How a Texas S&L; Ends Up Costing the U.S. So Much

Edwin T. McBirney III cut a wide swath through the lending circles of this city a few years ago when he owned and operated Sunbelt Savings Assn., known as Gunbelt Savings during the go-go McBirney era.

High-strung and jet-fueled, McBirney was widely known as “Fast Eddie” because of his love for big development deals done with flair and dispatch. With a big cigar in hand, McBirney was an overpowering figure who would barge into a room full of borrowers, bang on the table and tell them what kind of loan they were going to get.

“He was,” one Dallas banking attorney recalled, “a total piece of work, as we like to say here.”

Though the McBirney era has long since passed, it left behind fatal legacies for Sunbelt, including staggering losses on real estate development loans that led to its eventual failure. Sunbelt Savings was “a can of worms,” said H. Joe Selby, a former thrift regulator in Dallas who used to oversee Sunbelt, in a recent interview.

The story of how Sunbelt Savings got that way is a saga of questionable lending and management, explosive growth and charges of civil fraud against McBirney, who was both Sunbelt’s chief executive and major shareholder. He left his job with the firm in 1986 when regulators pressured him to resign.

McBirney declined to be interviewed for this article, but he has strongly defended himself in court and has blamed Sunbelt’s current problems on Thomas J. Wageman, who succeeded him as chief executive in 1986.

Sunbelt posted a loss of $1.3 billion in first three months of 1988, the worst ever in the savings and loan industry. Then, on Aug. 19, federal thrift regulators effectively nationalized Sunbelt and lumped it together with seven other failed thrifts as part of the costliest S&L; rescue ($5.5 billion) ever tried by the U.S. government.

Today, Sunbelt stands as a glaring example of why the Federal Savings & Loan Insurance Corp., the thrift industry’s deposit-insurance fund, is so deeply in debt. Troubles in Texas that mirror those at Sunbelt have played a major role in the thrift industry’s ballooning losses, which have already surpassed $9 billion in 1988.

A possible taxpayer bailout of FSLIC will loom large over the 101st Congress, which convenes in January. The cost of a bailout for FSLIC, which foots the cost of thrift failures, is estimated at from $50 billion to $100 billion and is rising at a rate of $1 billion a month.

Sunbelt’s rise and fall also mirror the vicissitudes of the Texas economy in this decade--so brisk early on and so lame down the home stretch. Soaring oil prices fueled a real estate boom, then plunging prices helped trigger a bust.

“In Texas, we don’t have a problem,” Wageman said in an interview at Sunbelt’s headquarters. “We have a collapse.”

The major complaints about McBirney, who resigned as Sunbelt’s top executive 2 1/2 years ago, are contained in a company lawsuit filed in June against 14 former Sunbelt directors, including McBirney, and its erstwhile outside accounting firm, Grant Thornton.

The picture of Sunbelt that emerges from the court papers--and buttressed by interviews and local news reports--is one of a cozy world where lenders, directors, borrowers and brokers made big dollars scratching each other on the back.

According to the lawsuit, Sunbelt violated dozens of prudent lending rules as it loaned hundreds of millions of dollars on development projects that were not economically viable or properly supervised. Though most of its assets were in Texas, the thrift also owned about $700 million in commercial real estate in Southern California.

McBirney took Sunbelt Savings on a “4 1/2-year spree of aggressive real estate lending” though neither he nor his business associates had “any significant experience in real estate lending” before 1981, the suit charged. Sunbelt was run more like a “speculative real estate investment company . . . than as a federally insured financial institution.”

In its heyday from 1983 to 1986, Sunbelt Savings had few equals among lenders when it came to frills. The financial institution owned seven airplanes between 1982 and 1987, court records show, while McBirney ran up company-paid limousine bills of nearly $70,000.

At its nadir on Aug. 19, Sunbelt Savings had one of the worst balance sheets in the industry. Its debts exceeded assets by $1.9 billion.

Wageman, 54, and McBirney, 35, hail from opposite ends of the banking industry and have butted heads in recent months like two angry rams.

Their conflict is spelled out in the June lawsuit as well as a countersuit McBirney filed several weeks later in which he called Wageman’s management at Sunbelt “a complete and unmitigated disaster.” Sunbelt was a “successful, rapidly growing and financially strong operation” while he was there, McBirney claimed.

McBirney was part of the group of real estate developers who, like moths to light, flocked into the thrift business in the early 1980s after lawmakers in capitals such as Washington, Austin and Sacramento vastly expanded the areas in which thrifts could invest their deposits.

It was a time when high interest rates were causing huge losses in the thrift industry, and the new breed of well-heeled entrepreneur was welcome. “The regulators welcomed those guys with open arms,” recalled L. Linton Bowman III, the Texas thrift commissioner from 1983 to 1987. “They simply wanted that capital.”

Wageman arrived at Sunbelt Savings in late 1986 after working for large commercial banks in Chicago and Midland, Tex. Popular with regulators for his hard-nosed style, he is a loan-turnaround specialist whose importance has risen as the U.S. banking industry has deteriorated.

He came to Texas in 1983 to shore up troubled First National Bank of Midland but, through no fault of his, the rescue effort ended shortly after liftoff. The bank failed 10 weeks after Wageman arrived because of a deposit run and was bought by a bank in Dallas.

The modern history of Sunbelt Savings began in 1981 when McBirney and a group of investors began acquiring money-losing thrifts in small north Texas towns such as Bonham, Stephenville, McKinney and Greenville. The thrifts were eventually consolidated under the Sunbelt Savings name and the headquarters established in Dallas.

Those were the days, according to University of Houston banking professor Paul M. Horvitz, when Texas thrifts “never met a deal they didn’t like.” Optimism was rampant. Lamar Savings filed an application to open a branch on the moon, and Sunbelt Savings financed a $3-million purchase of dozens of Rolls-Royces owned by guru Bhagwan Shree Rajneesh.

New laws gave thrifts vast freedom to make real estate construction loans for office buildings and condominiums in cities such as Dallas and Houston. Home mortgages were out; construction loans were in.

McBirney had come to Dallas from Philadelphia in 1970 to attend Southern Methodist University and, after getting a business degree, had become a real estate Jack-of-all-trades--investor, developer, lender.

As chief executive and primary stockholder of Sunbelt, court records indicate that McBirney used the thrift as a kind of a personal piggy bank, racking up huge entertainment expenses and lavishing gifts on friends and clients.

McBirney was known to map out his real estate deals on paper tablecloths at Jason’s, a favorite restaurant, where he often lunched with other Texas thrift owners such as Don Dixon of Vernon Savings and Thomas M. Gaubert of Independent American Savings.

His excesses and idiosyncrasies became widely known after Dallas television reporter Byron Harris wrote a long article last year in Texas Monthly magazine about the state’s thrift industry.

Titled “The Party’s Over,” the article told how McBirney hosted extravagant junkets and parties, including a 1984 Halloween bash at which he dressed up as a king and prepared a menu including dishes made of lion and antelope for hundreds of guests in the back yard of his palatial North Dallas home. Music for the party was supplied by two disco singers known as Two Tons of Fun.

According to the court suit against the ex-directors, Sunbelt spent more than $1.3 million on Halloween and Christmas parties in 1984 and 1985, including $32,000 paid to McBirney’s wife, “apparently for orchestrating the parties.”

Other perks included the seven company-owned aircraft that cost the firm an average of nearly $1 million a year to operate, as well as such McBirney expenses as $69,645 in limousine charges, $61,824 in Christmas gifts and $57,366 for meals at Jason’s. McBirney also rolled up $245,597 in American Express charges between 1982 and 1987.

All those expenses, according to the suit, “were typically paid by Sunbelt without supporting documentation from McBirney that they were reasonable and . . . related to Sunbelt’s business.”

In just four years, Sunbelt swelled from minnow to whale by raising deposits from professional money brokers, then lending the funds to developers who wanted to turn vacant land into shopping centers and apartments. Its liabilities--consisting mainly of deposits--reached $3.2 billion by the end of 1986, up from $191 million at the start of 1983.

By inflating its profits and net worth, court records show, Sunbelt was able to approve nearly $13 million in dividends to common and preferred shareholders in 1985 and 1986. More than 90% of Sunbelt’s stock was owned by the 14 directors named in the suit.

Sunbelt Savings was also part of an informal network (a “daisy chain” as Selby put it) of high-flying Dallas-area thrifts that bought and sold each other’s problem loans at artificially high prices to keep from showing a loss, interviews and court records indicate.

“A rolling loan gathers no loss,” quipped former Texas regulator Bowman, quoting the maxim of one lender.

Sunbelt loans typically demanded no money down and were large enough to provide the borrowers with plenty of money to develop the project, pay the interest on the loan and provide Sunbelt with a hefty up-front loan fee. In turn, the fee income allowed Sunbelt to report big profits and pay fat dividends.

Sam Ware was one Sunbelt borrower. Though he was less than 30 years old and had little experience in real estate development, Sunbelt loaned Ware and his firms $125 million, more than $80 million of which later went into default or on which the collateral was repossessed. Ware could not be reached for comment.

Sunbelt also made an initial loan of $49 million to acquire and develop 2,100 acres of rolling hills and piney woods about 20 miles southwest of downtown Dallas as part of a project known as Lake Ridge Development. Planned as home to 60,000 people, the land remains largely undeveloped as the development partners have sought protection from their creditors in bankruptcy court.

One of the Lake Ridge partners was Leo Niekerk, a real estate broker and investor with close ties to McBirney and Sunbelt. Though he quit as an officer and director of Sunbelt in December, 1983, Niekerk continued to use Sunbelt credit cards, was covered by its health insurance and received more than $4.5 million from the thrift in various fees and commissions, court records show.

Further, the lawsuit said, neither Niekerk nor his partner had the expertise or wherewithal to handle a project that big and expensive. Sunbelt, which has a $125-million loan commitment on Lake Ridge, is expected to sustain major losses on the property. Niekerk could not be reached for comment.

Opinionated and combative, Tom Wageman has not won any popularity contests in Dallas.

“You talk to 20 people and you get 20 different opinions about him,” said Selby, a former executive vice president of the Federal Home Loan Bank of Dallas. “The reason so many people don’t like him is that he is a no-nonsense commercial banker. When someone doesn’t pay, he forecloses.”

Wageman does not dispute that he takes a tough line with borrowers. “If you can’t pay, then we need to stop . . . (kidding) each other,” he said. “If they can’t pay, they can’t pay. . . . We gave them the money, and now it’s their turn to do their job and pay us.”

Wageman guided Sunbelt Savings through its huge first-quarter loss, blamed on McBirney-era loans and resulting from the fact that Sunbelt reduced the book value of its loans to market levels. The one-time writedown reduced the value of Sunbelt’s assets by nearly 40%.

McBirney argues, though, that Wageman has driven the company into the ground through mismanagement and quick foreclosure. “Wageman and his cronies” have taken Sunbelt on “a two-year foreclosure spree, the end result of which was to take in properties at grossly deflated prices,” McBirney said in his countersuit.

In a rare interview with the Dallas Times Herald last summer, McBirney indicated that his loans would have fared better with the right supervision. “The loan portfolio is like a woman,” he said. “You’ve got to give it tender, loving care. You’ve got to work with it. . . . Their position was to do nothing.”

The newly reorganized Sunbelt Savings has nearly $9 billion in assets, making it the largest thrift in Texas at the moment. In effect, regulators put the problems of eight thrifts under one roof to get their costs down and make their problems easier to address. Wageman was kept as chief executive.

The reorganization is an important part of a federal program to close and recapitalize scores of insolvent thrifts in states such as Texas, Oklahoma and Louisiana. In Texas alone, regulators plan to close or merge more than 100 thrifts.

Regulators say the $5.5-billion price tag on the Sunbelt rescue includes a $2.5-billion FSLIC note to shore up net worth as well as assurances that the federal insurance fund will absorb expected future losses on problem loans.

Some of the other thrifts lumped in with Sunbelt included:

- Independent American Savings, bought by Gaubert in 1983 and declared insolvent in 1987 because it had grown too fast and invested heavily in highly speculative, poorly underwritten construction loans, regulators said. At the time it was absorbed by Sunbelt Savings, Independent American Savings had a negative net worth of more than $873 million.

- Western Federal Savings & Loan, bought in 1982 by Jarrett E. Woods Jr. and declared insolvent by regulators four years later. Like Sunbelt, Western Federal Savings grew too fast and made poor loans, regulators said. Its negative net worth on Aug. 19 was $1.4 billion.

- Texana Savings & Loan in Texarkana, the smallest of the group with only $78.1 million in assets and a negative net worth of $7.5 million. Texana Savings was owned by a company whose major shareholder was Woody E. Lemons, now under indictment on charges of bank fraud while he was chairman and chief executive of Vernon Savings & Loan.

The eight thrifts were partners on many loans that had gotten into trouble and resulted in a mass of tangled litigation. “Once we fully implement consolidation and untangle the loan participations,” Federal Home Loan Bank Board Chairman M. Danny Wall said at the time of the consolidation, “the surviving institution will be much more attractive to a buyer.”

Sunbelt Savings also aims to shrink its costs by streamlining the number of retail branch offices from 139 to 90, Wageman said. Wageman said he may eventually try to buy Sunbelt, estimating that it would take a minimum of $100 million in private capital to take over the reorganized thrift.

An unrelenting optimist about Texas’ long-term future, Wageman said Sunbelt will make a good buy “because we have a first-rate franchise and a marvelous organization.”

The reorganization, though, has been ridiculed by others as doomed to fail. “Henry Gonzalez had it right,” thrift consultant Bert Ely said, referring to the Democratic congressman from San Antonio. “All this is doing is turning a lot of small dead fish into one big dead fish, which stinks even worse.”

McBirney is a self-described “investment consultant” now and, according to ex-regulator Selby, still drives a Rolls-Royce. He is also one of many lenders and developers under scrutiny as part of a widespread probe of alleged criminal fraud in the Texas thrift industry, banking and law enforcement sources confirm.

The investigation, conducted by a task force of federal law enforcement officials, has not had much to show for its efforts, which began more than a year ago. In October, the task force lost a major bank fraud case against Gaubert in Iowa.

Robert E. Davis, the attorney in Dallas hired by McBirney to represent him in the criminal probe, said McBirney and his other clients involved in the investigation took heart at what happened to Gaubert, who was acquitted Oct. 29 on bank-fraud charges after a three-week trial in Des Moines.

The case involved a now-defunct Iowa thrift, Capitol Savings, that had loaned $32 million for Dallas condominium developments. A character witness for Gaubert at the trial was Texas state Treasurer Ann Richards, the keynote speaker at the 1988 Democratic National Convention.

“They had no case against me,” Gaubert said.

Davis, has instructed McBirney to avoid interviews for the time being. “We don’t feel it’s in his interest right now,” Davis said.