One of the nation’s biggest and best-run savings and loan firms Wednesday signaled that it is fed up with the federal insurance system for its deposits and asked to join the insurance fund for banks instead.
Great Western Financial announced that it has applied for regulatory permission to drop Federal Savings and Loan Insurance Corp. coverage of deposits in its 263 retail branches in California, Florida and Arizona in favor of insurance by the Federal Deposit Insurance Corp.
While federal S&L; regulators played down the significance of Great Western’s action, others saw it as having major symbolic significance. The move by the Beverly Hills firm sends a strong message to lawmakers that the healthiest members of the thrift industry are no longer willing or able to pick up the skyrocketing cost of the failure of sick savings and loans. S&L; fees paid to the insurance fund have risen sharply in recent years as the FSLIC has been forced to use its money for rescuing failing institutions.
“We think our chances are excellent and we will get out (of the FSLIC),” Great Western Chairman James F. Montgomery said in a telephone interview. The move would save Great Western at least $27 million a year in added insurance premiums and certainly far more in lower deposit costs, Montgomery added.
The financial problems of the FSLIC are the bane of the thrift industry, depressing stock prices and forcing savings and loans to pay more for deposits because they are generally perceived to be more risky than commercial banks. Due to a special assessment, insurance premiums on FSLIC members are much larger than those imposed by the FDIC.
“This is a very important statement,” said Peter Treadway, analyst for the investment firm of Smith Barney, Harris Upham in New York. “This is a signal that Great Western is not going to put up with any more (nonsense) and have its net worth stolen without a fight.”
Great Western is a conservatively run financial institution that used to have John Wayne as its chief advertising spokesman. A statue of the late actor still greets visitors at the entrance to the company’s headquarters on Wilshire Boulevard in Beverly Hills.
Financial analysts consider the company to be one of the best-managed savings and loans in the country. “In terms of overall capital ratios, asset quality and caliber of management, Great Western is the strongest savings institution in the country,” First Boston financial analyst Eric I. Hemel said in a recent report.
Great Western would continue to function as a savings and loan, not a commercial bank, under the plan it outlined Wednesday, a status it says is appropriate for an FDIC member. Though the line between S&Ls; and commercial banks has become blurred in recent years, the principal function of the traditional savings and loan was to offer home mortgages, while banks focused on making business loans.
Federal thrift regulators expressed skepticism at the importance of Great Western’s announcement. “By itself, it’s no big deal and it’s not crystal clear whether it’s legal,” said M. Danny Wall, chairman of the Federal Home Loan Bank Board, of which the FSLIC is a part. The FSLIC insures customer deposits totaling nearly $1 trillion.
However, Great Western’s move will be closely monitored by competitors who are likewise fed up with the special assessment, which was imposed by regulators in 1985 to fund the FSLIC’s increasingly costly rescues of failing thrifts. The added assessment costs the nation’s 3,100 FSLIC-insured S&Ls; more than $1 billion a year.
“We are watching with interest,” said Richard H. Deihl, chief executive for the parent of Home Savings of America, Great Western’s archrival.
Signal to Congress
Though Great Western’s move is not expected to cause a stampede of imitators, at least in the near run, the move signals rising frustration among healthy S&Ls; that they have to bear the rising cost of S&L; rescues. So far this year, the FSLIC says it has “resolved” the cases of 135 failing S&Ls.;
“This is sure to get the attention of the (Federal Home Loan) Bank Board and Congress,” said Norman Coulson, chief executive of Glendale Federal Savings & Loan’s parent firm. “Congress has got to address this problem sooner or later. They can’t continue tapping the healthy thrifts forever.”
Pressure is indeed growing on Congress to confront the problems of the FSLIC, whose job is to insure thrift deposits up to $100,000 per account as well as pay the bill when a savings and loan fails.
An industry consensus has been growing in recent months that the FSLIC needs a taxpayer bail-out, though that concept is bound to meet fierce resistence in Congress at a time when the huge U.S. budget deficit is a hot political issue. But the FSLIC’s troubles are likely to be a top priority of the 101st Congress, which convenes in January.
Estimates of the cost of cleaning up the thrift industry’s problems--which stem mainly from real estate development loans gone bad--range from $40 billion to $100 billion and more. Sen. William Proxmire (D-Wis.) has estimated that the taxpayers will have to ante up $20 billion to help pay the bill--an amount that would dwarf other private-industry bail-outs like those of Chrysler Corp. and Lockheed Corp.
At the end of 1987, the FSLIC had a negative net worth of about $13 billion, meaning that its debts exceed its assets by that amount. The FDIC, on the other hand, has a positive net worth of more than $18 billion.
Banking experts do not expect a rush to follow Great Western’s lead because Congress has a moratorium on such FSLIC-FDIC switches that does not run out until next August. Great Western, however, claims that it qualifies for an exemption to that moratorium because it indicated a desire to switch to FDIC insurance before the moratorium was imposed in 1987.
Great Western said it intends to accomplish the switch by merging its California, Florida and Arizona retail operations into a small thrift subsidiary in Washington state that already has FDIC insurance. Since the end of 1985, 34 financial institutions have switched from FSLIC to FDIC insurance.
Though most of the 34 are small compared to Great Western, another firm that wants to switch is Home Federal Savings in San Diego, a large, healthy thrift. Home Federal’s effort is in limbo while it pushes for California legislation authorizing establishment of a system for FDIC-insured, state-chartered savings banks.
A spokesman for the FDIC would say only that the agency would process Great Western’s application--reflecting FDIC’s official reluctance to grab away the strongest of the FSLIC’s members.