U.S. Bails Out 15 More Failed S&Ls; : New Deals Likely Today in Rush to Capture Tax Break

Federal regulators rescued 15 failed savings and loans Friday--including three $1-billion bailouts--bringing to 210 the number sold or reorganized in 1988 at a cost of more than $35 billion in federal aid, regulators said.

Four thrifts in Illinois, Ohio and Colorado were sold to San Francisco-based First Nationwide Financial Corp. The others sold Friday were mostly small institutions scattered from Oregon to Florida.

The Federal Home Loan Bank Board had said that it expected to complete some additional deals today, bringing to 222 the rescues in 1988, at a cost of $38.6 billion--the highest in 50 years. Later, that figure was cut back to 216 or 217.

One of the efforts under way was an attempt sell Beverly Hills Savings & Loan of Mission Viejo to a commercial bank in Michigan.

Industry-Funded Agency

The funds used to bail out failed thrifts come from the Federal Savings and Loan Insurance Corp., an industry-funded government agency that is expected to eventually need tax dollars to meet its obligations. The FSLIC is not reimbursed for its assistance.

The frenetic rescue pace of the last week has been fueled largely by the desire--on the part of both regulators and buyers--to obtain maximum tax benefits before the law changes after year’s end. Those benefits, which include government assistance that is tax-free and tax credits that may be applied against future earnings, will be cut by half starting in 1989.

At the same time, the rapid merger pace is drawing a swelling chorus of criticism from lawmakers, who charge that the U.S. Treasury stands to lose significant tax revenues on these deals at a time of massive budget deficits.

Investigations Urged

On Friday, Sen. Donald W. Riegle Jr. (D-Mich.), incoming chairman of the Senate Banking Committee, called for a congressional review of all bank board mergers in December, and Rep. Toby Roth (R-Wis.) called on the Justice Department to investigate the bank board’s actions.

Sen. Timothy E. Wirth (D-Colo.), another critic, said a $400-million investment by First Nationwide would yield nearly $4 billion in tax credits that Ford Motor Co., owner of that San Francisco-based thrift, could use to lower the taxes it pays on future earnings.

That would be a “significant loss” to the Treasury and a “tax windfall” for Ford, Wirth said in a letter this week to M. Danny Wall, chairman of the bank board.

The bailouts for the year would be the largest number of federal bailouts of thrift institutions since the Great Depression. The government rescued 277 thrifts in 1938, at the depth of the Depression, and 48 last year.

Wall said that the pay-outs will leave the bank’s insurance arm, the FSLIC, with only about $1.85 billion in its coffers--barely enough to last a few more months. There still are an estimated 400 technically insolvent S&Ls.;

Wall insisted that the money on hand would be sufficient for the bank board “to deal with the problem” in coming weeks because the FSLIC frequently issues notes or provides technical help rather than merely infusing cash into troubled institutions. In addition, the rescue effort is expected to slow some.

But he said that the agency soon would be asking Congress for a blank-check guarantee of “the full faith and credit” of the government behind FSLIC efforts to pay off depositors of insolvent institutions, to issue long-term notes and to underwrite losses.

That, in turn, is expected to make it more difficult for the incoming Bush Administration to reduce the federal budget deficit. Wall already has conceded that the cost of the S&L; bailout could exceed the $45 billion to $50 billion that the agency originally estimated.

And some critics say the FSLIC has been too generous in providing cash, long-term notes and tax breaks to lure investors. Both Congress and the Bush Administration are expected to look closely at the bank board’s transactions for 1988.

Wall conceded that many of the investors who have bought failed S&Ls; so far have been entrepreneurs who had little experience in the business. But, he said, with a guarantee from Congress, “we would have the Fortune 500 at our door” seeking to invest.

He defended the agency’s recent deals, asserting that, despite the favorable terms the FSLIC provided, the government paid less to help finance the sell-offs of troubled thrifts to new buyers than it would have had to close the S&Ls; and pay off all the depositors.

In taking over the four thrifts in Colorado, Illinois and Ohio, First Nationwide Financial added $7.8 billion in assets to its balance sheet. The thrift now has about $26 billion in assets and operates more than 500 branch offices in 15 states.

The financial institutions it purchased are Mile High Federal Savings & Loan (formerly Silverado Banking, Savings & Loan) and Columbia Savings in Denver, Cardinal Federal Savings Bank in Cleveland and Pathway Financial in Chicago.

$1.6 Billion in U.S. Aid

First Nationwide agreed to provide the thrifts with $175 million in new capital, in return for which the FSLIC will provide $1.6 billion in cash and notes to bolster net worth and subsidize expected future losses on assets.

The efforts to sell Beverly Hills Savings to Michigan National Corp. were described as nearing completion. According to one regulatory source, there was a “very good possibility” that the sale could be closed today.

Michigan National is the fourth-largest bank holding company in Michigan, with $9.1 billion in assets, most of them in Michigan National Bank. The bank is highly profitable and earned $67 million through the first nine months of the year.

Beverly Hills Savings & Loan was the first of the nation’s troubled thrifts to be effectively nationalized by the Federal Home Loan Bank Board in 1985 and placed in what was termed a “management consignment” program. The program allowed the bank board to keep Beverly Hills Savings open for business while it was probing its financial problems.

Invested in Junk Bonds

Later lawsuits and a congressional investigation disclosed that Beverly Hills Savings was brought down largely by bad investments in junk bonds and commercial real estate. The company had been taken on a financial “joy ride,” according to Rep. John D. Dingell (D-Mich.).

Regulators have been trying for years to find a buyer for Beverly Hills Savings, but they have had no success because the thrift had only a few retail branches and a negative net worth that kept ballooning. Depending on the accounting system used, Beverly Hills Savings’ debts exceeded its assets by anywhere from $600 million to more than $900 million.

Other rescue efforts announced Friday included:

--The bank board provided $1.37 billion to assist in the purchase of United Savings Assn. of Texas, one of the state’s largest S&Ls;, with $4.4 billion in assets. The Houston S&L; is being sold to Hyperion Partners, an affiliate of the New York investment firm of Ranieri Wilson & Co. Inc., which agreed to put up $200 million.

--Golden West Financial Corp. of Oakland, Calif., will manage two insolvent Florida S&Ls;, Beach Federal Savings & Loan of Boynton Beach and New Metropolitan Federal Savings & Loan, headquartered in Hialeah. Golden West will get $1 billion in assistance.

--The insolvent Lyons Savings Assn. of Countryside, Ill., is being sold to Coast to Coast Financial Corp. of New York, a group of investors formed to buy ailing S&Ls.; The investors will put up $42.5 million and the bank board committed $385.1 million.

--Southeast Banking Corp., a Miami bank holding company, is acquiring the failed First Federal Savings & Loan Assn. of Jacksonville, Fla., in a package that includes $29 million in federal aid. Southeast is contributing $86 million in new capital.

--Western Federal Savings & Loan Assn. of Missoula, Mont., is acquiring the insolvent Great Falls Federal Savings & Loan Assn. of Great Falls in return for $11 million in federal cash and loss coverage for five years.

--River Valley Savings Bank, FSB, of Peoria, Ill, is buying Peoria Savings & Loan Assn. with about $3.3 million in federal aid. River Valley will invest $5 million of its own funds. The insolvency stemmed mainly from loans that turned sour.

--Local Federal Savings & Loan Assn. of Tulsa, Okla., acquired Community Federal Savings & Loan Assn. of the same city in a package that included $16 million in cash and federal assistance and a five-year, $40.6-million federal note.

--Jackson County Federal Savings & Loan Assn. of Medford, Ore., was recapitalized with a combination $14-million securities offering and a five-year aid package from the FSLIC. The subscribers included institutional investors and local residents.

Congressional criticism about the terms of the deals continued to plague the bank board during the year’s final hours of negotiations.

Riegle called Friday for “an immediate, in-depth review” by the General Accounting Office of all merger approvals in December. Riegle said he is concerned by news stories that suggest “many of these transactions are primarily driven by tax considerations, that insufficient capital and managerial resources are being provided by the acquirers and that the terms and conditions are overly generous.”

And Roth asked the Justice Department to investigate whether the bank board was negotiating responsibly. “It’s incredible that a federal agency would enter into the biggest sweetheart deal in history,” Roth said in a letter to Atty. Gen. Dick Thornburgh.

But Lawrence White, one of three members of the bank board, rejected suggestions that the bank board’s actions were inappropriate. “We are not squandering the taxpayers’ money,” he said. “I think we are being exceedingly responsible in the way we are looking at the transactions.”

Art Pine reported from Washington and Tom Furlong from Los Angeles.