Biggest S&L; Rescue Yet to Merge 8 Texas Thrifts, Could Cost $5.5 Billion
The Federal Home Loan Bank Board announced Friday its biggest financial rescue effort ever, a massive deal costing as much as $5.5 billion that will combine eight crippled Texas savings and loan associations into a single big institution in hopes of attracting a buyer.
Among the eight institutions in the new package is Sunbelt Savings of Dallas, whose $1.2-billion loss in the first three months of 1988 made it the worst performer of all the nation’s 3,100 S&Ls.;
The promise of huge amounts of financial backing is the regulators’ high-risk strategy for disposing of the new mutual institution, which will be called Sunbelt Savings FSB and have assets of $6.9 billion.
The Federal Savings and Loan Insurance Corp. will provide a $2.5-billion note to the new institution and a promise to guarantee profits on assets that are losing money now. This promise, known as a yield maintenance agreement, could “elevate the total cost” of the rescue to $5.5 billion, said William Fulwider, a spokesman for the bank board.
Previously, the biggest thrift institution rescue was the $2-billion package provided in May for Southwest Savings of Dallas in its acquisition of four other thrifts. The nation’s largest bank bailout was the $4.5-billion rescue of Continental Illinois in 1984.
Tangle of Loans
Friday’s announcement came one day after the bank board moved outside the thrift industry in the search for new investment cash and said that a diversified steel and technology company had agreed to invest $48 million to acquire 12 failing Texas thrifts. The ultimate cost of that bailout to the nation’s S&L; insurance fund is estimated at $1.3 billion.
But the eight institutions folded into one on Friday are so badly submerged in a tangle of bad loans and high-cost funds that no outside help could be found.
When the bank board closes branches and takes other steps to consolidate the eight S&Ls;, “the surviving institution will be much more attractive to a buyer,” bank board Chairman M. Danny Wall said Friday.
The late afternoon bank board announcement of the S&L; rescue referred only to the $2.5-billion note. In response to questions, spokesman Fulwider acknowledged that there was a yield maintenance agreement, which could bring the total cost to an unprecedented $5.5 billion.
The bank board is using the complex system of notes and agreements to avoid direct cash outlays by its insurance fund, which guarantees S&L; deposits up to $100,000. The fund now has about $2.5 billion in cash, which would be insufficient if regulators had to close down the troubled thrifts and pay off the insured depositors.
$6.8 Billion in Two Days
In just two days, the federal regulators have pledged $6.8 billion to manage the rehabilitation of 20 of the 109 insolvent Texas S&Ls.; Many members of Congress, as well as financial experts, are increasingly skeptical of the bank board’s claim that it can manage the crisis without turning to Congress for a direct infusion of taxpayers’ funds. The money now comes from levies on the S&L; industry.
Instead of dissipating the comparatively meager cash resources in the insurance fund, the bank board has adopted a policy of propping up the ailing S&Ls; until they recover their strength or until they can be merged with healthy financial institutions or other businesses with capital to invest.
The $5.5 billion represents the potential exposure of the insurance fund. The exact amount to be spent will depend on the ability of the new institution to recover from its devastated condition, and the amount of outside capital available from any buyer.
“As it was, no bid to date for the group sufficiently realized the value of these institutions,” Wall said. “It is in our best interest and that of depositors and others in the Texas thrift industry for us to shrink these institutions to their core business, and sometime in the next year realize their full value.”
However, the huge potential cost of the rescue demonstrates the difficulty of cleaning up the worst cases in the crippled Texas savings and loan industry, battered by slumping oil and real estate prices. “I’m not surprised they couldn’t find a buyer,” said Bert Ely, an Alexandria, Va., financial consultant who monitors the S&L; industry. “All they’ve done is taken a bunch of minnows and sharks and come up with a big bloated whale,” he said. “This thing is still a ward of the Federal Savings and Loan Insurance Corp. There is no fresh money in it--no private investors bought it. Instead of eight in trouble, now you have one in bad shape.”
Some Resent Burden
The S&L; industry supported the bank board’s action on Friday. “We’re anxious to see these cases dealt with as quickly as possible,” said Mark F. Clark, senior vice president for public affairs at the U.S League of Savings Institutions. The bank board will “reduce the number of branches considerably, cut the costs of operations and make it a more appealing package to a buyer,” he said.
However, he noted that the healthy members of the S&L; industry are still resentful of being financially burdened by the special assessment that the bank board uses to replenish its insurance funds. About 25% of industry profits are consumed by payments to the insurance fund. The consolidated institution created Friday will be run by the management team that has been operating Sunbelt under the direction of the federal regulators.
In addition to Sunbelt Savings, the consolidated institution includes Western Federal Savings of Dallas; Independent American Savings of Irving; First City Savings of Irving; Federated Savings of Brady; MultiBanc Savings of Alice; Texana Savings of Texarkana, and Summit Savings of Dallas.
Western Federal, with losses of $70 million, and Independent American, with losses of $44 million, were among the 20 worst performing S&Ls; during the first quarter.
