S&Ls; Receive Some Mixed Signals on Deregulation
Savings and loan executives couldn’t help feeling a little whipsawed over the past two days as they listened to federal regulators and industry leaders send mixed signals about the role of S&Ls; and industry deregulation.
Federal regulators previously had criticized thrifts for “exotic” investments such as the fast-food restaurants and wind farms that were part of the portfolios of two Orange County-based S&Ls.;
But they told nearly 300 S&L; executives at the 13th annual conference of the Federal Home Loan Bank of San Francisco that they can no longer exist on home loans alone.
But those executives who built financial fiefdoms based on the traditional mortgage business warned their colleagues that they should not stray from the special mission--home lending--that Congress set for them more than 50 years ago.
‘Twisted and Tugged’
“I feel like I’ve been twisted and tugged this way and that way and this way,” Gerald H. McQuarrie, chief executive officer of Downey Savings & Loan in Costa Mesa, said after a daylong session at the conference.
Perhaps more than any California savings institution, Downey represents the dichotomy in the industry.
It is a conservative, traditional thrift with more than 60% of its $3 billion in assets in home loans. Yet it is also at the forefront of unconventional activities with about 30% of its assets in direct investments--mainly shopping centers it owns or has interests in.
With approval from state and federal regulators, Downey has three times the direct investments that state-chartered S&Ls; normally are allowed and 10 times the amount federally chartered thrifts are permitted.
“It’s hard for us to understand,” McQuarrie said about the tug of war at the conference. “We just try to do what we know, which is building shopping centers. We’ve been doing it for 25 years.”
‘The Future Is Now’
McQuarrie’s bewilderment reflected a conference that on one hand gave leaders of a few of the nation’s largest S&Ls; a forum from which to criticize deviations from the traditional mission of the thrift industry, while on the other hand had regulators in the unusual role of cheerleaders for diversification.
“The future is now,” James M. Cirona, president of the Federal Home Loan Bank of San Francisco, said about the need to diversify. “You adapt to the new environment or you die.”
Cirona serves as the principal supervisory agent for the Federal Home Loan Bank Board in regulating S&Ls; in California, Arizona and Hawaii, one of the 12 districts in the regulatory system.
“The thrift industry will not survive on home lending alone,” said bank board Chairman M. Danny Wall in an interview during the conference.
Wall, who took over as chairman in July, said a slowing demand for loans and competition from banks, finance companies and other thrifts require S&Ls; to find new ways to remain profitable.
Brokered Funds Decried
He said many of the thrifts that failed in recent years, especially a few in Orange County, “set the parameters” for regulators in deciding how far to go with diversification.
Wall’s predecessor, Edwin J. Gray, for instance, and numerous industry leaders decried the use of brokered funds--the $100,000 jumbo certificates of deposit funneled by money managers into S&Ls; with high-yielding interest rates. Not only were the funds able to be moved quickly to higher-paying institutions--disrupting an institution’s operations--they raised the cost of money to S&Ls;, resulting in a thinner margin of profit or, often, a deficit.
Such “hot money” was blamed for contributing to the collapse of such thrifts as Butterfield Savings & Loan in Santa Ana, American Diversified Savings Bank in Costa Mesa and Consolidated Savings Bank in Irvine.
But managers hired by the bank board to run failed thrifts under its controversial management consignment program, usually found they had to continue using brokered funds just to keep operating. And healthy thrifts have long had their own money desks soliciting jumbo CDs.
“Now, the question is, where within those parameters do we operate?” Wall said.
‘Can’t Reverse Things’
Gray also initiated regulations that limit direct investments by S&Ls;, a move that incurred the wrath of such thrift owners as Charles H. Keating Jr., who chairs the holding company for Lincoln Savings & Loan in Irvine. While S&Ls; can seek bank board permission to get around them, the regulations have been perceived by some S&L; executives as another attempt to re-regulate the industry.
“We have to reflect on the environment in which we’re operating,” Wall said. “We can’t reverse things or go back in history. We have to deal with what’s out there now.”
The bank board and the district bank have already restructured their examining and supervising functions with the aim of creating so-called risk profiles of each savings institution to handle audits of S&Ls; with varying operations.
Such profiles focus not on the types of businesses an S&L; is engaged in so much as the expertise it has in operating those businesses. That change alone, a number of S&L; executives have said, has helped to ease tensions they had felt toward regulators previously.
But the encouragement by regulators to expand the markets in which S&Ls; compete was met with resistance by some industry leaders.
Touted as the Saviors
“Products highly touted as the saviors of our industry before are now abandoned, repackaged or heavily regulated,” said Ray Martin, chairman of Coast Savings in Los Angeles. “Real estate development, commercial loans and direct investments are not an automatic panacea for the industry.”
Richard Deihl, chairman of Home Savings of America in Los Angeles and a longtime advocate of keeping thrifts in the home lending business, ridiculed the topic he was supposed to speak on--the breakdown of geographic barriers as large S&Ls; move nationwide--and emphasized that thrifts should be only in mortgage and mortgage-related businesses.
Deihl and Martin also were angry that failing S&Ls;, especially those operating under the management consignment program, are paying high prices for deposits and taking them away from healthy thrifts at the same time the well-run institutions are subsidizing MCP operations through special assessments by the Federal Savings and Loan Insurance Corp. The FSLIC is the arm of the bank board that insures S&L; deposits up to $100,000 per account.
With $27 billion in assets, Deihl said, Home Savings must pay FSLIC assessments totaling $45 million this year, while New York’s Citibank, with $147 billion in assets, pays $35 million to the Federal Deposit Insurance Corp., which insures deposits at commercial banks.
Echoed the Sentiments
Martin claimed that there was “absolutely no justification” for healthy thrifts to keep paying additional assessments for FSLIC losses caused by collapsed S&Ls.;
Martin’s and Deihl’s appeals to stay in the mortgage business echoed the sentiments of Gray, the former bank board chairman.
In speeches he gave while in office, Gray criticized S&L; investments in such things as hamburger stands and wind farms. The criticisms were oblique references to Butterfield’s purchases of Wendy’s and Love’s eateries and American Diversified’s investments in wind farms, ethanol plants and other forms of alternative energy.
In a recent conversation, Gray said he was not trying to halt S&Ls; from engaging in the expanded investments permitted under deregulation but rather was trying to say that S&Ls; had to be better capitalized and know what they were doing before engaging in those activities.
The issue of diversification is really one of definition, said John H. Rousselot, a former congressman and now president of the National Council of Savings Institutions.
A Housing Mission
“Gray felt very strongly that the thrift industry had a housing mission,” Rousselot said. “He felt so strongly about it that he worked to define what home lending was, and his definition was very narrow.”
Gray believed that loans to developers of housing units, especially where S&Ls; had ownership interests in the projects or the companies, were direct investments, Rousselot said, and thus could not be used to meet the government’s definition of a thrift, which is that 60% of an S&L;’s assets must be invested in home amortgages.
Rousselot said a number of major operators built billion-dollar S&Ls; from mortgage loans at a time when that was all that savings institutions could do. Even so, he said, that doesn’t mean that managers with expertise in other investment areas shouldn’t be allowed to operate.
Now, to compete better and stay profitable, the definition of home lending could be broadened to include such an activity as car loans, he said.
That would be a welcome boon for Western Financial Savings Bank. The Orange-based S&L; was formed by the merger of an S&L; and a thrift and loan, which existed primarily as an auto loan lender. Western Financial has been making up to half its loans on cars, falling short of the 60% home lending requirement.
To come within the requirement, Western Financial pioneered a method to turn a pool of car loans into securities that it could then sell, thereby lowering its amount of auto loans and, conversely, raising the percentage of home loans to the 60% level.
