Once-Tiny Sunbelt S&L; Grew Into Major Loser in Big 1985-86 Collapse of Thrifts

DALLAS —  Downtown is a brash mix of glass, steel and concrete, a sky-scraping tribute to rapid growth.

Construction in and around the city boomed in the early 1980s, fed by a rich diet of easy money from such institutions as Sunbelt Savings Assn.

Once-tiny Sunbelt became a big lender under Edwin T. McBirney III, who bought it in 1982, merged it with five other thrifts and in three years made Sunbelt the fifth largest S&L; in Texas. “Fast Eddie,” as people began to call him, enjoyed increasing perks as Sunbelt grew.

The S&L; acquired seven planes, paid hundreds of thousands of dollars of McBirney’s credit card and restaurant bills and spent $1.4 million for Halloween and Christmas parties in 1984 and 1985, according to court records.

But the extravagant parties soon stopped. The real estate boom funded in large part by freewheeling S&Ls; ended in a colossal bust in 1985 and 1986. Scores of thrifts, including Sunbelt, became insolvent as borrowers defaulted on billions of dollars in loans.

Threatened National Disaster

Mounting losses from the Texas thrift industry overwhelmed the Federal Savings and Loan Insurance Corp. and threatened to bring on a national financial disaster.

For the first time, taxpayer funds will be used to rescue the S&L; insurance system, now broke and unable to cope with hundreds of insolvent thrifts struggling to stay afloat in Texas and other states.

There is no doubt that the U.S. government will protect depositors’ funds. But the immense cost of the bailout plan, now taking final shape in Congress, will dent the federal budget for years to come.

Atty. Gen. Richard Thornburgh says “fraud and insider abuse” have been “involved in 25% to 35% of savings and loan failures.” A congressional General Accounting Office official adds that “the bulk of the losses are directly attributable to the failure by management . . . to follow basic, prudent business practices.”

The bailout proposed by President Bush in February carried an estimated price tag of $157 billion through 1999. But $205 billion is a more realistic figure for the first decade, the Congressional Budget Office says. And financing costs over the full 30-year life of the plan could drive its total cost to $300 billion, with taxpayers paying 70% or more.

Congressional lawmakers hope to have a bill ready for Bush’s signature by July 4.

Both houses have clashed with the Administration over some details of the bailout, but no one disagrees with Bush’s stated goals: ensuring that “the guarantee to depositors is forever honored,” and seeing to it that “the system is reformed comprehensively so that the situation is not repeated again.”

The thrift crisis is concentrated in a quarter of the nation’s 3,000 federally insured S&Ls.; Since the beginning of last year the government has liquidated, merged with healthy institutions or placed under supervisory control 443 insolvent institutions, 150 of them in Texas, which accounts for the biggest chunk, by far, of the problem.

Greater Freedom

The roots of the crisis reach back to passage of federal legislation in 1982 that gave thrifts greater freedom to make commercial real estate loans and attract deposits.

S&Ls; told Congress they needed new ways to make money because they were suffering major losses on their old portfolios of fixed-rate home mortgage loans. But the law opened the door to abuses and far greater losses.

Sunbelt’s majority stockholder, McBirney, never had any intention of running a traditional savings and loan.

He funded land purchases, office buildings and other projects. Sunbelt offered higher-than-average interest rates to attract deposits needed to fund its frenetic loan activity.

But Sunbelt, nicknamed “Gunbelt” by some for its lending activities, far exceeded even the liberal limits of the new federal law, say federal regulators and members of the new management that took over after McBirney resigned under regulatory pressure in 1986.

A lawsuit filed last year by the new management and soon joined by FSLIC charges that McBirney and other Sunbelt officials ran it “as a speculative real estate investment company rather than as a federally insured financial institution.”

Sunbelt bore almost all the risk on commercial loans “because the borrowers put little or none of their own money into the transactions and had no realistic means of repaying Sunbelt.”

The suit also charges McBirney with receiving kickbacks, deceiving regulators about the true state of Sunbelt, violating numerous regulations and pocketing “excessive compensation.” McBirney, who owned 51% of the common stock, and other Sunbelt stockholders received dividends of $12.7 million in 1985 and 1986.

Boom Evaporating

At the same time McBirney was receiving dividends, the suit says, the real estate boom was evaporating, leaving Sunbelt’s borrowers unable to “sell or refinance their real estate for enough to pay Sunbelt the principal and accrued interest on their loans.”

Sunbelt reported $3.1 billion in assets at the end of 1985. By mid-1988, the accumulation of souring loans made under McBirney left Sunbelt with $500 million more in liabilities than assets, the suit charges.

McBirney denies all the allegations. He contends federal regulators showed “unwarranted personal animosity” and charges that the new management filed suit “to deflect the blame for Sunbelt’s recent financial problems from themselves to others.”

Sunbelt and McBirney were not unique. A new breed of owner entered the savings and loan industry in Texas in the early 1980s.

“They were investors, they were brokers, they were promoters, they were wheeler-dealers,” says David W. Gleeson, president of Lincoln Asset Management Co. in Dallas.