Lincoln S&L; Gets About $70 Million in Loan From Fed : Amount Is Largest Yet in Administration’s Program of Providing Emergency Funds

The Federal Reserve Board, making its largest loan so far under a new Bush Administration program to provide emergency funds to needy savings and loans, has advanced an estimated $70 million to Lincoln Savings & Loan in Irvine to make up for lost deposits.

The loan, made last week, is a result of the Fed’s agreement with savings and loan regulators in February to provide cash or cash equivalents to S&Ls; experiencing liquidity problems. The Fed normally makes loans only to healthy banks that can provide collateral.

One industry insider said the loan to Lincoln was part of a regulatory decision to replace lost deposits “dollar for dollar” while regulators figure out what to do with the institution.

Lincoln was seized April 14, a day after its Phoenix parent company, American Continental Corp., filed a U.S. Bankruptcy Court petition to reorganize its debts under federal bankruptcy laws.

Regulators claimed that American Continental was operating the S&L; in an “unsafe and unsound” manner.

Since then, withdrawals by Lincoln customers have reduced the S&L;’s deposits by $70 million. Lincoln had $4.4 billion in deposits at the end of the year.

The Fed, which declined to discuss its lending practices, has lent money to at least one other ailing thrift, the Wall Street Journal reported Tuesday.

The Journal report said the loan to Lincoln was funded 45% by the Fed, 45% by the Federal Home Loan Bank system and 10% by the U.S. Treasury.

While the two loans are believed to be first made to S&Ls;, they won’t be the last, said Bert Ely, an Alexandria, Va., industry consultant.

“There will be many others,” he said. “This situation has been brewing for many years.”

Some industry consultants believe that borrowing from the Fed indicates that other sources of deposits, including major deposits from money brokers, are drying up for S&Ls.; But Ely and others disagree.

“I think the significance is probably more of a regulatory one,” said Donald Murray, a partner in the Irvine office of the national accounting firm Touche, Ross & Co. “It’s the first step for the Fed in exerting more control over the S&L; industry.”

In past years, the Fed has loaned money to troubled banks through its so-called discount window, where banks borrow emergency money on a short-term basis.

The Fed, for instance, provided a $500,000 loan to Garden Grove Community Bank during a run on its deposits in 1984. The loan came just hours before banking regulators seized it and declared it insolvent.