Gibraltar S&L;’s Securities Sale May Erase Net Worth

Financially ailing Gibraltar Savings plans to sell a major portion of its mortgage-backed securities in a move expected to result in large losses that will wipe out the nearly $400 million in net worth at its California operations, the company said Friday.

Chief Executive John Carr said “probably more than half” of the company’s $4.4 billion in mortgage-backed securities will be sold, forcing the firm to post major losses. The sales are expected to take place in the next several weeks.

Carr also indicated that Gibraltar Savings is starting to liquidate its collection of “junk bonds,” which are high-risk, high-yield debt securities. The stated value of those bonds stood at nearly $500 million at the end of 1988, but the market value was less than $450 million, company figures show.

“We’ll hold those that do not pose a credit risk,” Carr said, referring to the junk bonds. “One man’s junk is another man’s high yield.”

The moves reflect a continuing endeavor to make Gibraltar Savings more attractive to potential buyers. About 10 banks, thrifts and outside investment groups have reportedly expressed interest in buying Gibraltar Savings once its most serious problems are ironed out.

But the expected losses give bondholders and stockholders less hope that they will recover any of their investments in Gibraltar Financial, the Beverly Hills-based parent company.

One regulatory official, who asked not to be identified, confirmed that there is virtually “no hope” for these investors. Officials at Gibraltar Financial could not be reached for comment. Deposits at Gibraltar Savings are insured up to $100,000 by the Federal Savings and Loan Insurance Corp.

Gibraltar Savings is organized into two subsidiaries--one for the California operations and one for its businesses in Washington and Florida. The total operations have 108 retail branch offices, including 83 in cities across California.

According to Carr, losses on the mortgage-security sales will be absorbed by the California operations, which had $383 million in regulatory capital at the end of last year. It is that measure of net worth that is expected to be wiped out, Carr said.

Crippled by two years of heavy losses, Gibraltar Savings was seized by government banking regulators in March and placed in a conservatorship. The move came after the losses had slashed net worth and sparked deposit withdrawals of more than $600 million.

The move effectively reduced Gibraltar Financial to a virtual shell by stripping the parent company of its operating assets. Since then, Gibraltar Financial has been unable to make the interest payments on its bonds and notes.

With about $15 billion in assets, Gibraltar Savings is the largest thrift in the nation that remains in serious financial trouble. The S&L;, whose headquarters was recently moved from Beverly Hills to Simi Valley, has operations in Florida and Washington as well as in California.

It is expected that the thrift will be sold to outside investors after passage of a savings and loan industry bailout bill being debated by Congress. The bill is expected to provide banking regulators with the funds they need to liquidate and sell off troubled thrifts.

Most of Gibraltar Savings’ mortgage-backed securities were amassed in 1986 and 1987 at a time the parent company was trying to show investors that it had a stable stream of profits. They were long-term investments financed by short-term borrowings.

However, when interest rates surged unexpectedly in 1987 and 1988, profits on these securities were squeezed by rising borrowing costs while the market value of the securities plunged.