S&L; Mop-Up Agency : History’s Biggest Fire Sale
Its assets include a racehorse with syphilis, the world’s first vertical country club and the shell of a luxury condominium on a rocky ledge in Puerto Rico.
In fact, the Resolution Trust Corp., which conducted its first business on Thursday, will be the largest financial institution in the world.
To the RTC falls the distasteful task of being garbage man of the savings-and-loan crisis, the agency that must clean up the littered streets after an orgy of mismanagement, miscalculation, greed and outright theft.
The newest federal agency opened for business with a bulging portfolio of $104 billion worth of assets from the 262 failing S&Ls; that federal regulators have seized since February. In the next two or three years, the RTC is expected to close several hundred more S&Ls; and accumulate assets nominally worth as much as $400 billion.
Healthy Portfolios
The RTC will sell the healthy portions of the savings institutions it takes over, such as portfolios of home loans.
That should be easy. The far trickier job will be disposing of the undesirable real estate and problematic business ventures--the churches built on speculation, the shopping centers 10 miles from the nearest homes, the sperm bank for buffalo. As much as $150 billion of the RTC’s $400 billion in assets is likely to be in this category.
“We’re not having a thrift crisis. What we’re having is a real estate crisis,” said Jamie J. Jackson, president of Oak Tree Capital, a merchant banking firm active in S&L; rescues. “The RTC will become the largest real estate owner and manager in the history of the world.”
Jackson said the agency will function as a property “undertaker, handling bodies all over the United States.”
The more the RTC makes, the better for the taxpayers, because money from the sale of the assets will help pay the cost of making good on federal deposit insurance.
6 Distressed States
The new law lists six economically distressed states--Texas, Oklahoma, Colorado, Arkansas, Louisiana and New Mexico--where the RTC cannot sell a property for less than 95% of market value. That may be a difficult goal to reach, but Congress feared that excessive bargains would depress already-lackluster markets.
“If they do too much too fast, they glut the market,” said Mark J. Riedy, president of the National Council of Savings Institutions. “If they do too little too late, it raises the cost to taxpayers.”
This biggest going-out-of-business sale in history is drawing swarms of eager players. In Washington on Tuesday, a day before the RTC was born, more than 300 deal makers, accountants, lawyers, auctioneers, bankers and S&L; executives jammed into a standing-room-only conference on the new agency.
“The noise up here is almost deafening,” Riedy joked at the speaker’s rostrum. “From the podium, I can hear your meters ticking.”
A worried Rep. Elizabeth (Liz) J. Patterson (D-S.C.) said recently: “There are people out there waiting to pick the Resolution Trust Corp.’s pocket before it has its pants on.”
The potential “for scandal is tremendous,” said Sen. John Kerry (D-Mass.).
Guarding against scandal and setting RTC policies will be the responsibility of an oversight board composed of Treasury Secretary Nicholas F. Brady, Federal Reserve Board Chairman Alan Greenspan, Secretary of Housing and Urban Development Jack Kemp and two private citizens to be named by Bush.
On a daily operating basis, the RTC will be directed by L. William Seidman, chairman of the Federal Deposit Insurance Corp., which regulates banks and guarantees their deposits up to $100,000.
The FDIC, which will supply all personnel for the RTC, expects to hire several thousand new workers to keep track of the huge volume of real estate and other assets that must be sold. Beyond that, the RTC will hire a small army of subcontractors as property managers, disposal experts, sales agents and auctioneers.
The new S&L; legislation orders the RTC to publish an inventory of all its properties by January, a virtually impossible task. A few of the more bizarre investments, such as the syphillitic horse, are widely known in the financial community, although there are few details. But for the most part, the bankrupt institutions being seized by the government are precisely the ones that have been mismanaged by executives who kept sloppy records or none at all.
“It will take a lot more than four months to get your hands around the inventory,” said John A. Koskinen, chief executive of the Palmieri Co. in Washington, which specializes in managing troubled companies. When his firm worked on the Penn Central Railroad bankruptcy, he said, it took a full year simply to locate the records for all of the 8,500 properties owned by the company.
Koskinen’s firm has encountered similar chaotic record-keeping while running S&Ls; as a conservator on behalf of the government. For example, there were scanty files on real estate loans with no information on how much money was advanced, how much had been repaid or what had been offered as collateral. Some loans for motels did not show the correct number of rooms.
Making it even harder to get a correct inventory is a severe shortage of professionals to appraise and help sell properties.
Appraisers in Texas, the heartland of failed thrifts and repossessed real estate, are in desperately short supply, said G. Ronald Witten, president of the Dallas real estate research firm M/PF Research. The backlog of work already stretches for two months and more, he said.
Unraveling the ownership of seized real estate could take years. Many properties were held as joint ventures by various investors and had numerous lenders. Title questions on some properties may take five years or more to resolve, according to real estate experts familiar with properties the RTC will control.
Those disputes will likely end up in court. Some real estate consultants predict that as many as 100,000 civil lawsuits--15,000 more than were filed in Los Angeles County last year for all purposes--will swamp the RTC as lenders and investors fight for the scraps of assets.
A shrewd eye and sound judgment will be needed to find the salvageable properties--the empty office buildings that can be rented with a bit of renovation, the tracts of homes that can be completed and sold at a profit.
The RTC will first try to sell seized S&Ls; whole to healthy thrifts and banks seeking to expand their branch networks and deposits. But when the portfolios of bad real estate are too big, the RTC will have to strip out the losing assets before making a deal to sell an S&L.;
“It’s not Wilshire Boulevard property, it’s primarily junk,” said Joseph E. Robert, chairman and chief executive of J. E. Robert Cos., an Alexandria, Va., firm that manages troubled loans and assets for government agencies.
William L. Callender, chief executive of California Federal Bank in Los Angeles, has reviewed the portfolios of troubled thrifts, looking at assets that he says are so bad they cannot be given away. The properties include time-share vacation condominiums in Louisiana that look out over oil rigs and apartment buildings with three-quarters of their units vacant.
And then there’s the case of the vertical “country club.” It’s a club in a high-rise building chock-full of recreational facilities but unfortunately lacking a golf course.
Many of the assets are “totally unsellable at virtually any price,” Callender said.
But the RTC’s mission under the law is to dispose of the properties by Dec. 31, 1996, when it is scheduled to go out of business. The logistics of disposing of such a huge portfolio are staggering.
“If you sold $10 million of real estate each day seven days a week for 365 days a year, it would take 28 years just to sell $100 billion, and that’s without a day off,” said James Gall, president of the Auction Co. of America, a Miami-based firm used by the FDIC to sell assets from seized banks.
Gall hopes to snare a chunk of business from the RTC and the property managers it hires. Arguing that auctions can help move an otherwise stagnant market, he notes that his firm recently sold for $2.7 million a San Francisco condominium that had stood empty for two years at a $3.1-million asking price.
Knows It’s a Hard Sell
Merrill Butler knows from experience how hard it is to sell the holdings of defunct S&Ls.; He handled the disposition of the bad assets of Stockton-based American Savings & Loan, which was seized by federal regulators and sold to a private investor, Robert M. Bass of Texas.
Despite a major effort, Butler told a seminar in June: “We still have under property management 1,700 condos, 540 single-family detached units, 8,000 apartment units, 2,500 acres of land, 13 hotels/motels with 2,400 rooms, 1.725 million square feet of retail space, 3.19 million of office space, a kitty-litter mine, one marina with boat slips, the nation’s largest indoor flea market, one winery and one truck stop--and a few other little parcels.”
Even if all of RTC’s assets were good, who has the money to buy them?
Japanese investors have spent huge amounts of money in recent years buying choice U.S. real estate. Yet the Japanese own only $43 billion worth of such property, compared with the $150 billion in undesirable properties the RTC may control.
Some markets, especially in depressed Texas and Oklahoma, are already burdened with real estate seized by S&Ls; when loans went bad.
$3 Billion in California
As of March, U.S. thrifts owned about $31 billion in real estate that they had taken back from buyers. About $3 billion of it was in California, second only to the $16 billion worth of properties in Texas. Despite the comparatively big holdings in California, experts expect little or no impact on the state’s healthy and diversified real estate market.
Even with a huge addition to the ranks of foreclosed properties as the RTC proceeds, “we wouldn’t even notice it,” said Stan Ross, co-managing partner with Kenneth Leventhal & Co., a Los Angeles-based accounting firm specializing in national real estate.
Robert A. Rosenblatt reported from Washington and James Bates from Los Angeles.
REPOSSESSED S&L; ASSETS In millions of dollars as of March 31, 1989 States With Most Repossessed Assets Texas: 15,849 California: 3,490 Arizona: 1,228 Florida: 1,207 Oklahoma: 756 Colorado: 753 Louisiana: 646 Arkansas: 576 Illinois: 496 Missouri: 479 States With Least Repossessed Assets Vermont: 0 Maine: 3 Idaho: 4 Connecticut: 8 Delaware: 9 Montana: 16 D.C.: 16 New Hampshire: 18 South Dakota: 19 Hawaii: 23 Source: Kenneth Leventhal & Co.
S&L; FAILURES IN CALIFORNIA Savings and loan institutions in California that have been seized by the Federal Deposit Insurance Corp. since February:
Assets Deposits Institution City (millions) (millions) Gibraltar Savings Beverly Hills $13,420 $7,410 Lincoln Federal S&L; Irvine 5,500 4,400 Pacific Savings Bank Costa Mesa 1,100 1,000 Southwest S&L; Los Angeles 962 837 Independence S&L; Vallejo 442 377 Westwood S&L; Los Angeles 341 414 Westco Savings Bank Wilmington 203 194 First California Savings Orange 168 204 Founders Federal S&L; Los Angeles 133 160 First Federal S&L; Bakersfield 133 127 Cabrillo Savings Bank Hayward 86 73 Gateway Savings Bank San Francisco 81 132 Washington S&L; Stockton 70 71 Arrowhead Pacific Savings San Bernardino 57 81 Bank Sierra Federal S&L; Beverly Hills 49 43 Unified Savings Federal Northridge 37 53 S&L; Royal Oak S&L; Manteca 37 37 City S&L; Westlake Village 32 31 Guardian Federal S&L; Bakersfield 29 29 American Interstate Los Angeles 27 26 Savings Perpetual Savings Assn. Santa Ana 24 34 City Federal S&L; Oakland 22 31
Institution Accounts Gibraltar Savings 462,217 Lincoln Federal S&L; 176,323 Pacific Savings Bank 49,343 Southwest S&L; 69,143 Independence S&L; 46,286 Westwood S&L; 9,065 Westco Savings Bank 13,825 First California Savings 11,744 Founders Federal S&L; 19,372 First Federal S&L; 12,323 Cabrillo Savings Bank 6,243 Gateway Savings Bank 4,809 Washington S&L; 7,577 Arrowhead Pacific Savings 6,959 Bank Sierra Federal S&L; 1,304 Unified Savings Federal 627 S&L; Royal Oak S&L; 4,291 City S&L; 1,070 Guardian Federal S&L; 651 American Interstate 364 Savings Perpetual Savings Assn. 1,641 City Federal S&L; 4,453
Source: Federal Deposit Insurance Corp.
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