Troubled Companies : American Diversified Awash in Red Ink : Federal Regulators Can’t Win as Savings Bank Threatens to Founder

American Diversified Savings Bank--and the federal regulators who are keeping it alive--find themselves in a quandary as the institution’s deficit continues to grow.

If regulators were to close American Diversified now, the Federal Savings and Loan Insurance Corp. would have to pay off a $599-million negative net worth, the amount by which the S&L;’s liabilities exceed its assets.

If they keep the Costa Mesa-based savings and loan open in an effort to find an alternative to liquidation, the S&L;’s deficit will probably grow larger, industry sources said. In the third quarter alone, the institution’s negative net worth rose by $18 million.

That American Diversified will close its doors--perhaps as early as next year--seems certain, industry sources said.

If that happens, depositor accounts up to $100,000 will be insured by FSLIC. But the agency itself may take one of the largest hits in its history, approaching a record $681 million pay-out in 1986.

“There is no reason for American Diversified to exist,” said Thomas J. Haupert, who was hired as the S&L;’s president 14 months ago by the FSLIC-appointed board of directors.

Controversial Program

Spokesman for FSLIC and its parent agency, the Federal Home Loan Bank Board, declined to discuss the future of American Diversified.

The S&L; is operating under a management consignment program conceived by the bank board as a way to keep insolvent S&Ls; afloat while solutions other than liquidation are pursued.

The primary alternative available to the bank board is a possible sale. But no one is offering to buy American Diversified, regulators have acknowledged.

Meanwhile, American Diversified’s current officers have embarked on a strategy that will have almost the same effect as a liquidation. They’re selling virtually all of the S&L;’s assets but a few long-term notes.

At the end of June, American Diversified’s $581 million negative net worth was the worst of any of the 95 S&Ls; seized and managed by federal regulators, according to regulatory records.

“FSLIC is not going to fund a $581 million negative net worth,” Haupert said.

Declared Insolvent in 1986

American Diversified’s deficit includes $482 million in cash advances made by the FSLIC to keep the institution afloat since February, 1986, when regulators declared it insolvent, ousted Chairman Ranbir S. Sahni and his associates and placed the S&L; in conservatorship.

The S&L; has repaid the advances, Haupert said, but it has done so with depositor funds that are insured by FSLIC and that the agency would be forced to return to depositors, with interest, upon possible liquidation.

The S&L; had $700.6 million in assets at the end of September, a drop of $33.4 million since June 30, the end of American Diversified’s 1987 fiscal year. Its liabilities were $1.3 billion at the end of September, about the same as three months earlier. Comparable figures for September, 1986, are not available.

American Diversified’s future remains uncertain, primarily because FSLIC itself is recovering from insolvency with the help of recent legislation that will let it recapitalize its depositor insurance fund at a rate of $3.8 billion a year, until it reaches a total of $10.8 billion.

The agency’s largest single loss so far was $681 million paid as part of the 1986 liquidation of Sunrise Savings & Loan, a Boynton Beach, Fla., institution seized by regulators a year earlier.

FSLIC has also seized a number of S&Ls; in Texas, where some institutions operating under the management consignment program could cause the agency even bigger losses.

“It won’t surprise me if regulators close down American Diversified. They don’t know how to run it,” said former chairman Sahni, who owns 96% of the S&L;’s stock and contends that he will pursue ongoing court battles with regulators “to my last breath.”

General Accounting Office Report

A report from the General Accounting Office in September said 45 failed S&Ls; it had studied suffered greater losses under the management consignment program than they had under the operators that the bank board had kicked out.

The bank board, however, disputed the GAO report, saying the consignment program costs the FSLIC fund less in the long run than allowing them to continue operating under their former directors and officers.

Nearly all of American Diversified’s assets consisted of ownership interests in real estate. Haupert and his colleagues have been quietly selling off parcels contained in the S&L; huge real estate portfolio, and they are now negotiating to sell nearly half of its remaining real estate holdings in a package deal involving 37 properties.

Bids received by the S&L; for the package are not even close to the more than $300 million that American Diversified had put into the properties, Haupert said, but a sale should be completed by the end of the year.

Bids on another package of 11 remaining properties are due within a week. Haupert said he hopes to complete a sale by early January. The S&L; is carrying those properties on its books at about $110 million.

After the two packages are sold, the S&L; will be left with 32 properties in which it has invested about $190 million. It also has $8 million in loans made to real estate investment partnerships and $162 million in additional loans.

Earlier this year, American Diversified closed its only retail branch in Lodi, where the S&L; was founded in March, 1980, as Tokay Savings & Loan. Its modest fourth-floor office in the Great Western Savings building across from South Coast Plaza neither makes loans nor accepts deposits in person. American Diversified once occupied six floors in the building.

Deposits Pouring In

Mail and wire deposits, though, are pouring in--mainly in the form of $90,000 certificates of deposit sold by the S&L;’s money desk and through ads in the Wall Street Journal, Haupert said.

At the end of September, total deposits from U.S. depositors were $1.2 billion, nearly double the S&L;’s $636 million in deposits a year earlier.

The operation of American Diversified was doomed well before the federal regulators took over, according to their financial reports.

An audit for the 1985 fiscal year showed that the S&L; had a net loss of $48 million and a negative net worth of $34 million negative net worth at June 30, 1985.

But by the time regulators moved in less than eight months later, the S&L; had lost an additional $376 million, and its negative net worth had ballooned to $410 million, records show.

Sahni disputes the audit figures, saying that American Diversified had a $19-million positive net worth at the time it was seized. He says the losses and negative net worth were artificial because regulators had written down the book value of many of the S&L;’s properties to less than their true market value.

“I took a (real estate syndication) company from $10,000 in 1971 to a company with $24 million net worth in 1984 when I merged it into the S&L;,” Sahni said. “It’s crazy to think I can take a company that far and lose it in one year.”

But in its lawsuit against Sahni, the FSLIC says that the former chairman fraudulently inflated American Diversified’s financial reports to make it appear solvent, while, at the same time, he was mismanaging its assets.

Wind Turbine Loan

In early December, 1985, for instance, Sahni made a $6-million short-term loan to an energy company to build wind turbines in Tehachapi. When the loan came due at the end of the month, the company repaid the $6 million--plus a so-called release fee consisting of $6.8 million in notes.

While the fee income looked good on American Diversified’s balance sheet and helped lower the institution’s negative net worth by $6.8 million, the energy company had obtained the $12.8 million it needed to repay the first loan and the release fee by taking out another loan from American Diversified for $14 million.

Although the energy company made its required annual payment of $3 million last December, Haupert said he expects the company to default on its payment this year. The S&L; has already written down the value of the loan, he said, and it is negotiating to sell the loan to another energy company.

Sahni said his accountants approved the way the deal was structured. He pointed out that the $14-million loan is secured by the wind turbines.

“It was a good loan. It was not a loan to phony up things like they’re talking about,” he said. “Now it’ll be up to the courts to decide.”

When regulators seized American Diversified, they found one of the most complex organizations ever built by a savings institution.

The S&L; had a national trading center with desks set up to trade in financial, commodity and currency futures. “It was like going to Vegas,” Haupert said.

Computer Expenditure

The S&L; had paid more than $1 million to acquire a computer, but it was designed to run scientific programs instead of business programs. The machine was unable to consolidate the financial records of the S&L; and its 20 subsidiaries, Haupert said.

American Diversified continues to run a food-service trade center it owns in San Francisco. The S&L; leases the center for various trade shows.

The S&L; also has a group of “tech assets,” which are mainly energy-related properties and businesses. Those investments had come under fire from federal regulators, who have criticized non-traditional investments made by new S&Ls.;

The tech assets include two ethanol plants, three wind farms, a contract to collect manure for a planned co-generation facility in Chino, a national paging system and a cable TV system for American Diversified’s apartment complexes and other properties in 22 states.

Sahni has offered to buy the tech assets, but he has not yet come up with money to do so, both Haupert and Sahni acknowledged.

The company’s key assets, though, were more than 200 land parcels and developed properties in which the S&L; had invested directly and 52 more real estate limited partnerships managed by American Diversified. It also held minor interests in some of the limited partnerships.

In fact, operating under liberal state laws governing S&L; investments, American Diversified had become more of a real estate development company than a traditional savings institution.

Real Estate Deals Canceled

Under Haupert, the S&L; has bought out, sold out or rescinded several dozen real estate deals and investment syndicates.

A new S&L; subsidiary was created to rescind 27 real estate investments in which the institution sought public funding. Haupert said American Diversified had to get out of the deals because lawyers were worried about possible lawsuits over the S&L;’s failure to disclose the fact that it was insolvent at the time the offerings were made.

On Oct. 26 American Diversified regained operating control of the remaining 41 limited partnerships from Sahni, who had managed to usurp the S&L;’s control earlier in the month.

When they seized control, regulators also found that the S&L;’s records were in a disastrous state, Haupert said.

“There was no central file for the names of properties, and the names were changed constantly. Sahni apparently carried a lot of this in his head,” he said.

“One day, we needed a financial statement on a property for a loan. We went through records of three subsidiaries in six hours before we found it,” Haupert said. “Transfers of ownership on many properties were not completed, and titles to properties were uncertain. It took many, many hours to unravel everything.”

Sahni battled regularly with accountants and regulators over how to report various transactions, and he was late in reporting the S&L;’s financial condition. Both state and federal regulators and the Securities and Exchange Commission chastised him for his disorganized record-keeping.

Regulators also inherited about 140 lawsuits filed against American Diversified or its subsidiaries. “Former employees, vendors with liens on properties, developers, buyers, sellers--people on all sides of various deals--had filed lawsuits,” Haupert said.

Most of the litigation was turned over to the San Francisco law firm of Pettit & Martin. So far, 46 of the firm’s 206 lawyers have billed the S&L; for work done at FSLIC’s request.

The agency and the S&L; have paid Pettit & Martin more than $10 million in legal fees, much of it on litigation that the agency has filed against Sahni and that Sahni has filed against the S&L.;

Sahni, however, said that just a handful of lawsuits were filed against American Diversified and its subsidiaries and that most of them came from construction subcontractors. He also denied that his records were incomplete.

PROBLEMS AT AMERICAN DIVERSIFIED SAVINGS

Since the first quarter of 1986, American Diversified Savings’ negative net worth has increased more than ninefold.

Quarter ended: March June Sept. Dec. March June 1986 1986 1986 1986 1987 1987 Negative net worth (in millions) $63 107 132 522 554 581 Loss (in millions) $72.5 43.9 25.0 389.9 30.4 27.8

Based on Federal Home Loan Bank Board figures.