Western Empire S&L; Seized; Suit Threatened

Federal regulators seized Western Empire Savings & Loan in Irvine on Friday, prompting angry threats from the New York investment group that bought the S&L; 13 months ago that it will sue the federal government.

Regulators took over the thrift after deciding that it was operating in an unsafe and unsound manner and had inadequate capital with no prospects for obtaining more. They put the S&L; in receivership and transferred its assets to a newly created thrift called Western Empire Federal Savings & Loan.

The new S&L; will open Monday for business as usual under control of the Resolution Trust Corp., the federal agency that handles failed banks and thrifts. The S&L; has $491 million in assets and $312.4 million in 8,205 deposit accounts, which will continue to be federally insured.

Castle Harlan Inc., a New York investment group that paid $15.8 million in cash to purchase Western Empire in December, 1988, disputed the regulators’ view of the S&L;’s capital base and called the takeover “an unconscionable abuse of power that attacks the very foundations of our economic system.”

The New York investors charged in a prepared statement that regulators “have confiscated our investment, which they urged us to make, without due process.” The group called it “expropriation, pure and simple.”

Castle Harlan said it plans to sue the government for breach of contract and unconstitutional seizure of its property. Rob Wages, an executive with the group, said legal action is one of several options that the investors are considering.

Western Empire is the second Orange County thrift that regulators have seized this month. A week earlier, they seized Huntington Savings & Loan in Huntington Beach.

Without government assistance or guarantees, Castle Harlan purchased the insolvent Western Empire, and came up with a rescue plan that was approved by regulators.

That plan relied on securities trading, including a concentration of high-risk, high-yield corporate securities known as junk bonds. At the end of September, Western Empire had $191.8 million, or 33.8% of its $567.8 million in assets, in junk bonds. In addition, it had about $220 million in mortgage-backed securities, usually considered a much less risky investment.

But Congress changed the rules in August when it passed comprehensive legislation to bail out the ailing S&L; deposit insurance fund. The law requires thrifts to sell their junk bond portfolios within five years, a last-minute provision that started the huge slide in the value of junk bonds. Thrifts nationwide held about 10% of all junk bonds in December.

The junk bond market continued to take a beating as even healthy S&Ls; wrote down the value of their junk bonds to reflect falling market prices. Western Empire attributed its $2-million, third-quarter loss to junk bond losses. It lost $3 million during the first nine months of 1989..

The junk bond tumble eventually led to the collapse earlier this week of Drexel Burnham Lambert, the New York investment banking firm that pioneered the market.