U.S. Seizes American S&L;, Erasing Stock Investments
The Federal Home Loan Bank Board on Tuesday seized control of American Savings & Loan Assn., apparently wiping out the value of stockholders’ investments and smoothing the way for sale of the thrift to Texas billionaire Robert M. Bass.
The bank board put American into a receivership Tuesday morning before the branches opened for business, a step that split the S&L; from its owner, Financial Corp. of America, and placed the institution under government ownership.
This effectively eliminates the value of the investments of shareholders in FCA, which derived its income from American Savings, regulators said. FCA, based in Irvine, Calif., said the bank board had rejected its request to pay its 12,000 stockholders for their losses.
The government takeover seemed to have no impact on daily business activities at the 187 branches of American Savings throughout California. Deposits up to $100,000 are guarded by federal insurance, and regulators previously pledged protection for accounts beyond the $100,000 figure.
Loans and other business transactions are untouched too. Interest rates will be maintained on current certificates of deposit and other accounts.
“We’ll have the same products, same services, same staff,” said Dianne S. Nelson, FCA’s manager of corporation communications. “It’s business as usual.”
In the long run, however, industry experts said consumers likely will find American Savings offering lower interest rates for new accounts and for the renewal of existing certificates of deposit when the Bass group takes control.
Continually buffeted by bad news, the financial institution has paid exceptionally high rates to attract deposits. The takeover by the Bass group, which is bringing $550 million in new capital, combined with a $2-billion federal aid package, should restore the financial health of American Savings, making it unnecessary to offer unusually high rates.
The rescue of American, the nation’s second-largest thrift institution, should ease the competitive pressure on other S&Ls.; The competition has been good for consumers but bad for thrift bottom lines.
“Every thrift manager in the state should be jumping for joy,” said Jerome I. Baron, financial analyst for Prudential-Bache Securities in New York. “It should enable them to bring their interest rates down. They have had to pay higher rates because of American’s presence in the marketplace.” American ranks second in size only to H. F. Ahmanson & Co., Los Angeles.
Fears in Congress
Meanwhile, federal regulators worked Tuesday to ease fears in Congress that the sale may be too generous to the Bass coalition of investors, who want to create a new bank to deal in profitable stock acquisitions.
Bank board Chairman M. Danny Wall said in letters to key members of Congress that his agency would keep strict control over the investment activities of the revived S&L;, rather than allowing it the widespread freedom given to thrift institutions chartered by California.
American would be split into what regulators like to call a “bad bank” and a “good bank.” The “good bank” is, in fact, a thrift institution made up of what is now American Savings, its network of offices, its retail deposits and its healthy loans and other sound assets.
The government also said American can have a merchant banking subsidiary, which will be allowed to invest in stock purchases and corporate acquisitions. Industry sources said this could give the Basses an investment kitty of up to $1.8 billion.
Merchant Bank Questioned
Congress remains skeptical of the role of the merchant bank.
“The question is, are you going to give a corporate raider access to a pot of money that is guaranteed by the government,” said a staff member at the House Energy and Commerce Committee, which will hold hearings Sept. 13 on the proposed acquisition.
Wall said he would keep a tight rein on the Bass group’s investment activities. “The Bass group has provided a business plan for the insured institution,” Wall said in his letter to members of Congress, but he did not provide any details of the plan. “The activities of the merchant bank are restricted in accordance with the operating agreement.”
The bank board’s takeover Tuesday creates a new government-controlled thrift that will be sold to the Bass group when the transaction gets final approval from the Internal Revenue Service and California regulators. Regulators hope that the deal can be concluded within a few weeks.
The “good bank,” to be called New American, will be a California-chartered S&L.;
Separate Unit for Trouble
What remains is a pile of troubled loans and other assets that will be grouped together in a separate unit also owned by the Bass Group. This unit also will hold American’s portfolio of mortgage-backed securities, on which the institution had suffered a major financial loss.
It is these bad investments that the federal government has agreed to support with a $2-billion guarantee. Basically, the Bass Group hopes to make the best of these bad investments, but the government will pick up any losses it suffers over the next 10 years.
In an unusual step, the Federal Savings and Loan Insurance Corp., the federal agency protecting deposits, would retain a 30% share in the institution after the sale to the Bass group.
Parallel to Chrysler
“If in fact the Federal Home Loan Bank will retain ownership, it is a unique and interesting approach very similar in some respects to the Chrysler bailout,” said Tom Stickel, president of TCS Financial and a former S&L; executive. “And let us hope we have the same success with this as we did with Chrysler.”
The swift pace of government activity in the past two days provided reassurance to American personnel without disrupting business.
“It does remove the cloud that was surrounding the whole situation of what was going to happen, the uncertainty,” said Donald Brown, a loan agent at American Savings’ San Diego loan center in Mission Valley.
“Everyone is being bought and sold, it seems. But things work out; they always have, always will,” Brown said. “American is a great company to be with. They are always up front. You always got news releases in your box telling you what was going on.”
The proposed sale, Brown said, “leaves one less advantage for competition. People were saying before, ‘Hey, you’ve got problems.’ Well, now we can say we have cash, lots of it.”
Although American customers were protected and employees reassured, the big losers in the American S&L; takeover are the people who bought stock in FCA, parent of the S&L.;
$811,000 Personal Loss Told
John Turner, a semi-retired real estate broker who lives in San Jose, Calif., owns 90,000 shares of FCA and said he will lose $811,000 if the complete value of his investment is wiped out.
“It was what I have expected in view of the way the Federal Home Loan Bank has acted in the past,” Turner said. “The shareholders of FCA have been the victims of a securities fraud that was perpetrated since August of 1984 on the financial markets. FCA died in 1984 and the Federal Home Loan Bank, because their (insurance fund) was insolvent and unable to close it down, put the patient on a resuscitator and even made it sit up and wave when people walked by to make them think it was alive. It was a deliberate action on the part of the Federal Home Loan Bank.”
Staff writers Chris Kraul in San Diego and Douglas Frantz in Los Angeles contributed to this story.
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