be open to a wide range of investors.

Several government studies conducted in the last year showed that about 460 S&Ls; nationwide are operating with negative net worths and that an additional 830 S&Ls; have less than the 3% ratio of liabilities to net worth that is required by federal regulators, said Day, the former American Diversified president.

Day said some S&L; executives currently having problems with regulators told him they wanted to attend the seminar but were told by regulators to stay away.