MAVERICK BANKERS : Reined-In Executives Seek Showdown With Regulators
In the last four years, Orange County has made a dubious mark as a center for failed financial institutions.
It has chalked up seven bank failures, six savings and loan collapses--including the seizure of Santa Ana-based North America Savings on Friday--and a rare thrift and loan demise.
In all, the county has been the home of about 23% of the federally insured financial institutions that have failed in California since 1982.
The aftermath of the bigger busts is a trail strewn with acrimonious lawsuits, millions of dollars in unpaid loans and uninsured deposits and stigmas on the careers of many bankers.
Government regulators claim that former executives took huge risks with other people’s money to dabble in things they knew little about and to fund projects that benefited them and their associates.
The two federal agencies primarily responsible for mopping up after bank and S&L; collapses--the Federal Deposit Insurance Corp. and the the Federal Savings and Loan Insurance Corp.--have charged many of these executives in civil lawsuits with racketeering, fraud, theft, negligence and other misdeeds and improprieties.
But four of the most controversial of these Orange County financial executives are not slinking off into the night.
The founders of Heritage Bank, American Diversified Savings Bank, Butterfield Savings & Loan Assn. and Consolidated Savings Bank are digging in for long legal battles.
In an unprecedented war against the regulators, the four one-time banking chiefs claim overzealous government officials thwarted their rescue plans and prevented infusions of new capital needed to save their institutions--institutions that they now stand accused of ruining.
They claim that federal examiners drastically discounted the value of their holdings and that young, inexperienced agents imposed their will over business matters they hardly understood. The regulators, they charge, failed to live up to their obligations under supervisory and settlement agreements and, in effect, forced their institutions to fail.
Those claims are now gathering some support even from the more traditional sectors of the industry. The California League of Savings Institutions, the powerful S&L; trade group, has formed a special task force to analyze and make recommendations on complaints received by league members about federal examination policies and practices.
If the four Orange County bankers win--and no one has ever beaten the regulators badly--they would force drastic changes in the way the regulators handle troubled institutions. They would also walk away with millions of dollars in damages.
- Douglas E. Patty, 46, the bejeweled former head of the now defunct Heritage Bank in Anaheim, has sworn a fight to the finish with the FDIC, and he has the money to do it. He answered the agency’s fraud and negligence suit against him and others by filing a suit charging the FDIC with breaching a settlement agreement it had signed with him seven months before the bank failed in March, 1984.
- Ranbir S. Sahni, 50, a one-time Indian air force jet-fighter pilot, is challenging the federal government’s takeover of his American Diversified Savings Bank in Costa Mesa last February. He set up such a complex set of investment schemes that even industry consultants estimate that the FSLIC will lose at least $300 million trying to administer the S&L;’s ongoing transactions. Among his investments that regulators often criticized were wind-turbine farms in Northern California.
- Robert A. Ferrante, 36, a real estate developer and sole owner of Consolidated Savings Bank in Irvine, also has sworn to fight regulators to the end, and he also apparently has the money to do it. He responded to the FSLIC’s suit against him and others by suing the Federal Home Loan Bank Board, parent of the FSLIC, for breaching an agreement to review and approve Consolidated’s operating procedures in a timely fashion. A real estate deal he had with Sahni contributed to the downfall of Consolidated last May.
- Donald W. Endresen, 41, a real estate manager, syndicator and former chief executive of Butterfield Savings & Loan Assn., has sent letters to about 3,800 shareholders scoring the FSLIC’s “unchecked power” and “intimidation tactics.” He is seeking contributions for a special-purpose political-action fund to lobby Congress for a clamp on regulatory abuses. Though heavily criticized by regulators for buying the Love’s barbecue restaurant chain and a Wendy’s fast-food franchise territory, Endresen said that he had thought he was getting along well with the regulators in cleaning up Butterfield when it was seized.
Some regulatory executives blame deregulation for most of the bank and S&L; failures, but industry leaders said it was not windmill farms or hamburger stands that caused the major problems: It was entrepreneurs run amok.
“You make a bad loan or a bad investment, you can’t blame it on the regulators,” said Anthony Frank, chairman and chief executive of the giant First Nationwide Bank, a federal S&L; in San Francisco. “You shouldn’t have more than 1% (of total loans as) problem loans . . . but many of these guys have problem loans of 20% to 55%.”
Frank and other industry insiders say they believe that greedy and unscrupulous loans--not deregulation--cracked the foundations of the four Orange County operations, as such loans did at many banks and S&Ls; nationwide.
“Too much has been casually made of pointing the finger at deregulation without looking at what happened,” said Jerome I. Baron, an industry analyst with the New York brokerage firm of First Boston Corp. “The problem has been bad assets, the traditional types such as bad credit and construction lending on bad structures.”
Asset Quality Problems
Bank and S&L; failures in the early 1980s were caused more by soaring interest rates. That caused the institutions’ cost of funds to far surpass the income from their holdings of mostly low fixed-rate loans, said Harry W. Quillian, general counsel to the FSLIC.
“But now it’s asset quality problems,” Quillian said. “In the last two or three years, when we close S&Ls; and look at their portfolios, we see insiders engaged in egregious conduct. . . . They’re arranging for loans to themselves or persons affiliated with them, and they’re flouting supervisory directives that tell them to stop unsafe and unsound practices.”
In the last five years, the agency has collected $60 million from directors and officers or, primarily, their insurance carriers, “a good source for recovery,” he said. Insurance carriers reacted by pulling out of the market or increasing premiums by 400% or more, forcing many small institutions to go without director and officer insurance.
The fallout from the fast-growth era is not over yet. Last year 138 U.S. banks collapsed, more than at any time since the Great Depression. And the FSLIC has only $1 billion in reserves left, not enough to close down any major S&Ls; in trouble, although there are scores nationwide teetering on insolvency. (The FSLIC, an agency of the federal government, insures deposits at S&Ls; up to $100,000 per account. In the event of a failure, it is the FSLIC that seizes and, if necessary, liquidates the S&L.; The FDIC fills a similar role for banks.)
In state and federal civil lawsuits, regulators charge that Patty, Sahni, Ferrante and Endresen improperly lent millions of dollars to friends, relatives or insiders--and at a pace that outstripped their ability to manage their operations. The suits also claim that the entrepreneurs invested heavily in questionable real estate projects and syndications and a variety of other risky deals.
Basis of Lawsuits
The FDIC and the FSLIC claim that they have enough evidence of flagrant conduct to warrant substantial punitive damages in civil lawsuits.
More particularly, the agencies’ lawsuits allege that:
- Patty and others were negligent in a wide array of matters, such as approving million-dollar-plus loans for customers who were not paying off current loans and lending money to insiders--directors and officers of the bank--at rates more favorable than others could get and for riskier projects. The FDIC is seeking $150 million in damages.
- Ferrante and others, according to the FSLIC’s lawsuit, flagrantly violated state and federal laws and regulations in a series of transactions that benefited Ferrante and his associates. Eight loans amounted to more than seven times Consolidated’s reported regulatory net worth and more than 38% of its total assets at the end of February. The FSLIC is seeking $33.8 million in damages.
- Endresen and others, according to the FSLIC’s lawsuit, fraudulently concealed a change in a loan term that resulted in a $15-million loss, commingled Butterfield S&L;’s assets with its parent company’s books and conspired with brokers in the purchase of $85 million worth of real estate properties in the Pacific Northwest that resulted in excessive commissions and inflated prices that damaged Butterfield by about $20 million. The FSLIC is seeking $59.5 million in damages.
- Sahni, according to the FSLIC’s lawsuit, fraudulently inflated sales prices of at least two real estate properties, illegally obtaining a $500,000 kickback. He also mismanaged the S&L;, improperly paid a $558,000 bonus to the bank president and violated FSLIC regulations and orders. The FSLIC is seeking $72.2 million in damages. In a second suit filed in July, the FSLIC accused Sahni of fraud and racketeering in keeping nearly $1.1 million in municipal bond proceeds for himself. That suit, however, was recently settled, with Sahni receiving 10% of the proceeds and winning dismissal of the lawsuit.
Fast growth and an inability to underwrite loans properly “seem to go together,” said longtime S&L; lawyer Ernest Leff of Beverly Hills. Though he disagrees with the regulatory agencies’ methods of handling troubled institutions, he said federal officials are probably right in saying that the fast-growth operators put their institutions in jeopardy.
Crackdown on Entrepreneurs
Regulators at first encouraged entrepreneurs to open new institutions and to use the broader investing and lending powers granted under deregulation. But the regulators were slow to recognize the dangers of rampant growth in time to rein in the juggernaut.
When the regulatory hammer finally began falling, it cracked down primarily on the institutions led by entrepreneurs. Patty, Sahni, Ferrante and Endresen--all highly critical of regulatory policies and actions--claim that they were singled out because regulators were on a “vendetta” to wipe out those criticizing the regulators.
“If you have over 450 S&Ls; with negative net worth, and the only ones being put in conservatorship and receivership are entrepreneurial S&Ls;, . . . there’s no question that these elements have been singled out for shutting down,” Leff said.
A former state regulatory official, who did not want to be identified, said “there well could have been a vendetta” against those critical of regulatory policies, but many of the complainers were draining their institutions of needed capital.
“They can’t have it both ways. They can’t run their institutions into the ground and then complain about the treatment they’re getting,” said First Nationwide’s Frank, also a director of the Federal Home Loan Bank of San Francisco and one of the more influential voices in the industry. The San Francisco bank is one of 12 regional arms of the Federal Home Loan Bank Board.
Frank acknowledged that he and other heads of large S&Ls; advocated government action against operators who were forgoing traditional home lending and were putting their institutions in jeopardy. But he denied that entrepreneurial owners were the subject of any vendetta or target group.
‘They’re Reacting
“FSLIC appears to be heavy-handed . . . and the FDIC is pretty heavy-handed,” said Gerry Findley, a Brea-based financial institutions consultant. “But they’re reacting to the actions of some persons who never should have gotten into the business because they have problems handling fiduciary responsibilities.”
Yet, Findley believes, “had the leaders (of the failed banks and S&Ls;) been more responsive to the desires of the regulators, the regulators probably would have been less prone to move on them so aggressively.”
A prime example was Valencia Bank in Santa Ana, whose operators worked closely with FDIC officials and received numerous reprieves from the death knell as they pursued possible buyers for two years. The bank finally succumbed Feb. 7, 1986.
Regardless of the criticisms, say Patty, Sahni, Ferrante and Endresen, regulators not only tied their hands but took steps that ensured the ruin of their companies.
First, they said, they were cajoled or coerced into signing supervisory agreements, which granted regulators broad powers that effectively made them the managers. A constant barrage of demands for paper work and requirements for approval on the minutia of daily operations kept employees from their proper tasks and undermined operations, they said. Industry consultants said that the FSLIC and FDIC are ill-equipped to make the business decisions necessary to run the institutions and cut losses.
Then, they claim, examiners consistently devalued real estate used as collateral or held as investment, eviscerating capital and leading to insolvency. While appraisals on any parcel can vary as much as 20%, regulators “always” come in with appraisals that are lower by 20% or more, said Lawrence Taggart, former commissioner of the state Department of Savings and Loan.
Charges of Deposed Chiefs
“I’ve seen many shops that are very profitable, and immediately after an audit or examination, they’re in the red,” said Taggart, now an industry consultant.
Finally, the deposed Orange County chiefs charge, when they asked for approval of operating activities, which was required under supervisory orders, FDIC and FSLIC supervisors failed to act quickly--or often failed to act at all. Even new business plans and the potential sales of their institutions met with indifference or, worse, requests for more paper work, they said.
Spokesmen for the two agencies said they could not respond to general charges and were not allowed to talk about specific instances of alleged mistreatment by government employees.
Harry Quillian, the FSLIC general counsel, said his agency had received such complaints and was investigating them. He pointed out that the agency had doubled its staff in the last year and may have to weed out some people.
But, he emphasized, government auditors and examiners were carrying out the “get tough” policy ordered by Edwin J. Gray Jr., chairman of the Federal Home Loan Bank Board.
