Bass Drops His Plan to Form a Merchant Bank : Concession Clears Way for His Buyout of Ailing American Savings & Loan

Texas investor Robert M. Bass, bowing to congressional and regulatory pressure, has agreed to drop a controversial plan to form a merchant bank as part of his previous agreement to buy insolvent American Savings & Loan, regulatory and industry officials said Monday.

The merchant bank would have allowed Bass, a billionaire who lives in Ft. Worth, to make corporate acquisitions using $1.5 billion in American Savings’ deposits. “The merchant bank has been done away with,” said one well-placed source who asked not to be identified.

The agreement would subject a Bass-owned American Savings to tougher restrictions on the kinds of its investments it can make. Under current federal regulations for savings and loans, American Savings would be able to place no more than $600 million in non-traditional investments such as corporate acquisitions. S&Ls; typically invest in home and consumer loans as well as various mortgage securities.

Bass’ concession removes the last major obstacle to completion of the government-aided deal, which was announced Sept. 5. Barring unforeseen events, the sale now needs only a favorable ruling from the Internal Revenue Service and should close shortly before the end of the year, sources said.

Stockton-based American Savings, the country’s second-biggest thrift, was placed in government receivership Sept. 6 after its capital was wiped out by massive losses on real estate development loans. American Savings, which is a unit of Irvine-based Financial Corp. of America, has 186 savings branch offices throughout California.

Year-End Target Date

If the sale goes through, it would qualify as the largest single rescue ever pulled off in the savings and loan industry. Federal regulators agreed to provide a $2 billion assistance package of cash and notes to complete the sale.

Though a spokesman for the Federal Home Loan Bank Board, Karl Hoyle, would not comment on the proposed merchant bank, he said he expects the mammoth transaction to go through.

“We intend to get it done this year,” Hoyle said. Spokesmen for Bass and American Savings declined to comment.

The Federal Home Loan Bank Board approved creation of the merchant bank as part of a deal to sell American Savings to the Robert M. Bass Group for $550 million. But the plan, once unveiled, caused a backlash among lawmakers and regulators who questioned whether Bass should be allowed to make potentially risky corporate acquisitions using deposits that are backed by federal insurance.

Some members of Congress were openly hostile to the idea, while thrift regulators in California privately raised sharp objections. The California Department of Savings and Loan said it would not issue a state charter to an American Savings that had a merchant bank.

Under a compromise worked out between the Bass investors and the Federal Home Loan Bank Board, American Savings will have a federal charter. This will allow the thrift to invest up to 3% of its assets--or $600 million in this case--in direct investments through a service corporation, which will be an American Savings subsidiary.

Drexel Dropped

It is believed that Bass will fund the deal through the sale of $200 million to $300 million in high-yield debt, known as junk bonds, sold through investment bankers including First Boston.

A plan to use the Drexel Burnham Lambert investment bank as the underwriter was dropped, partly because of Drexel’s continuing and highly publicized legal problems. Drexel and its top junk bond salesman, Michael Milken, are under investigation by federal prosecutors in New York. A Drexel spokesman declined to comment.

Bass officials had lobbied hard for the merchant bank, saying that only through acquisitions of large, profitable companies could American Savings take full advantage of its $1.7 billion in tax credits. Those tax credits were built up as a result of American Savings’ heavy losses in recent years.

Indeed, it was the concept of a merchant bank that sparked the attention of the Bass investors in American Savings in the first place, but their interest in the financial services side of the business grew as they learned more about the company, sources said.

“They felt the deal still had merit, and the Bass people really want to get into this business,” said one official close to the negotiations. “They feel it has real promise over the next five to 10 years.”