Bank, S&L; Regulators Want More Power to Oust Mavericks

As the sole owner of Ramona Savings & Loan Assn. in Orange, John L. Molinaro reviewed the latest certified financial statement and decided the small S&L; could pay him a $2-million dividend.

On May 9, the association’s board of directors complied. Molinaro already was earning $40,000 a month in salaries plus $3,000 a month in expenses.

But the payment alarmed officials at the California Department of Savings and Loan, which regulates state-chartered S&Ls.; They determined that the dividend payment rendered Ramona insolvent, and the agency issued a “cease and desist” order, compelling Molinaro to return the money to the institution.

When Molinaro refused, the state agency filed a lawsuit Aug. 15 seeking a court ruling to enforce its order. But the Orange County Superior Court could not rule fast enough to suit regulators and would not remove the money from Molinaro’s control pending a court decision.

So on Sept. 12, state and federal regulators seized the 59-year-old Ramona and its $108.1 million in assets.

The collapse of Ramona illustrates the growing concern that the government’s ultimate weapon--the ability to seize and shut down a bank or S&L--may; in fact be its only effective weapon against what it considers to be outlaw bankers.

“What we’ll have to do (from now on) is if an institution becomes insolvent, we’ll have to take it over right away,” said William J. Crawford, the state S&L; commissioner.

Short of taking over an institution, executives at the state S&L; agency and the California Department of State Banking believe they do not have other powers to act swiftly and effectively enough to control irresponsible, improper or illegal actions by S&L; executives.

The powers of the state agencies are not as broad as those of the federal agencies, but the state can move faster in taking action against banks and S&Ls;, federal officials say.

Federal agencies also are facing more legal challenges to their actions, and some courts are listening. On Jan. 13, for instance, a U.S. District Court judge in Washington upheld the Federal Home Loan Bank Board’s method for evaluating an S&L;’s assets but ruled that the bank board could not rely solely on its lower reappraisals as grounds for taking over the institution.

Since last fall, when certain provisions of the 1982 federal financial institution deregulation law expired, federal agencies have been required to seek court approval for many of their actions, including seizures of troubled institutions. They also have an entire nation to cover and may end up spending much of their resources in one area, as they did this past year in Texas and Oklahoma, and leaving some enforcement problems with the states.

Crawford said he is working on formulating legislation that would provide his office with the ability to act quickly. The state banking agency plans to seek legislation that would give it the power to remove officers or directors that are injuring their institutions, said James F. Carrig, the agency’s chief counsel.

But their proposals irk some industry representatives.

“They have awesome powers,” said Ernest Leff, a Beverly Hills lawyer who represents S&Ls.; “The idea they need more is mind-boggling.”

Dennis F. Fabozzi, a banking lawyer in Santa Ana, said increased powers will jeopardize the free enterprise system, even a system that has safeguards for financial institutions.

“When you say regulators can set a bank’s policies and procedures, tie the hands of directors and officers and now say who is working there and who isn’t, aren’t we truly nationalizing a bank?” he asked.

The regulators don’t see it that way.

Paramount Concern

With the public’s money on deposit and federal agencies insuring that money up to $100,000 per account, regulators say the safeguarding of those deposits and the protection of the insurance funds are of paramount concern.

Last year, federal regulators seized 138 banks nationwide, the most to fail since the Great Depression. Recently, L. William Seidman, chairman of the Federal Deposit Insurance Corp., predicted that even more banks would fail this year.

The Federal Savings and Loan Insurance Corp. can no longer afford to close any of the major troubled S&Ls; because its reserves have dropped to $1.9 billion, according to congressional testimony last week. It is awaiting congressional approval of a recapitalization plan that would pump up to $15 billion into its fund. A new wave of S&L; takeovers is expected to start once the FSLIC gets approval for the recapitalization plan.

Meantime, Crawford’s new aggressiveness comes as a boon to FSLIC.

Crawford put North America Savings & Loan Assn. into conservatorship Jan. 16, barely a month after learning that the Santa Ana institution had lost $8.9 million in the first 11 months last year and had a negative net worth of $1.5 million at the end of November.

The state agency’s action against North America Savings marked the first time in at least 35 years that the commissioner has acted without the aid of federal regulators in seizing an S&L.;

On Friday, the FSLIC took over for the state. It put North America into receivership and transferred the assets to a new federally chartered S&L; to be operated under a new management team. Federal regulators said they acted because they have broader powers to remove officers and directors.

Both the Ramona and the North America Savings cases emphasize the “get tough” policy Crawford warned industry leaders and consultants about last summer, said Gary Findley, a Brea lawyer who represents financial institutions.

Order Didn’t Work

But getting tough, to Crawford, means putting some teeth in the agency’s cease-and-desist orders and gaining other “intermediate” powers. Such an order is the second most drastic weapon that either state agency can take, said lawyers representing the agencies. In the Ramona case, for practical purposes, it didn’t work, Crawford said.

“The law says you’ve got to prove that a guy knowingly and willfully did something wrong, and you can’t prove it that quickly,” Crawford said. “If you go to court, the judge is worried about the owner’s rights. So he holds hearings and so forth.

“But the institution, meanwhile, is taking in the public’s money, and we don’t know what it’s doing with it. If there’s a threat of insolvency, we’ve got to move fast,” he said.

For state-chartered banks, the state banking agency is the primary regulating authority. “We want to be in a position to take appropriate action ourselves when it becomes necessary to remove an officer or a director,” Carrig said.

The banking agency’s proposal, not yet submitted for legislative action, would set up a three-prong test that regulators have to meet before ordering the removal of a bank executive. The state agency, Carrig said, would have to find first that the executive violated state law or committed unsafe or unsound acts. Then the agency must find that the bank suffered a substantial financial loss and that there is evidence either of personal dishonesty or willful disregard for the bank’s safety or soundness.

“We hope bankers realize this power is necessary and that there are adequate safeguards,” he said. Besides requiring specific proof, the proposal would require that the executive have notice of the state’s claims and an opportunity to be heard. In special circumstances, the agency would be able to act first and hold a hearing later, he said.

Some Disagreement

Not everyone agrees, though, that regulators need more powers.

“They have all the powers they need,” said S&L; lawyer Leff. “They have the choice of keeping an institution alive or tubing it. And the powers to do either currently exist.”

In particular, he said, federal regulators have the power to remove board chairmen and presidents, as they did in the case of Financial Corp. of America in Irvine and its subsidiary, American Savings & Loan, the nation’s largest S&L.;

Rather than going through the cumbersome, court-assisted removal process at FCA, however, federal regulators pressured Charles Knapp to resign as chairman. After regulatory officials said publicly that they feared for the company’s “continued viability,” a run on deposits began at the S&L.; An unexpected quarterly loss spurred the run. Eventually, depositors pulled out $7 billion, the biggest run ever on an S&L.;

When American sought to borrow funds from the Federal Home Loan Bank of San Francisco to stem the run and save the institution from collapse, Knapp was told there would be no loans unless he resigned.

He did, and regulators loaned American Savings $3 billion under an agreement that gave the government a contractual right to dictate company policies, receive weekly reports and approve all management changes. FCA board members have said privately that Knapp’s successor, William Popejoy, was handpicked by federal regulators. But Popejoy maintains that the board was not pressured by the government.

Four maverick Orange County bankers deposed in regulatory takeovers--Douglas E. Patty, Donald W. Endresen, Ranbir S. Sahni and Robert A. Ferrante--have argued that regulators can take such stringent actions that government examiners are placed in the role of making routine, as well as major, business decisions.

That is not a role regulators can or should play, banking lawyer Fabozzi believes.

“If you want to reward entrepreneurs and have private free enterprise, you’re going to have failures and you’re going to have successes,” he said. “If the regulators gain any more power, we’re going to tilt toward the nationalization of banking.”

At Valencia Bank, a client of Fabozzi’s firm, regulators went through “a tremendous administrative exercise,” giving the Santa Ana bank every benefit of doubt, before seizing and closing it last February, the lawyer said. Through their efforts, though, they controlled the bank’s loan and collection policies, its internal procedures and nearly every other aspect of the daily operations, the lawyer said.

“They have the power to make a bank president jump as high as they want him to,” Fabozzi said. “How much more power do you need?”

Testing Power Limits

The state S&L; agency is testing just how much power it does have.

A state Court of Appeal panel in Santa Ana is expected to decide if Crawford can use a cease-and-desist order to force Molinaro to return the $2-million dividend he received from Ramona S&L.;

Such orders typically prohibit executives from doing something in the future. Molinaro’s lawyers claim in court papers that the order cannot be used to reverse an action he already took.

The $2-million dividend, of course, is not the only problem state regulators and the FSLIC found at Ramona.

In the state agency’s action and in a $25-million lawsuit filed in September by FSLIC in U.S. District Court in Los Angeles, the regulators accuse Molinaro and former S&L; co-owner Donald P. Mangano Sr. of causing Ramona to buy properties from them or their companies at unfair prices, to fund construction projects with their affiliates to the S&L;’s detriment, to fund loans at amounts higher than the security was valued at by the S&L;, to sell real estate to their affiliates in sham transactions to artificially inflate Ramona’s financial results and to make favorable loans and salary and fee payments to them and others.

It also claims that the certified audit Molinaro relied on to obtain the $2-million dividend was faulty and that he knew it. The audit by Tustin accountant Mike Sage said Ramona’s net worth was $8.3 million, but regulators later determined it was a negative $19.6 million.

Sage withdrew his audit in an August letter to regulators that stated “several audit adjustments” not reflected in the financial statement “could lead to material differences” and “incorrect conclusions on the financial condition of the association.”

Sage is the only defendant named in the FSLIC suit who cannot be found, according to court records and FSLIC lawyers. Nine days after Molinaro received his dividend, Sage cashed a $75,000 check from Molinaro at Ramona and demanded payment in $100 bills, said Edwin W. Duncan of Los Angeles, a lawyer for the FSLIC. Sage did the same thing the next day with a $45,000 check from Molinaro, Duncan said. The money was in addition to $143,930 he received from Ramona for the audit and other services.