Accelerating Cleanup of S&Ls; Is Good News for County

Times Staff Writer

Beverly Hills Savings & Loan in Mission Viejo was the first troubled thrift in the nation to be seized by regulators and put into a new federal program that allowed it to remain open with new managers while merger prospects were sought.

That was in April, 1985.

Today, the S & L is swimming in more red ink than ever, and regulatory matchmakers still are looking for a mate. It’s a tough sell: Beverly Hills S & L has a negative net worth of $582 million, the largest deficit of any insolvent thrift still in operation.

Despite the difficulty in finding a solution for ailing institutions such as Beverly Hills Savings, the pace of S&L; mergers, acquisitions and liquidations is rapidly increasing.


In the last month, more than three dozen sick S & Ls have been eliminated through mergers. As of Friday, regulators had rid the industry of 104 insolvent thrifts since the first of the year, more than double the 48 removed in all of 1987.

Months, and in some cases, even years of efforts by the Federal Home Loan Bank Board and its insurance unit, the Federal Savings and Loan Insurance Corp., are now paying off. In recent weeks, public attention has been focused on the pending sale of the industry’s biggest basket case, American Savings, to the Robert M. Bass Group of Texas and on the bank board’s efforts to merge troubled thrifts in Texas and other Southwest states.

“The thing that’s important is that while we were going through the American process, we were also working on other cases,” said Roger Martin, one of three members of the bank board.

That should be good news for the thrift industry in Orange County, where more tombstones have been erected over failed S & Ls than in any county in the state.


In the last three years, federal regulators have seized, sold or installed new managers at 11 thrifts in the county. Six institutions no longer exist, having been either sold or closed by FSLIC.

The five remaining S&Ls; are being operated by managers hired by the bank board to keep the institutions afloat while regulators seek alternatives to closing them.

Three of those thrifts--Pacific Savings in Costa Mesa and Butterfield Savings and Perpetual Savings, both in Santa Ana--could be sold by the end of 1988.

The other two--Beverly Hills Savings and First California Savings in Orange--are expected to be sold or liquidated in six months to a year, managers at those thrifts said.


The five failed Orange County institutions are among at least 400 insolvent S&Ls; nationwide that the bank board and FSLIC want to merge with healthy companies or shut down and liquidate. The S & L failures across the country have been attributed to regional economic downturns, bad management or outright fraud.

The agency would rather marry off such institutions than bury them. It can keep merged institutions afloat by issuing promissory notes as capital. That allows FSLIC to repay those notes over time, and it is easier financially than paying a large amount of cash to liquidate them.

The June 6 closing of American Diversified Savings Bank in Costa Mesa, for instance, cost FSLIC its biggest cash pay-out ever--a $1.14-billion refund to depositors.

However, FSLIC notes are a sore point in Congress now. In congressional hearings over the pending American Savings deal, legislators have harshly criticized the board’s use of such notes. The notes are to be paid off over time using proceeds from special assessments levied on solvent S&Ls.;


A note for $500 million is part of the $2-billion in assistance that FSLIC is giving the Bass group to acquire American Savings, which was operated by Irvine-based Financial Corp. of America.

The promise to pay in capital over time not only eases the burden on the FSLIC insurance fund but also allows regulators to erase deficits while getting new capital from buyers who want to start with a clean slate.

That practice has other detractors. “The board has overissued notes by about 50%,” said Bert Ely, a Washington-area industry consultant. “That’s like someone with a take-home pay of $4,000 a month who has $6,000 a month in expenses.”

M. Danny Wall, the bank board’s chairman, and industry leaders are urging Congress to back the notes with the full faith and credit of the government, an action some argue is not needed because the ability of FSLIC to honor obligations already has such backing.


‘Failed-Again Thrifts’

Ely also criticized the bank board’s efforts to merge several ailing thrifts into one institution, saying those deals simply compound small problems into bigger ones without providing much new capital.

“They’re creating failed-again thrifts,” he said. “The new thrifts will be out there a few years and will fail again.”

But Martin believes the regulatory review process is so thorough that there won’t be any “failed-again” thrifts.


“We’ve got regulatory lawyers, contract lawyers, securities lawyers and so on,” he said. “Just read one of these 100-page assistance agreements and you’ll see how thorough they are.”

Regulators are anxious to sell as many insolvent thrifts as possible for several reasons. In the fiscal year starting Oct. 1, FSLIC losses will be counted as part of the federal deficit. Previously, only part of the losses were included. Ely believes the bank board wants to take as many losses as possible this fiscal year. At the end of the year, special tax benefits expire for companies that acquire sick thrifts. Congress, however, has a bill pending to extend the deadline for six months.

And insolvent S&Ls; operating with FSLIC help typically pay high interest rates to attract deposits and offer low rates on loans. Wall, pressed by leaders of healthy thrifts, has vowed to rid the industry of the unfair competition, which is driving up costs and shrinking the profit margins of the other S&Ls.;

The sheer magnitude of the 100-page assistance agreements and the review process they go through are part of the reasons that negotiations take so long. Martin spearheaded talks with the Bass group for eight months before an agreement was reached earlier this month.


“Negotiations in other areas of the country, like the Southwest, take time, just as the American case has taken time,” said William Fulwider, a bank board spokesman. “We’re at the point where a lot of them are falling into place, but it’s taken some time to get to this point.”

Martin acknowledged that the process of finding buyers for failed thrifts is slow.

“There were 124 insolvent institutions with $37 billion in assets in Texas, and we’ve only dealt with 35 of them with $12 billion in assets,” he said. “So only about a third of the problem there has been resolved.”

Problems involving 48 S&Ls;, most of them in Texas, are expected to be resolved this month, he said. The price tag for handling the disaster there will increase to more than $20 billion.


The long merger process starts when regulators determine that an institution’s problems are cleaned up enough to put it on the market. Then FSLIC seeks bids and, after the deadline for receiving bids passes, begins to negotiate with interested buyers.

In fact, at a recent conference in San Francisco, regulators encouraged prospective investors to buy struggling S&Ls; and even explained what to expect in bidding for them and in negotiating with regulators.

The rosy picture and upbeat mood did not sway some industry executives, however.

It takes a long time to negotiate with regulators and the government structure is difficult to deal with, Stephen T. McLin told some 350 investors. McLin is president of America First Financial Corp., which recently bought Eureka Savings and Stanford Savings in the Bay area.


He urged investors to “take the time to learn the ways of government and regulators.”


Ranked by negative regulatory capital

(In thousands)


Total Regulatory Capital Total Assets 1. Beverly Hills Savings, -$561,510 $1,620,241 Mission Viejo 2. Gill Savings, Hondo, Tex. - 477,127 1,362,534 3. Commodore Savings, Dallas - 426,321 724,707 4. Security Savings, Scottsdale, Ariz. - 291,055 784,752 5. First Texas, Dallas - 290,713 3,370,312 6. Champion Savings, Houston - 284,978 716,906 7. Savers Federal Savings, Little Rock - 240,688 974,523 8. Sandia Federal Savings, - 216,355 1,092,090 Albuquerque, N.M. 9. Creditbanc Savings, Austin, Tex. - 216,074 577,296 10. Guaranty Federal Savings, Dallas - 201,361 2,749,010 11. Freedom Savings, Tampa, Fla. - 196,941 1,611,458 12. Lyon Savings, Countryside, Ill. - 188,171 1,729,552 13. Alamo Savings of Texas, - 181,250 623,171 San Antonio 14. Pacific Savings Bank, Costa Mesa - 179,272 1,096,568 15. Commonwealth Savings, Houston - 147,601 1,785,572 16. Butterfield Savings, Santa Ana - 122,815 577,923 17. Cardinal Federal Savings, Cleveland - 101,658 1,559,805 18. Broward Federal Savings, - 95,687 602,951 Sunrise, Fla. 19. Baltimore Federal Financial - 82,902 1,810,715 20. Bright Banc, Dallas - 80,892 4,714,186

Source: Alex Sheshunoff & Co., Austin, Tex.