High Rates Paid by Ailing S&Ls; Seen as Costly to Thrift Industry
Troubled savings and loan firms, which must pay well above market rates for deposits in order to stay in business, are probably costing the thrift industry at least $1 billion a year, the chief economist at the Federal Home Loan Bank Board in Washington said Tuesday.
“That’s real money,” economist James R. Barth emphasized in a telephone interview, noting that the thrift industry has nearly $1 trillion in deposits. Plagued by high costs for savings as well as a horrendous collection of bad real estate loans, the savings and loan industry lost $6.8 billion in 1987, an industry record.
Barth’s estimate of $1 billion in added interest costs came in the wake of the regulatory closure Monday of two insolvent thrifts in Orange County, North America Savings & Loan and American Diversified Savings Bank. Both paid depositors exceptionally high interest rates for their savings.
Stepped-Up Efforts
Savings and loan executives have been complaining for years about how badly run thrifts drive up industry costs by offering such high interest rates. Healthy thrifts have had to raise their rates to meet the competition.
The rates offered by “brain-dead” thrifts are “ridiculous” and create a “competitive imbalance” in the industry, said Fredric J. Forster, president of Newport Balboa Savings & Loan in Newport Beach.
The closures in Orange County are in line with stepped-up regulatory efforts by the FHLBB to close or sell off failed thrifts around the country. Many of the nation’s insolvent thrifts, which number about 500, are located in Texas, but California also has more than its share of problem thrifts, regulators say.
The Federal Savings and Loan Insurance Corp., an arm of the bank board, recently spent about $300 million to arrange the sale of Eureka Federal Savings, which has 35 branches in Northern California. The new owners put up $100 million in cash to take over the insolvent thrift.
The closures of American Diversified and North America are eventually expected to cost FSLIC more than $900 million and forced the government agency, which insures customer deposits up to $100,000, to ante up $1.35 billion to pay off depositors.
Though FSLIC is funded with industry money, the regulatory efforts to dispose of failed thrifts are going over well with managers of healthy thrifts. “This is in the best interest of the shareholders and the borrowers,” said Ray Martin, chief executive of Coast Savings & Loan in Los Angeles.
“As soon as they can get rid of all of those dogs,” industry consultant Gerry Findley said, “the more faith we all can have in the savings industry.”
Tried to Force Down
But what is good for the thrift industry is not necessarily good for consumers. Savers in California, for instance, have been enjoying windfalls for years as their neighborhood thrifts have offered attractive savings plans.
Beverly Hills Savings, for instance, still offers one of the highest savings rates in the state, even though the financial institution is hopelessly insolvent and has been operated under special regulatory supervision since 1985.
Butterfield Savings, an insolvent thrift in Santa Ana, ran an advertisement this week in the Wall Street Journal in which it offered a hefty interest rate of 8.25% for a one-year, $90,000 certificate of deposit.
Regulators have tried to force down rates by telling managers of the failing thrifts that their rates are too high, but the efforts have met with only limited success.
Indeed, the persistently high rates merely underscore a serious dilemma facing these financial institutions. If they were to lower their rates, they probably would not be able to attract the money they need to stay in business, consultants say.
“Any new money coming in is used to meet liquidity requirements, payroll expenses and lease expenses,” said J. Stephen Skaggs, a financial analyst for Sheshunoff & Co. in Austin, Tex. “It’s just a black hole.”
Noted Salvatore Serrantino, a consultant for California Research Corp. in Santa Monica: “It’s a matter of survival.”
Times staff writer James S. Granelli in Orange County contributed to this story.
VARIETY OF CD RATES
Annual yields on certificate of deposit account balances of $2,500 with one-year term as of June 3 in Southern California.
Troubled S&Ls; under special regulatory supervision
Perpetual 7.90%
Beverly Hills 7.84
Butterfield 7.74
First California
Savings in Orange 7.52
Manhattan Beach 7.50
Westwood 7.50
Banks
Wells Fargo 7.00%
Mitsubishi 6.85
Sumitomo Bank 6.85
Sanwa Calif. 6.85
Security Pacific 6.80
Bank of America 6.75
California First 6.75
First Interstate 6.55
Savings & Loans
Southern Calif. 7.85%
Columbia 7.79
Mercury 7.76
Lincoln 7.73
Fidelity Federal 7.71
Pacific 7.68
Republic Federal 7.66
Great American 7.65
American 7.63
Sears 7.60
Gibraltar 7.60
Far West 7.51
Home Federal 7.50
Household 7.50
Imperial 7.45
Union Federal 7.41
Citicorp 7.41
Pomona First 7.40
First Nationwide 7.40
Home Savings 7.36
Great Western 7.35
Valley Federal 7.34
World 7.32
Calif. Federal 7.30
Downey 7.25
Glendale Fed 7.25
Coast 7.05
