Bill Simon: Bottom-Fishing in S&L; Waters

When William E. Simon and Preston Martin ran into each other a few months ago at a christening ceremony for the child of a mutual friend, it proved to be far more than just a chance social encounter of old business colleagues.

As circumstance would have it, both were casting about for new careers. Martin had resigned in March as vice chairman of the Federal Reserve Board and Simon, a former secretary of the Treasury, had grown increasingly restive in his astonishingly lucrative career as a corporate buyout strategist.

After the christening (held in a hallowed Virginia church that George Washington used to attend), the pair talked at length about future plans. Martin said he was thinking of starting a mortgage insurance company.

When they talked by phone the next day, Simon told Martin: “You’re going for a (mortgage insurance company). I think I’ve got a better idea.”

The rest of the story is now unfolding rapidly. Simon is spearheading a group of investors, including Martin, that is taking a deep plunge into financial services.

The Simon-led group agreed last month to acquire a struggling savings and loan in Hawaii, Honolulu Federal Savings, and a 3-year-old financial institution in Beverly Hills, World Trade Bank, that has yet to show an annual profit. The group also disclosed that it owns another S&L;, little Westcoast Savings in Pacific Palisades, and is helping to operate still another that is in government conservatorship, Westwood Savings & Loan.

The Simon-led investors are also awaiting word from federal regulators about their bid for two other insolvent S&Ls--Southern; California Savings in Beverly Hills and Bell Savings in San Mateo.

And just last week, the investors formed a real estate investment and development company known as CM Partners, to be headed by Century City attorney Craig Gosden.

According to Simon, Honolulu Federal and World Trade Bank are the start of what he says will be a “mosaic of financial institutions”--located mostly in the Sun Belt--that will seek to capitalize on the burgeoning growth in financial services and Far East trade.

Established Moneymaker

The fact that an established moneymaker like Simon is focusing a large part of his attention on ailing savings and loans may bode well for an industry whose bottom ranks are in dire need of new capital and able management.

If Simon succeeds, “it will be a heartening sign for other investors to come into the industry and participate in a turnaround,” said William Ford, chief executive of Broadview Financial in Cleveland.

Putting Simon, 58, and Martin, 62, together represents a partnership of workaholics that combines Simon’s ability to raise capital with Martin’s extensive knowledge of the banking industry.

They first teamed up in the early 1970s when Martin enlisted Simon to promote the new idea of selling mortgage securities backed by conventional home loans. Today, it is a market worth hundreds of billions of dollars.

“I got the cold shoulder all over (Wall Street) until I ran into this fellow named Bill Simon, and he saw it like a flash,” said Martin, who was chairman of the Federal Home Loan Bank Board at the time. Simon then headed government bond trading operations for Salomon Bros., the investment banking firm.

Simon--his demeanor direct, his dark-rimmed glasses noticeably thick--later became a thoroughly familiar face to the American public when he acted as an energy spokesman for the Nixon Administration during the first crude-oil price crisis of the 1970s. His career has also included long and sometimes controversial stints as bond trader, Treasury secretary, author, lecturer, financier and conservative gadfly.

Lesser-Known Investors

Some of the lesser-known investors in his new group include: Gerald L. Parsky, a one-time Treasury Department aide to Simon and now partner in the Los Angeles law firm of Gibson, Dunn & Crutcher; Roy Doumani, chairman and president of the World Trade Bank holding company, and Larry B. Thrall, a real estate investor in Los Angeles.

Parsky is the key link among the investors. He worked at the Treasury Department and for Simon in various capacities through much of the early to mid-1970s. He served as Simon’s executive assistant during the energy crunch and later as an assistant secretary when Simon was named to head the Treasury Department in 1974.

In the past few years, Parsky has worked with Doumani and Thrall in their real estate investment activities, working variously as their attorney in some deals and partner in others. According to Thrall, the trio has an interest in a broad portfolio of real estate-- typically an office building--that is predominantly located in California.

Though the investors will not disclose their goals or financial resources, they do suggest big doings ahead. According to Simon, the group should have “major, major interests in thrifts and savings institutions” in the next couple of years.

Martin, who is to be an investor in only the S&L; properties, Parsky said, has assumed a major management role as chief executive of H.F. Holdings, the new parent of the Honfed, as the Hawaii S&L; is known.

Martin is working out of temporary office space in San Francisco, where he is hiring a full-time staff in anticipation of further acquisitions. According to Simon, the possible purchase of four more financial institutions is now under review.

The investors agreed to take over Honfed by promising to inject $60 million in new capital into the institution, which has been bedeviled by problem loans on unsold condominiums. With nearly $1.7 billion in assets, Honfed is Hawaii’s largest thrift.

Now Earning Money

In what was a regulatory-supervised takeover, the Simon investors agreed to put $20 million in new equity into the savings and loan and raise an additional $40 million in capital through the private sale of long-term debt. Though Honfed is now earning money, its net worth had been erased by loan writeoffs exceeding $90 million, Simon said.

The group is “bottom-fishing,” observed Philip Brinkerhoff, chief executive of Financial Corp. of Santa Barbara. “They think this is the bottom of the market.”

Simon does not dispute that he is trolling for good deals at the bottom of an industry whose poor performers are causing endless problems for the Federal Savings and Loan Insurance Corp. The FSLIC is the government agency that assumes control of an S&L; once it has failed.

Bell Savings and Southern California Savings, for instance, have sustained massive losses in recent years and now have an estimated combined net worth of a negative $350 million. Simon says that his bid to acquire these S&Ls; would require considerable financial assistance from the FSLIC.

During a recent interview in World Trade Bank’s futuristic offices, Simon said he will remain chairman of Wesray Capital, the New Jersey leveraged buyout company that in the last six years has catapulted him into the ranks of the U.S. super-rich. But he also said he is paying less attention to those operations now.

Simon, the son of a Patterson, N.J., insurance agent, is now said to be worth well in excess of $250 million. “It’s a lot,” he said, declining to be more specific. “It’s an incredible amount.”

Wesray has thrived by acquiring corporations through leveraged buyouts, then reaping huge profits by selling stock to the public. (In a leveraged buyout, a company is purchased by borrowing against its assets, and the debt is repaid with cash from company operations and by selling off assets.)

Makes Fast Profits

So successful has Simon been in making fast profits that some S&L; executives are questioning his motives. “There’s a suspicion that he’s just out for the quick buck,” said one industry official, who asked not to be identified.

Such anonymous talk irritates Simon. “I don’t care what people think,” he snapped, showing the impatience well known to associates. Anyway, he added, “I don’t know how to make a quick buck with S&Ls.;”

Simon certainly has his detractors, who label him blunt, abrupt and arrogant, but the flip side is that he is admired for his business acumen, directness and loyalty. “He’s not out to win any popularity contests,” Parsky said, “but he deals very staightforwardly with people.”

A booster of conservative causes, Simon is never far from the limelight.

In one notable newspaper comment earlier this year, Simon called the president of Dartmouth College a “wimp” because 10 students had been suspended in connection with a raid they made on several anti-apartheid shanties located on campus.

The students were associated with the Dartmouth Review, an off-campus student newspaper that Simon says he helped fund. Simon condemned what he felt was a “double standard” toward the conservative Dartmouth Review students, while anti-apartheid demonstrators were only lighly punished when they occupied some school administration offices during one of their protests.

Dartmouth President David McLaughlin later lightened the penalties on the 10 suspended students and said he regretted that the school’s disciplinary panel had not given the anti-apartheid protestors “meaningful penalties.”

Other Causes Vary

Simon’s other causes vary. He spoke out against budget deficits, military buildups and drug abuse by high school students. He has also opposed U.S. Catholic bishops for their allegedly liberal biases and has advocated a single, six-year term for President of the United States to make the office less political.

A former head of the U.S. Olympic Committee, Simon is likewise a sports nut who relaxes as vigorously as he labors. He spent part of a recent business day in Los Angeles body surfing at the beach in Santa Monica.

Working with such a colorful and dominating figure will not be anything new for Martin, who spent much of his time at the Federal Reserve in the ample shadow of the 6-foot-8-inch, cigar-smoking chairman of the Fed, Paul A. Volcker.

Though not as charismatic as Simon and nowhere near as rich, Martin is nonetheless no wallflower and is well known in national banking circles. His career has included long stretches as regulator, academic, corporate executive and entrepreneur.

Martin resigned as Fed vice chairman after he apparently became convinced that he would not succeed Volcker, but not before he had well-publicized disagreements with the powerful chairman over Third World debt problems and the direction of interest rates.

What money Martin has was apparently made when he sold the mortgage insurance company he had founded to Sears, Roebuck in 1973. But Martin scoffs at reports that he is worth as much as $10 million.

“That,” he said with a chuckle, “is a marvelous exaggeration.”

But it is Martin’s experience in the savings and loan industry that sets him apart in his new job. In addition to his mortgage insurance firm, he was chief executive of a California S&L;, Allstate Savings, while working for Sears, Roebuck, and served as a top regulator for the savings and loan industry in California and on the federal level.

Most Lasting Mark

Martin-watchers say he left his most lasting mark on the Federal Home Loan Bank Board, where he was chairman from 1969 to 1972. While there, he helped found the Federal Home Loan Mortgage Corp., an agency founded to provide the thrift industry with a resale market for its home loans.

Freddie Mac, as the agency came to be known, buys mortgages from primary lenders, giving them the money they need to make more home loans. Then, with the help of Wall Street, Freddie Mac packages them for sale to other investors. It was in this early stages of this now-booming business that Martin and Simon first got acquainted.