Columbia Savings Sues Merrill Lynch Over Junk Bonds
Troubled Columbia Savings & Loan has sued Merrill Lynch, Pierce, Fenner & Smith, alleging that the Wall Street brokerage misled it into buying $20 million of “virtually worthless” junk bonds.
Columbia said in the lawsuit that it bought the bonds in August from Merrill Lynch after allegedly being told by the brokerage that the bonds’ issuer, struggling Lomas Financial, was about to receive new financing. One month later, Lomas, a Dallas-based financial services company, sought protection from its creditors under Chapter 11 of the federal bankruptcy code after halting payments on $2.1 billion of its debt.
A spokesman for Merrill Lynch on Friday denied Columbia’s allegations and promised that the brokerage will aggressively defend itself. Columbia declined to comment on the lawsuit, filed late Thursday in Los Angeles Superior Court.
The Lomas bonds are part of a growing portfolio of troubled securities held by Columbia, including $3.8 billion in high-yield, high-risk junk bonds, far more than any other U.S. thrift. Columbia’s portfolio has tumbled in value during the past six months as investors have shunned junk bonds because of recession fears and problems with some major issuers. Those problems also led to the recent collapse of investment banker Drexel Burnham Lambert.
Columbia must divest its junk bonds by 1994 as required by last year’s federal thrift bailout legislation. In the nine months ended Sept. 30, Columbia lost $212 million, contrasted with a profit of $48.7 million in the 1988 period. Industry executives believe that if Columbia’s junk bonds keep falling in value, it risks being taken over by regulators.
Separately, another sticky problem for Columbia is developing in Orlando, Fla., and Kansas City, tied to an embarrassing $15.8-million loan the thrift made to the now-grounded Braniff Inc. airline.
The Drexel-arranged loan, secured by leases at 29 Braniff gates at Kansas City International Airport, was made just weeks before Braniff filed in September for Chapter 11 protection. On Thursday, Columbia was given until the end of this month by a federal bankruptcy judge in Orlando to decide if it wants to take over the leases to try to recover at least part of its loan.
Whether Columbia recovers any of its money is growing more unlikely. Delbert Karmeier, Kansas City’s director of aviation, said that to take over the leases, Columbia first must pay $2.5 million in back rent that Braniff owes. It must also keep paying $240,000 a month in rent.
Furthermore, selling the gate leases--Columbia’s only real hope to recover any of its money--will be difficult, he said, because there are already plenty of unused gates in Kansas City.
In addition, Karmeier said, Columbia will have to act fast. According to airport rules, he said, Columbia would lose rights to the gates if they aren’t in substantial use within four months of taking them over.
The gates also secured another $5-million loan made to Braniff by European American Bank in New York, but airport officials said Braniff’s loan arrangements give Columbia’s claim higher priority.
Columbia declined to discuss the Braniff loan.
