How the Unthinkable Happened in Arizona

In the go-go, boom-boom days, they said what happened to savings and loans in Texas could never happen here.

Highflying thrifts lent millions on tracts of desert dirt, but Arizona was different, they thought. Land flipped from buyer to buyer at higher and higher prices. S&Ls; offered loans without down payments, and some even made themselves partners in risky ventures. Even the oldest, most conservative savings banks got caught up in the pandemonium.

But the multibillion-dollar bust in Texas, the birthplace of the nation’s S&L; crisis, would never happen here, they said.

It did.

Five of the eight S&Ls; based in the Phoenix area are insolvent and have been taken over by regulators. The real estate market is in a free fall. Quarterly losses have run into the hundreds of millions of dollars. Estimates of taxpayers’ costs to clean up just the Arizona thrifts climb as high as $6 billion.

Similar to Texas

“I think what happened in Phoenix is very similar to what happened in Texas,” said Gene Rice, chairman of MeraBank, Arizona’s largest thrift. “The market became overbuilt because of too much optimism in financial institutions and out-of-town investors. Then, when it collapsed, everyone ran for a corner.”

Arizona, added thrift analyst William Ferguson, “appears headed in almost the exact direction Texas went in. The ratios look about the same.”

Experts say the collapse of the thrift industry in Arizona, far removed from the plunge in oil prices that helped trigger the Texas debacle, points out how pervasive the S&L; crisis is, and how few lessons the industry has learned from Texas.

In Arizona, the worst is not over, and in the end, taxpayers will be stuck with a lot of tracts of dusty desert far outside Phoenix.

To be sure, the bill awaiting taxpayers for the Arizona problem is only a fraction of the $50-billion to $75-billion tab for Texas, and experts say Arizona didn’t suffer as much fraud as the Lone Star State. But on a percentage basis, the Arizona crisis actually looks worse than Texas.

Texas has 204 thrifts; Arizona has only 11. Five of them--all in Phoenix--are insolvent, according to the Federal Home Loan Bank Board. In Texas, 90 S&Ls; were declared insolvent.

“There’s tremendous concentration in this market,” said Bob Stallings, chairman of Western Savings, who was recruited last spring from a Dallas thrift. “I’m seeing some of the same problems here and, in fact, even worse.”

Rise of Repossessed Assets

Repossessed assets at Arizona thrifts rose from $207 million at the end of 1986 to $1 billion at the end of 1988. Regulatory capital, a measure of the institutions’ solvency, has plunged to $343 million in 1988 from $1.13 billion in 1986. Earnings have reversed to a $657-million loss in 1988 from a $110-million profit in 1985, with an additional $195-million loss in the first three months of this year.

And a recent poll in Phoenix found that despite the government’s $100,000 deposit insurance, six out of 10 consumers believed that S&Ls; were risky places for their savings.

Arizona officials have gone to Washington to ask for special consideration in the Bush Administration’s S&L; bailout plan and to plead for a guarantee that the land won’t be dumped at fire-sale prices.

Regulators now control the bulk of thrifts’ real estate assets in Arizona--more than $10 billion worth.

“The most important economic factor in Arizona is what happens with the Bush plan,” said state Banking Commissioner Hank Rivoir. “The (regulators) could kill Arizona’s economy for years to come, or they could give us just a flesh wound.”

Like Texas, Arizona has a liberal real estate law that allowed the risky S&L; lending practices.

When Texas was booming, developers armed with easy-to-get loans overbuilt; when oil turned down, the market crashed. In Arizona, an overbuilt market began to crash after the 1986 federal tax law removed tax breaks for some real estate investments.

Real estate values actually have fallen faster than they did in Texas, Stallings said.

Buyers Stay on Sidelines

The crash is the result of concern about the future of the insolvent thrifts and whether the government will end up dumping assets. For now, potential buyers are on the sidelines, watching prices plummet.

“Everyone is pushing down trying to find the bottom. You keep pushing, and there’s nothing there,” he said. “Dallas-Fort Worth was never as bad as values indicated they were, and I’m seeing the same thing here.”

Western Savings, Stallings’ thrift, is much like some Texas S&Ls.; One of Arizona’s oldest thrifts and today the state’s second largest, Western plunged into aggressive real estate lending, much of which turned sour. It needed big returns on investments to repay depositors. It even ventured into the junk bonds and preferred stock of a much-troubled Dallas real estate investment firm, Southmark Corp.

Western lost. A $46.5-million investment in Southmark is now worth less than $10 million.

Like other Arizona thrifts, Western has offered depositors some of the highest interest rates in the country just to keep money in the bank.

Regulators forced the ouster of Western’s top management and encouraged Stallings’ hiring. But it was too late. In June, regulators declared Western insolvent and took control.

MeraBank had losses of $209 million last year and $29.2 million in the first quarter of this year. Analysts say that despite its more conservative management, MeraBank teeters on the verge of insolvency.

“With the way the Arizona market has tanked, even the best-run thrifts have trouble surviving,” said SNL Securities analyst James Marks.

Longtime MeraBank chairman Rice says he’s been through five downturns in the S&L; industry, each one worse than the previous.

“In good times, everyone thinks it will last forever. In bad times, everyone thinks it will never turn around. And they’re both wrong,” Rice said.

The thrift does have the advantage of an agreement between regulators and its parent company, Pinnacle West Capital Corp., which also owns the state’s largest public utility. The agreement is that Pinnacle will maintain adequate levels of capital.

Pressing for Mercy

Rivoir, the banking commissioner, has assembled an advisory committee and gone to Washington to press for mercy. Stallings has proposed his own plan and met with business leaders whom he says are eager to help.

Thrifts are hiring loan experts from Texas and importing some of the techniques developed there to survive the thrift crisis, said Phoenix banking consultant Deborah Bateman.

But investors and thrift executives can do little more than wait for Washington to decide their fate. Bateman said she knows of investors who are ready to grab banks, thrifts and their assets dirt-cheap, but regulators have put everything on hold until the Bush plan is passed.

“We’ve got conservators that are baby sitters right now,” she said. “Nothing is going on.”