Herbert J. Young was flat-out wrong in early 1987 when he predicted the future for Gibral-tar Savings, a financial institution in Beverly Hills that he had run for more than 25 years.
"The key fundamentals are in place for a successful year. . . . ," Young said in his annual written report to shareholders. "All indications point to continued interest rate stability and a healthy real estate market in the company's principal lending areas."
In fact, in the ensuing 24 months, soaring interest rates and severe down drafts in the real estate market sparked nearly $250 million in losses at Gibraltar Financial, the parent company, and ultimately led to large withdrawals of deposits at Gibraltar Savings.
Whether it was a bad forecast or an attempt to mislead, as shareholders would later charge, Young's failure to guard against these events helped to trigger what would become the collapse of Gibraltar Savings, a well-known local financial institution that billed itself as more than 100 years old and as "solid as the Rock of Gibraltar." Neither claim was quite accurate.
Gibraltar Savings is now in a government conservatorship, a virtual ward of the Federal Deposit Insurance Corp. Regulators seized the undercapitalized company on March 31, saying it was in the grip of a serious deposit outflow.
Gibraltar's downfall was also the undoing of Young, a well-known and well-liked local boy who went to Fairfax High School and spent nearly his entire adult life building the firm into one of the nation's 10 largest thrifts. He was forced to resign more than a year ago as Gibraltar Financial's chief executive amid charges that he mismanaged the company.
A close look at what happened at Gibraltar Savings unmasks a case study in how not to operate a savings and loan in today's hostile and unpredictable climate of financial deregulation.
Its recent past is strewn with major mistakes and miscalculations in investments in real estate and mortgage-backed securities, according to outside experts and court records detailing its business practices.
Gibraltar has had lending woes on condominiums in Dallas, commercial offices in New Orleans and, according to one lawsuit, on a "world-class" equestrian center in Griffith Park that was supposed to have condominiums for horses. Its huge collection of mortgage-backed securities, valued at $5.6 billion at the end of 1988, now hangs like a millstone around the company's neck.
Meanwhile, shareholder suits charge that Young misled stockholders about the firm's real financial condition, particularly in those remarks to stockholders in early 1987. Gibraltar Financial recently established a reserve of $4 million to pay for pending litigation, indicating a settlement of those suits may be at hand.
Gibraltar Savings has also had a series of embarrassing and damaging differences with business partners and customers who later sued the lender on the grounds they were cheated, court records show.
The firm is a "monument to the ineptness of its management," said Jonathan Gray, thrift-industry analyst for Sanford C. Bernstein & Co. in New York.
That was not readily apparent in the years following World War II, when the company emerged from obscurity and swelled in size by helping finance California's prolonged housing boom.
It was early in the post-war years that Young, born and raised in Los Angeles, was attending several local colleges, including USC and UCLA. He was also part of a California Air National Guard group that was activated during the Korean War.
After nearly two years in the military, Young joined Gibraltar in 1952 at a time the company was headed by new president and chairman, Sydney R. Barlow. Learning the business from the ground up, Young worked as teller, lending counselor and property appraiser.
Married to Barlow's daughter at the time, Young rose to become chief executive in 1961, a time when the company had its only office in Beverly Hills and assets of some $200 million. Today, its assets exceed $15 billion and retail offices number about 100 in California, Florida and Washington state.
Always acquisition-minded, Young expanded Gibraltar's operations rapidly throughout the 1960s and 1970s. Its first branch office outside Beverly Hills opened in Baldwin Hills in 1961, followed by later openings in cities such as San Marino and Panorama City.
It was in those days that an actor named Harold (Hal) Peary, who played the early radio roles of "The Great Gildersleeve," had the job as celebrity spokesman for Gibraltar Savings.
Gibraltar Savings went through mega-growth spurts from 1969 to 1976 after Congress passed legislation approving mergers between savings and loans. The law allowed Gibraltar to buy thrifts all over the state, from Pioneer Savings in the Los Angeles area to Frontier Savings in the San Joaquin Valley. By 1982, Gibraltar had 81 offices in California, just slightly fewer than the 83 that it has now.
Part of Inner Circle
In 1986, the financial institution celebrated what it said was its 100th anniversary, but in reality the firm is nowhere near that old. It did, however, buy one savings and loan in 1976, Cal Western Savings, whose roots go back to 1886.
The name, Gibraltar Savings, did not come into existence until 1952 when the financial institution changed its name from Beverly Hills Building & Loan Assn. The lone office in those days was located on Beverly Drive near Wilshire in an office that later became a hamburger restaurant.
As the years passed, Young became part of an inner circle of powerful executives that exerted great influence in the California savings and loan industry. A very popular industry figure, Young nurtured a high profile in trade and lobbying groups that shaped the industry's treatment from lawmakers in Washington and Sacramento.
"The S&L; industry is very incestuous," said one former industry official who is now a regulator. "If you were a solid member and paid your dues, you never spoke poorly of that person. That was the story with Herb."
Yet Young's business acumen was not held in high regard by competitors or industry analysts who make recommendations on the company's stock.
"Gibraltar was always considered (of) weak quality among the stockholder-owned thrifts," said Donald K. Crowley, financial analyst in San Francisco for Keefe, Bruyette & Woods.
Indeed, though Young described his departure 13 months ago as a voluntary retirement, Young left because the directors were highly critical of investment decisions made by Young and his No. 2 man, Jerome Nussbaum. Nussbaum, who could not be reached for comment, was demoted and later let go.
An internal investigation, headed by Los Angeles attorney Martin C. Washton and commissioned by the board, began just days after Gibraltar Financial reported a $155-million loss in the third quarter of 1987. The probe took three months to complete.
Though the directors found no evidence of fraud or gross mismanagement, they concluded Gibraltar's business strategies were both ill-timed and ill-advised, according to Washton.
"It was by mutual consent (that Young left)," said one source close to the company. "There was no other course of action."
Though Young left a company awash in losses, he received a severance payment of nearly $1.3 million as provided by his contract. He also received a company Mercedes valued at $36,900 and is entitled to annual retirement payments of $344,000, according to the firm's 1988 proxy statement.
These days, Young is said to spend much of his time at his ranch in Ojai. He also remains a director of Gibraltar Financial and retains the honorary title of chairman emeritus, but he is leaving the board in June. "The board decided we didn't need him anymore," a company spokesman said.
Young has consistently avoided interviews since his resignation. He did not return phone calls to his home in Beverly Hills and sent word through Los Angles public relations executive Melvyn S. Rifkind that he has no interest in talking now.
"His view is: 'Whatever happened, happened,' ' Rifkind said.
Like many thrifts in trouble today, Gibraltar Savings' present problems stem from the early 1980s when federal and state lawmakers provided savings and loans with an arsenal of new investment powers.
Gibraltar Savings rushed headlong into new fields and de-emphasized its traditional business of fixed-rate mortgage loans, a business that had been rendered unprofitable by rising interest rates that ballooned deposit costs.
While some well-managed thrifts in California began making adjustable-rate mortgage loans and diversifying prudently, Gibraltar invested heavily in such unfamiliar ventures as business lending, commercial real estate development, equipment leasing and mortgage-backed securities. It then had to scramble and retrench later on, often with disastrous consequences, when the new enterprises did not live up to expectations.
"It was like quicksand," said William J. Popejoy, a friend of Young's who is the former chief executive of American Savings in Stockton. "Each step they took, they got in a little deeper."
New Orleans Project Damaging
In 1987, Gibraltar Financial lost more than $50 million alone on a single commercial development project in suburban New Orleans known as Galleria. It lost another $57 million when it discontinued an apartment-building and real estate development program. Those two financial disasters were major reasons behind the $155-million, third-quarter loss in 1987 that led to the board to call for the internal investigation.
No single project was more damaging than Galleria, a glamorous but controversial development in the New Orleans suburb of Metairie that was originally intended to cost $500 million. The development was a joint venture between Gibraltar Savings and Daniel P. (Danny) Robinowitz, a Dallas developer.
When the project was first announced in 1983, times were good in the New Orleans area and energy prices were still high. When phase one finally opened more than four years later, oil and gas prices had collapsed and so had the greater New Orleans economy.
The development was delayed by court actions brought by angry homeowners who lived nearby and feared the potential congestion. They twice took the project to the Louisiana Supreme Court, and though the homeowners lost, the lawsuits cost the development dearly in terms of time.
Gibraltar Savings eventually took a huge financial bath on the development because the deteriorated economy drove office-space rents down to half what was expected. The lender ended up by marking down the value of the investment and selling the project, resulting in a loss of $53 million.
Robinowitz later sued Gibraltar, saying the company had deceived him when it bought out his interest in late 1986 for a low-ball price of $3.5 million. Washton, Gibraltar's attorney, called the lawsuit a case of "seller's remorse." The suit is still pending in a Texas state court.
Another financial disaster was Gibraltar's real estate development arm, which specialized in building apartments and selling an interest in them to investors looking for tax breaks.
The business collapsed after tax reform in 1986 closed loopholes in the tax code that had made residential income property so attractive to wealthy private investors, who used paper losses on the buildings to offset their real income.
The tax-law change, which drastically curbed the use of these losses as deductions, caught Gibraltar with properties that sharply lost their value because they could not be syndicated. Ensuing writeoffs cost the financial institution $57 million.
Its current millstone, though, is the mortgage-backed securities, whose fixed-rates of return have been severely squeezed by rising interest rates. Betting that interest rates would remain stable, Gibraltar Savings bought most of the securities in 1986 and 1987 in an attempt to show investors that is had a stable stream of profits.
When interest rates surged unexpectedly in 1987 and 1988, profits on the securities were squeezed by rising costs and the market value of the securities fell.
Today, the securities are unprofitable but Gibraltar cannot afford to sell them because it would probably lose hundreds of million dollars and wipe what little net worth is left on the books.
"They bet the bank (on the mortgage securities)," said Shearson Lehman Hutton analyst Allan Bortel, "and lost."
For all the troubles, buyers are expected to queue up for a chance to buy all or part of Gibraltar Savings if enough financial assistance is offered by banking regulators. The company's 83 retail branch offices in California are well-located and have a loyal base of customers, competitors say.
"I think everyone is looking at Gibraltar right now," said a top marketing executive at another large California thrift. A sale could come as quickly as six months, said John Carr, the thrift's new chief executive installed at the behest of the FDIC.
Carr replaced James N. Thayer, ousted as chief executive on March 31 when the regulators took over.
Thayer, a longtime director of Gibraltar Financial who replaced Young as chief executive, also declined to be interviewed for this story. He remains chief executive of the parent company, Gibraltar Financial--a company with very few employees and without much to do now that its thrift business is in conservatorship.