FCA Seeks $1.5-Billion Federal Bailout of S&L; : Irvine-Based Firm Hit by Huge Losses, Including $468 Million in ‘87, That Wiped Out Net Worth

Financial Corp. of America, hammered by continued heavy losses, on Wednesday proposed that the federal government come to its rescue with a $1.5-billion bailout of its operating subsidiary, American Savings & Loan, the country’s largest thrift.

Irvine-based FCA, which has been on shaky financial ground since it suffered a terrifying $6.8-billion run on its deposits in 1984, on Wednesday announced a whopping loss of $468 million for 1987, including $225 million in the fourth quarter alone.

The losses wiped out FCA’s net worth, and the firm’s liabilities exceeded its assets by $163 million at the end of 1987, FCA said. That means that if the firm sold off all of its loans, it still wouldn’t have enough money to pay off all of its depositors and creditors.

Even so, FCA’s top executive said the firm can still survive and prosper, citing the federal bailout of Chrysler Corp. as an “excellent example” of how the savings firm can turn itself around.

$195 Million in Capital

The financial institution noted that it still has $195 million in capital as defined by the more liberal accounting standards of U.S. savings and loan regulators. And in an apparent effort to reassure its depositors, it also pointed out that accounts are insured up to $100,000.

FCA’s worsening financial condition comes at a time of mounting troubles throughout the savings and loan business. Large pockets of the industry in the West and Southwest are hopelessly insolvent because of real estate development loans that aren’t making money.

Reflecting the enormity of the problem, the nation’s 3,200 savings and loans reported total losses of $2.5 billion in the first nine months of 1987, even though nearly 75% of the industry is making money. S&Ls; in Texas, Oklahoma, Louisiana and Arkansas alone posted losses of nearly $5 billion during this nine-month period, according to Sheshunoff & Co., a bank consulting firm in Austin, Tex.

Faced with the prospect of dealing with such massive problems, the Federal Savings & Loan Insurance Corp. itself received a $10.8-billion bailout package from Congress in 1987. FSLIC, the arm of the Federal Home Loan Bank Board that insures customer deposits up to $100,000 and takes over when an S&L; is insolvent, itself became insolvent at the end of 1986.

FCA’s difficulties have been hanging over the FSLIC like a dark cloud since 1984. The agency would have to shell out billions of dollars to either merge the American Savings unit with another S&L; or close the institution and pay off depositors.

FCA Chairman William J. Popejoy said American Savings, with nearly $34 billion in assets, can still survive on its own if it gets help from the FSLIC. “This company is still very much alive, and the successful turnaround of the Chrysler Corp. with government loan guarantees is an excellent example of how we could accomplish similar r1702065516Savings could return to financial health in the next three to five years if FCA gets a loan from the FSLIC, Popejoy said.

Plagued by Bad Loans

Since 1984, the financial institution has been plagued by a seemingly bottomless pit of bad loans in commercial and residential real estate that has gradually eaten up the firm’s net worth. The firm was able to keep its head above water in 1985 and 1986 when falling interest rates reduced its costs of obtaining deposits and enhanced the value of loans and other mortgage assets, which were sold off.

But after two years of modest profitability, the company lost substantial ground in 1987. The company earned a total of $149 million in 1985 and 1986. But when interest rates turned up sharply in the spring of 1987, it effectively cut off the company’s principal source of earnings.

The company has also suffered from continuing problems in real estate. In the fourth quarter, FCA added $236 million to a reserve to cover problems in real estate lending. These additions to reserves cut directly into operating profits. The reserve now totals $1.2 billion.

FCA’s announcement Wednesday appeared to be a trial balloon designed to see what regulators think of a possible rescue. Though no formal plan has been prepared, FCA would move promptly to prepare one if regulators react positively, Popejoy said in a phone interview.

“I think this is the best move the bank board could make,” Popejoy said. “It would cost them very little in cash.”

Bank board regulators responded with a statement that didn’t directly address FCA’s suggestion, noting only that “the board has received no formal request from FCA for an FSLIC loan.”

FCA’s Thinking

As envisioned by FCA, the FSLIC would provide $1.5 billion in financial assistance through what are known as capital certificates. These would be interest-bearing notes that would provide FCA with both cash and other non-cash capital.

The certificates would bear an interest rate of 8% and provide FCA $120 million annually in earnings, Popejoy said. The certificates would also count as capital that would raise the thrift’s net worth to required federal regulatory levels.

“This would give us the time to work on the problems that are vexing this company,” Popejoy said.

Such a plan also might give the FSLIC an ownership interest in FCA that would pay dividends in later years when the financial institution recovers its health, Popejoy said. A similar plan was instituted last year in the rescue of several failing S&Ls; in New Orleans.

Several outside observers, though, doubted whether the FSLIC could handle the financial burden.

“There is a lot of strain on FSLIC already,” said Gerald S. Haims, an analyst for Seidler Amdec Securities in Los Angeles. “It doesn’t have the wherewithal to sponsor this kind of rescue.”

FCA’s latest rescue proposal appears to have less in common with the Chrysler bailout, which depended in part on taxpayer backing, and more with the rescue of Continental Illinois National Bank several years ago that was contained within the commercial banking industry.

The bailout of Chrysler in 1979 was a $3.5-billion rescue effort that needed the approval of Congress. The package included a $1.5-billion loan guarantee backed by the government, along with $2 billion in financing raised through Chrysler workers, dealers and other creditors.

The bailout of Chicago-based Continental in 1984 was a banking-industry affair coordinated by the Federal Reserve Board and the Federal Deposit Insurance Corp., which insures savings deposits at commercial banks. A key part of the rescue plan was large borrowings from the Federal Reserve and a $5.5-billion line of credit from 28 private banks that enabled Continental to stave off a large run on deposits.

Federal savings and loan regulators have recently been looking for a less painful way to take care of the FCA headache. Regulators had been in intense talks to sell American Savings to Ford Motor and its thrift subsidiary, First Nationwide Bank in San Francisco. But the talks broke down three weeks ago, reportedly over the type of protection that the FSLIC would provide Ford against future losses in American Savings’ loan portfolio.

Ford Motor said it would put up $1 billion in cash but said it needed financial assistance from the FSLIC to effect the sale. Industry sources estimate that this would cost the FSLIC as much as $4.5 billion.