For Regulators, S&L; ‘Hospital’ Is No Cure-All

The old management at Centennial Savings & Loan in Guerneville, population 900, apparently liked to conduct its business affairs in style--to put it kindly.

Before the Northern California savings and loan was taken over by federal savings and loan regulators 13 months ago, its expenses included $48,000 a year for a European chef and its assets included a corporate airplane and a Mercedes limousine. The S&L; had a Christmas party in 1983 that cost $132,000.

“It was just crazy,” said Jack Steele, dean of the USC business school and a member of Centennial’s new board of directors.

Law enforcement agencies are now investigating Centennial Savings in connection with allegations that the S&L; laundered drug money and received kickbacks on high-risk real estate loans, FBI and company officials confirm.

Further, the FBI recently arrested two people earlier this month and accused them of embezzling $1.8 million from the company. One of those arrested was Centennial’s branch manager in Santa Rosa, while the other is a former executive vice president of the S&L.;

Centennial is one of the so-called MCPs, a sorry fraternity of failed S&Ls; that remain open across the country as virtual wards of the federal government. (Twenty of the 46 S&Ls; put into the program are in California.)

MCP is bureaucratic shorthand for “management consignment program,” a controversial plan of semi-nationalization that began again in California last year when regulators swooped down on Beverly Hills Savings & Loan on a Tuesday afternoon in late April.

In what became a general pattern for later takeovers, regulators ousted the old management and board and replaced the state charter with a federal one.

The following day, when Beverly Hills S&L; opened its doors to lines of anxious depositors, new management from a healthy financial institution--First Nationwide Financial in San Francisco--was in charge.

At the time, the management consignment program was hailed in established industry circles as a temporary and relatively painless way to rein in unhealthy growth at high-risk S&Ls; whose loan portfolios were riddled with problems.

It was intended primarily as a holding action to spare the money-short Federal Savings and Loan Insurance Corp. the immediate and hefty cost of either closing the S&Ls; or arranging shotgun mergers with healthy financial institutions.

(FSLIC, an arm of the Federal Home Loan Bank Board, insures customer accounts up to $100,000 should an S&L; shut down.)

Though praised 18 months ago, the program long ago lost its novelty and today it is being pelted with flak from a variety of industry insiders, including some staunch early supporters.

Decline in Value

The longer the delay, the more the assets of a troubled S&L; are likely to decline in value, particularly in overbuilt markets, some lending experts say.

Buttressing this belief is a recent report from the General Accounting Office, Congress’ research unit, warning that it may cost more in the long run to keep sick savings and loans open than to shut them down.

Further, industry executives complain angrily that ailing S&Ls; offer high rates for savings in order to fund their operations.

Though great for consumers, it drives up costs for all S&Ls; because they have to raise their savings rates to stay competitive.

“It was an A-plus the first six months, a B-minus in the second six months and a C-minus the third six months,” said Anthony Frank, chairman of First Nationwide, summing up a general frustration felt by some of his colleagues.

As the MCP was first envisioned, the new management from healthy thrifts would analyze the ailing institution’s loan problems while regulators found new owners, all within three to six months. Recruited by the FSLIC, the new managers are paid a fee to cover expenses.

Now, the program has taken on a life of its own.

“It was supposed to be a three-month program but we have been here 15 months,” said Peter Pickslay, who has been installed as president of Eureka Federal Savings & Loan in San Carlos, Calif., under the program. “If it had been known that we would be here (this long), they would not have gotten any managers.”

Estimates Proved Incorrect

Initial time-resolution estimates proved incorrect because regulatory and industry officials underestimated the depth of the problems.

They also said their hands remain tied until the FSLIC finds the money it needs to close or sell the insolvent institutions.

“The problems are a lot greater than anyone thought and it takes a lot longer to work them out,” said industry consultant David Smith, partner in Kaplan, Smith & Associates in Glendale.

The latest financial reports show that liabilities of the California MCPs exceeded their assets by anywhere from $444 million to $1.53 billion, depending on the accounting system used. Together, they owned about $653 million worth of foreclosed real estate as of March 31, the latest public reports show.

The MCPs, as these institutions are now known, used to operate with a daring that dismayed the clubby regulatory and industry establishment in California.

Unshackled by state and federal deregulation in the early 1980s and eager for big profits, they shared a passion for rapid loan growth and unconventional investments that ultimately proved their undoing when the loans went into default.

Investments not even distantly related to single-family-home mortgage lending, the traditional staple of an S&L;, permeated their loan portfolios.

Centennial Savings still owns a mushroom farm in Washington and it used to own a construction company that paved highways. Eureka Federal Savings nearly became a controlling shareholder in a Nevada casino.

But it was more conventional real estate development and construction loans that caused the most severe difficulty, most industry and regulatory officials agree.

Unsold or unfinished luxury high-rise condominiums along the ocean in Long Beach and the freeway in Glendale stand as monuments to the continuing problem.

The MCPs operate largely under a cloak of secrecy dictated by regulators who are not overeager for depositors to know the true condition of these financial institutions. With the FSLIC as underfunded as it is, regulators say privately that they would be hard pressed to deal with widespread depositor unrest.

So far, though, depositors have kept faith, largely because their savings are insured up to $100,000 by the FSLIC.

The MCPs have even increased the amount of money in insured deposits since the end of 1984 because they are offering some of the highest interest rates in the state of California.

The only visible sign of deposit instability occurred after Beverly Hills Savings & Loan opened under new management. Unnerved savers withdrew more than $43 million in deposits the day after the news was announced, but deposits stabilized after savers realized that their deposits were secure, regulators said.

Found No Sympathy

Under government control, the MCPs have instituted policies that have played havoc with borrowers suddenly confronted with lending officers not overly sympathetic to their loan problems.

Los Angeles hotelier Severyn Ashkenazy, for example, placed some of his real estate investments in bankruptcy court to avoid foreclosures on two of his luxury hotels by two different lenders in the management consignment program.

California savings and loan regulators recently put the five largest MCPs up for bid, closed two of the smallest ones and arranged the sale of another to an S&L; in Buffalo, N.Y.

Regulators also changed the name of Sun Savings in San Diego to Flagship Savings and are turning over the troubled loans to the Federal Asset Disposition Assn.

The five on the auction block are Beverly Hills Savings, Southern California Savings, Bell Savings, Eureka Federal Savings and Central Savings. Together, they have assets of almost $10 billion.

Some bids have been received, according to James Cerona, president of the Federal Home Loan Bank of San Francisco, but he declined to be more specific. He said only that he is “hopeful” that “several” of the five will be sold when the bids are evaluated and analyzed within the next few weeks.

One of the bids came from an investor group led by William E. Simon, former secretary of the Treasury, that recently announced it was taking over Honolulu Federal Savings & Loan, Hawaii’s biggest thrift.

Simon confirmed in an interview that his group wants to buy Bell Savings and Southern California Savings, which have nearly $2.9 billion in assets between them. Simon said he expects to hear shortly whether his bid has been approved.

Only Beverly Hills Savings among the five attracted no interest from would-be acquirers, industry officials said in interviews. Its drawbacks are a limited branch network and a diversified portfolio of bad loans that extend across the country.

Woes Most Novel

While Beverly Hills’ problems may be the most serious, Eureka’s woes are arguably the most novel because it strayed far from the traditional domain of real estate lending.

Eureka Federal was recently on the verge of becoming a controlling shareholder in the Dunes Casino in Las Vegas by virtue of a $25-million loan it made to John Anderson, chairman of the casino. Collateral on the loan was 3 million shares in Dunes Hotels & Casinos.

Eureka moved to take control of the shares after the loan went into default and even got permission from the Nevada Gaming Control Board to have the stock registered in its name. But the move was headed off by a recent private agreement reached earlier this month, Anderson said.

Anderson confirmed that Eureka Federal had backed off on its move to take control of the stock, saying in a brief telephone interview that “Everybody’s happy now.” He would make no further comment.

Eureka is also known for the lavishness of its headquarters. Its base of operations in the Bay Area--complete with waterfalls, luxurious offices and and tennis courts--are “probably the plushest in the industry,” said Pickslay, the veteran Home Federal Savings troubleshooter now running the S&L.; “I’m enjoying every minute of that.”

But it is the activities of Centennial Savings, a medium-sized institution, that are apparently raising the most eyebrows.

“Centennial, relative to its size, has as many problems as any savings and loan in the United States,” said Robert McNitt, an S&L; executive brought in from Great Western Savings in Beverly Hills to help run Centennial.

The firm lost $88 million in 1985 and had a regulatory net worth of a negative $91.4 million on March 31, according to figures from the Federal Home Loan Bank Board. Of its $387 million in assets, less than 55% were earning interest on March 31, its financial report show.

Received Big Bonuses

The old chairman of Centennial was Erwin Hansen, who once served as a chief accountant for the Federal Home Loan Bank Board in Washington. Regulators say Hansen received bonuses totaling more than $800,000 in 1983 and 1984. (Hansen, who lives in Santa Rosa, Calif., where the S&L; is now headquartered, could not be reached for comment.)

Although the S&L; has sold its twin-engine corporate prop plane, the Mercedes 600 limousine remains in a Santa Rosa warehouse. Title to the car has not been established yet, Great Western officials say. Further, the limousine, acquired in Europe, does not have the proper smog equipment.

Problems, of course, are not new to the S&L; industry, particularly in this decade.

Today’s MCP is actually a third-generation rescue operation whose roots go back to the early 1980s when soaring deposit costs, fueled by double-digit interest rates, caused horrendous losses.

Some failing S&Ls--undone; by low-interest, fixed-rate mortgages--were put into what was known as the Phoenix program, named after the mythological bird that arose from the ashes. Under the program, several failed institutions were placed under a single management on the theory that they could be managed more efficiently that way.

As the program evolved, some of the Phoenixes, as they were called, were eventually acquired by healthy institutions, while others--in Rochester, N.Y., and Chicago--remain in the program while regulators work to recapitalize them.

The MCP approach was first tried in California in 1982 when regulators seized failing Fidelity Savings & Loan in Oakland and installed executives from Home Federal Savings of San Diego to temporarily run the institution.

Fidelity Savings was later acquired by Citicorp and renamed Citicorp Savings. A similar scenario was acted out a year later with Biscayne Federal Savings in Florida.

But the 1986 MCP faces knottier and more expensive problems because it is loan quality, not high interest rates, that is causing most of the troubles, regulatory and lending experts say. That is the difference between a loan that is generating no income because the borrower is in default and a low-interest loan that is still generating cash even though the S&L; is not making money on it.

Rate Problem Soothed

Further, while the recent drop in interest rates has soothed the rate problem, it may take years to clean up or sell the troubled real estate loans, particularly in badly over-built office-building and condominium markets in California and Texas, lending experts say.

Regulators are clearly counting heavily on a recapitalization plan for the FSLIC now included as part of banking bill pending before Congress.

If the bill passes, it would pump an estimated $15 billion to $22 billion into the FSLIC, giving the rescue agency the resources it says it needs to promptly dispose of S&Ls; when they become insolvent. Hundreds of savings and loans across the country--that are not in the management consignment program--remain open today though they have negative net worths.

“The recapitalization will allow the Bank Board to resolve the problems more quickly than it has been able to in the past,” according to Cerona, the Federal Home Loan Bank of San Francisco president.

But the bill containing the recapitalization plan faces powerful opposition and its passage is far from assured. “So far, at best, it’s a definite maybe,” said Brian Smith, a researcher in the Washington office of the U.S. League of Savings Institutions, an industry trade group.

If the recapitalization try fails, some believe, a possible alternative is the merger of the FSLIC and the Federal Deposit Insurance Corp., the agency that insures customer deposits at commercial banks.

“FSLIC is doomed without the recapitalization,” said Peter Stearns, who headed the agency most of last year. “They won’t run out of money. They just won’t be able to deal with the problems.”