2 Costa Mesa S&Ls; Closed in Biggest U.S. Cash Bailout : Depositors to Recover $1.35 Billion
The Federal Home Loan Bank Board today announced a record $1.35-billion cash pay-out to shut down two insolvent savings institutions in Costa Mesa, Calif.
In rare move, the bank board closed American Diversified Savings Bank and North America Savings and Loan Assn. without arranging for a takeover by another institution.
The board said it will begin on Tuesday to pay off deposits up to the insurance limit of $100,000 in the two Orange County banks. A total of about $500,000 in both institutions exceeded the limit. Those depositors will share in liquidation proceeds.
Only 10 of 235 failed S&Ls; handled since 1981 have been resolved with a straight payoff of depositors. Usually, the bank board pays a bonus to a healthy thrift to buy a sick S&L; because it is cheaper. At the very least, the board arranges to transfer deposits to another institution.
Had Few Retail Deposits
But bank board Chairman M. Danny Wall said the unique characteristics of the two Costa Mesa thrifts made that impractical. They had little value as going concerns because they had few retail deposits and lacked branch offices, he said.
Both also relied on high-cost, short-term deposits arranged through brokers, which they in turn lent out for speculative real estate ventures and other risky investments.
Both institutions share the same headquarters and have been insolvent for some time. Regulators took over the management of American Diversified in February, 1986, and of North America in January, 1987.
The bank board is paying $1.14 billion from the Federal Savings and Loan Insurance Corp. to American Diversified depositors and covering $209 million in deposits at North America.
Wall said closing the two thrifts will help all S&Ls; by reducing pressure to pay high interest rates. Failing thrifts had to pay high rates to get the cash needed to meet expenses and some healthy thrifts have had to raise their rates to compete.
Paying More Than 8.5% Interest
North America was paying 8.53% interest on deposits, 1.45 percentage points above the average for all thrift institutions. American Diversified was paying 8.64%.
Bert Ely, a financial institutions analyst in Alexandria, Va., said the two Costa Mesa S&Ls; were prime examples of “several score” high-flying institutions that in the early and mid-1980s used federally guaranteed deposits to fuel rapid growth of shaky lending. Regulators were unprepared for the boom and failed to check it, he said.
“It was a systemic breakdown. What we are seeing are two of the more extreme examples of it. But they’re not the only ones out there. There are others,” Ely said.
“These two represented abuses,” bank board member Lawrence White said. “The whole essence of being a depository institution with government-provided insurance is that there is a strong . . . obligation to operate in a safe and sound manner. These two places did not.”
Previous Record $300 Million
Before today’s action, the largest cash pay-out was $300 million in 1984 to close the Empire Savings and Loan of Mesquite, Tex.
However, in transactions over the last year the bank board has bailed out insolvent institutions for as much as $2 billion, with most of the assistance coming in the form of notes or guarantees against certain kinds of future loss, not cash.
The bank board expects to recover about $400 million from the sale of the Costa Mesa S&Ls;’ assets. It estimates the ultimate cost of closing American Diversified at $798 million and of North America at $133 million.
The closing of the Orange County associations leaves the insurance fund with about $1.9 billion in cash to handle problems elsewhere.
