Regulators Seize Mercury Savings : Thrifts: Huntington Beach-based S&L; and San Diego’s Imperial Savings among 12 nationwide taken over on same day. Deposits are safe but crackdown continues.

Two of Southern California’s best-known thrifts--Mercury Savings in Huntington Beach and Imperial Savings in San Diego--were seized Friday by government regulators in a further crackdown on the nation’s largest troubled savings and loans.

The seizure of the ailing thrifts had been anticipated after both were put under severe operating restrictions last month as their financial conditions worsened. Those restrictions, which prohibited the thrifts from even making a home or car loan, were widely viewed as a way to control losses while regulators prepared to take over.

Still, Friday’s action is sobering news for the S&L; industry. It shows regulators are unlikely to permit troubled thrift operators to stay in business long if they cannot meet tough new capital standards that took effect in December requiring institutions to maintain a stronger financial safety net to protect against losses. Those new standards were passed as part of the nation’s massive S&L; bailout that is expected to cost taxpayers more than $200 billion.

Some industry observers said they viewed the seizure of Imperial and Mercury as a sign regulators are stepping up their efforts in dealing with large, troubled thrifts amid criticism from Congress that they are moving too slowly in mopping up problem thrifts. Nationwide, 12 S&Ls; were seized Friday, bringing the total number of thrifts seized since early last year to about 360. Nearly 60 nationwide and seven in California have been seized since the first of this year.

This month alone such large problem institutions as Franklin Savings Assn. in Kansas, Ben Franklin Federal Savings in Oregon and CenTrust Savings in Florida have been seized.

“A lot of the tall trees are getting cut down. I think they realize they have to start moving,” said Bert Ely, a thrift consultant in Alexandria, Va.

The new standards and the federal law under which they were promulgated drew fire from William O’Connell, retired president of the U.S. League of Savings Institutions. He called the law a “disaster” and said Congress must call a halt to the takeovers of “honest” operations such as Mercury and Ben Franklin.

Two other major Southern California S&Ls;, Santa Barbara Savings and Valley Federal Savings, remain under strict operating rules. Many industry executives believe they will eventually be seized as well.

Branches of both Mercury and Imperial will remain open during normal business hours, and depositors are unlikely to notice any difference. Federal government insurance of deposits up to $100,000 will remain in effect. Imperial has 80 branches, while Mercury has 24.

Both thrifts were taken over by the Office of Thrift Supervision, which named the federal Resolution Trust Corp. as conservator, a job that includes arranging to sell the institution.

“This is a day that is going to be remembered,” said Leonard Shane, Mercury’s chairman.

Mercury and Imperial followed vastly different paths leading to Friday’s federal takeover.

Mercury’s seizure was ironic. The thrift for years was viewed as the archetypal savings and loan that operated conservatively in an era when renegade S&L; operators gambled taxpayer-insured deposits on such things as risky real estate projects and junk bonds.

That changed when Mercury, which has $2.15 billion in assets, lost $13.8 million in 1988 and $5.4 million in the first nine months of last year, mainly from accounting adjustments it was forced to take because borrowers paid off adjustable-rate mortgages sooner than expected. Mercury had been claiming future profits by assuming those mortgages would have a much longer life.

Mercury also had problems with two large troubled loans that financed Marriott hotels in Irvine and Tulsa, Okla. Last month, it began foreclosure proceedings on the loans, which total $60.7 million.

The seizure of Mercury is an especially humbling blow for Leonard Shane, 67, who served as chairman ever since the S&L; was founded 26 years ago. Shane is a former president of the thrift industry’s main trade group, the U.S. League of Savings Institutions, and was often outspoken about wayward thrifts.

He declined to comment specifically on the government’s action but said he will serve as a consultant to regulators on Mercury. Earlier this month, Shane stepped aside from managing the firm’s day-to-day operations as president and chief executive, turning those duties over to Michael A. Durkin, a former state regulator.

“I don’t know where we’re going to be or what’s going to happen, but I’m aware that we’re being treated differently,” he said. “One good thing is that the regulators will be re-examining the whole question of how we got here through these accounting losses.”

Mercury was not forced into receivership, which is the typical route for takeovers. Under a receivership, an S&L; is liquidated. But under a conservatorship, regulators will try to conserve Mercury’s assets and its marketability while searching for a buyer, Smith said.

Also, under a conservatorship, shareholder rights remain intact. But trading in Mercury stock was halted by the New York Stock Exchange, which hasn’t decided yet if it will allow trading to resume.

Mercury is only $100,000 in the red under the common definition of insolvency, which is assets minus liabilities. But under the new federal thrift law’s restrictive definitions, Mercury has a negative $33.3 million in tangible capital, the basic cash available to act as a last resort against losses.

“Mercury is not deeply insolvent, not way in the hole like so many other S&Ls;,” explained Janis Smith, a spokeswoman for the federal Office of Thrift Supervision. “There’s a good deal of marketability there, and the conservator will preserve what can be preserved.”

But, Smith said, Mercury also had suffered serious losses that were likely to continue, driving the institution further into debt and putting the deposit insurance fund at risk.

Except for the board, all top officers have been retained, Smith said. However, one top officer, Shane’s son William, announced Friday that he was quitting to become president and chief executive of National Economic Resources, which specializes in financial and estate planning for individuals and small- and medium-size companies.

All of Mercury’s 24 branches continue to operate as usual, and $1.8 billion in deposits continue to be federally insured, Janis Smith, an OTS spokeswoman, said.

Mercury and Imperial had sought unsuccessfully to convince regulators that they could turn their fortunes around, and publicly expressed confidence they could recover. Mercury had been shopped around by investment bankers for some time, but no buyer was found.

Regulators said that although both institutions have been losing money, they hope to whip them into shape and sell them.

Imperial, the nation’s 16th-largest thrift as of Sept. 30, becomes one of the largest thrifts ever seized by the federal government and the second-largest ever seized in California, behind Gibraltar Savings in Simi Valley.

Imperial’s troubles stem from a high-flying period in the mid-1980s to late 1980s when the thrift, led by former Chairman Kenneth Thygerson, became a key member of a group of buyers of high-risk, high-yield junk bonds. That group was assembled by Drexel Burnham Lambert, the Wall Street firm that collapsed last week.

As of Dec. 31, Imperial held slightly more than $1 billion in junk bonds, which are issued by companies with low credit ratings.

The bonds pay investors higher yields to compensate for their higher risk. Junk bonds have tumbled in value the past six months due largely to recession fears and troubles with junk-bond issuers such as Robert Campeau’s department store chains. Imperial also suffered from problem car and mobile home loans.

“It was the Imperial touch,” said Mike Abrahams, an S&L; industry analyst in Los Angeles with Bateman Eichler, Hill Richards. “Everything they touched was junk to begin with. I think that, as time goes by, (lawsuits) will dig deeper and we’ll find even more problems.”

Imperial, which had $9.7 billion in assets at year’s end, had negative tangible capital of $60 million as of then. Its parent firm, Imperial Corp. of America, was not seized, although the savings and loan made up nearly all of its holdings.

Times staff writer Greg Johnson in San Diego contributed to this story.

MERCURY SAVINGS: A CHRONOLOGY

April, 1964--Leonard Shane and six others form Mercury Savings & Loan in a storefront office in Buena Park. They later relocate to Huntington Beach. Early 1980s--Like most financial institutions, Mercury suffers losses from the twin blows of high inflation and a bust in the real estate market. 1986--Two separate and apparently isolated sets of fraudulent transactions by employees cost the S&L; $17 million. Early 1988--Mercury reports reduced annual income of $5.1 million for 1987 as higher interest rates play havoc with its earnings. The S&L; had earned $9.4 million in 1986 and $11.1 million in 1985. Early 1989--Mercury posts $6.1-million profit for the previous year, then revises it twice because of accounting adjustments and winds up with a $13.8-million annual loss. Late 1989--Mercury continues to lose money, mainly from accounting adjustments, and chalks up $5.4 million in red ink for the first nine months. Jan. 24, 1990--Mercury suffers a sharp blow when it devalues $60.7 million in loans from its two biggest borrowers--the owners of the Irvine Marriott and the Tulsa Marriott. The hotels had defaulted on the loans, and Mercury initiates foreclosure proceedings. Source: Los Angeles Times files

A POWERFUL BLOW--Mercury’s Shane loses beloved platform along with power. D5