U.S. Shuts 2 S&Ls; Cost Is $1.3 Billion : Record Sum to Cover Insured Deposits at Insolvent Orange County Thrifts
Regulators reached into the government’s pockets Monday to return a record $1.35 billion to depositors of two insolvent Orange County financial institutions, a move that will severely drain the $3-billion nationwide fund that insures customer accounts at savings and loans.
Government officials closed the two firms--American Diversified Savings Bank and North America Savings and Loan--after trying unsuccessfully to peddle them to other institutions and after their practice of paying exceptionally high interest rates caused trouble in the industry.
Other savings firms have been forced to offer higher rates to keep their customers from defecting, and the competition for depositors has hurt the profits of healthy institutions.
California ‘Front’
M. Danny Wall, chairman of the Federal Home Loan Bank Board, said he considers Monday’s actions the opening of a “second front” against insolvent institutions that pay abnormally high rates for deposits. The initial offensive by the savings and loan regulatory agency started a month ago in economically depressed Texas.
The action also was taken to stem mounting industry losses, which last year reached a record $6.8 billion. About 400 savings firms recorded losses last year because of regional economic difficulties, mismanagement and fraud.
Regulators prefer to merge ailing institutions into healthy ones because such combinations involve less cost to the federal insurance fund. But American Diversified and North America were in such terrible shape that no other institutions wanted to take them over, and regulators were compelled to take the rare step of liquidating them by paying off depositors first and selling the firms’ assets.
Both institutions’ assets are expected to be worth far less than the total value of customer deposits. While regulators will pay out $1.35 billion to depositors, the total cost to the government for the closings is estimated at somewhat less--$931 million--after the firms’ assets are sold.
American Diversified and North America were declared insolvent and seized by the bank board more than a year ago, but they were allowed to continue operating under new managers hired by the board and its insurance arm, the Federal Savings and Loan Insurance Corp.
Full Backing of U.S.
The closings are the ninth and 10th liquidations by FSLIC since 1981, when regulators began seizing troubled savings institutions. The latest actions will reduce the FSLIC fund, whose money comes from assessments on the savings and loan industry, to less than $2 billion from the current $3 billion. Despite its relatively small resources, the insurance fund also has the full backing of the U.S. government.
The FSLIC will begin paying off depositors today. The agency insures deposits in each member institution up to $100,000 per account.
About $2 million in deposits at American Diversified are over the $100,000 insured limit; about $700,000 in accounts at North America are likewise uninsured. Those depositors will share in whatever proceeds the FSLIC eventually might receive from the sale of the two thrifts’ assets.
Regulators said American Diversified had about 13,500 accounts and North America had about 2,500. But very few if any of them are held by individual small depositors.
Nearly all the depositors at the two firms are sophisticated investors who were either shopping the country for unusually high returns or were solicited by the so-called money desks operating at each S&L;, said Mary Creedon, the FSLIC’s principal deputy executive director.
American Diversified was paying interest that averaged 8.64%, well above the national average of 7.08%. North America was paying an average deposit rate of 8.53%.
About 80% of the depositors were other financial institutions, including banks, credit unions and other S&Ls;, Creedon said at a press conference in Costa Mesa on Monday.
Estimated Shortfall
With the savings and loan industry deeply troubled by soured loans in energy and real estate, as well as fraud, the General Accounting Office reported that the FSLIC faced potential liabilities that would have put it $13 billion in the red at the end of last year. The congressional investigative agency said the FSLIC’s deficit could grow to as much as $30 billion to $65 billion in the next few years.
Members of Congress have noted, however, that the FSLIC fund is backed by the full faith and credit of the U.S. government. And bank board officials said $20 billion for the fund will be raised in the next three years through industry assessments and congressionally approved bond sales.
“A big concern of industry analysts is the sufficiency of the FSLIC fund to cover the whole list of problems beyond those handled today,” said Stephen Skaggs, vice president of Sheshunoff & Co., a financial industry consulting firm in Austin, Tex.
Monday’s action “is a positive sign,” he said. Through a recapitalization plan approved by Congress a year ago, “FSLIC got the money to liquidate them, and it did and that’s good,” Hanc said. “It reminds the average depositor that his deposit is insured.
“Besides, to a large extent, the average depositor probably doesn’t care. This is the playing out of a story that has been going on for a long time, so I wouldn’t expect that it will have much effect on confidence in the industry.”
The liquidations “are positive steps,” agreed Kirk Hallahan, a spokesman for the California League of Savings Institutions. “We are pleased to see the Federal Home Loan Bank Board take action. These are the second and third problem institutions the bank board has resolved in the past month in California.”
Confidence Called Firm
Noel Fahey, a senior vice president with the industry’s primary trade group, the U.S. League of Savings Institutions, said the liquidations are unlikely to further damage public confidence in savings and loans.
“In the thrift industry, we have had plenty of shocks over the past few years and, frankly, people are used to it,” Fahey said. “Besides, Congress has reaffirmed twice that it stands behind the (FSLIC) fund, and the public accepts that.”
The amount of money needed to cover American Diversified’s insured deposits--$1.14 billion--is nearly four times the $300 million needed to pay off depositors at Empire Savings in Mesquite, Tex., which previously held the dubious record for the largest pay-out. It will cost an estimated $209 million to pay off depositors at North America.
Neither of the closed institutions had a retail office to serve small accounts. American Diversified, seized by federal regulators in February, 1986, and North America, seized in January, 1987, both operated out of the same Costa Mesa office building.
About 100 employees at American Diversified and 30 at North America will eventually lose their jobs. But for the next few weeks, the FSLIC intends to keep them working on winding up the affairs of the two institutions.
Sharp Decline
“There were 60 people when I came here in 1983,” said Martha Manning, an American Diversified receptionist. “I saw it grow to 1,700 people and then go down to 100. Now we’ll all be gone. It’s sad.”
That rapid growth, which propelled the S&L; from $11 million to $1 billion in assets in a few years, was one of the major concerns of federal regulators. They accused American Diversified and its primary owner, Ranbir S. Sahni, of making inappropriate investments in wind farms and ethanol plants, and of mismanagement.
Sahni claimed that regulators did not understand his investment strategy, and he predicted two years ago when the firm was seized that the government would lose $300 million to $400 million on the deal. The FSLIC said Monday that it expects to lose $798 million on the S&L.;
Sahni and FSLIC are embroiled in a series of civil lawsuits filed against each other. Attorney fees billed to FSLIC are close to $15 million, Sahni said. FSLIC-hired lawyers acknowledged last fall that the bill had reached $10 million, the single highest legal bill ever received by the agency.
At North America Savings, regulators knew only that the S&L;’s capital was evaporating and that the problems involved sole owner Duayne D. Christensen’s business dealings with his confidante and companion, Janet F. McKinzie.
When they seized the S&L;, they found what they described as the biggest case of insider fraud in state S&L; history. Christensen died in a car crash hours before state regulators took over North America. The FSLIC, acting as receiver for the institution, has sued his estate, McKinzie and other parties for more than $40 million in fraud and racketeering claims.
Regulators said they expect to lose $133 million at North America.
Times staff writers John O’Dell and Floyd Whaley in Orange County contributed to this story.
