S & L’s Stock Plan a Victim of Speculators
When Glenfed Inc. revised its dividend reinvestment plan in 1988, it was supposed to create an investment opportunity for ordinary shareholders, not arbitragers.
But last month, the parent of Glendale Federal Bank found to its dismay that the new plan offered arbitragers--professionals who specialize in profiting from price discrepancies in the same stock--just the kind of short-term profit they seek. And the company blames arbitragers for much of the fall in Glenfed’s stock since mid-June. Glenfed closed at $12.25 a share Monday, down 11% since June 21, before the problem surfaced. So Glenfed announced June 27 that it would change the program to curb what it termed abuses of the plan.
The problem centered on a program that allowed stockholders to plow back their cash dividends each quarter to purchase new Glenfed shares at a discount of 5% off the market price. Beginning in November, 1988, Glenfed also let shareholders with more than 100 shares supplement their dividends with up to $5,000 in a cash contribution to buy additional new shares at the discount.
But Glenfed said some sharp brokers realized that they could exploit the difference between the 5% discount price and the market price of Glenfed shares to make a quick profit.
The brokers used a method called short selling. Usually the technique is risky: Investors borrow stock and sell it in the hope that the price will go down. Then they can buy back stock at a lower price to return to the lender and pocket the difference. If the stock price goes up, however, short sellers lose.
But Glenfed’s plan made it easy for short-selling arbitragers. After borrowing Glenfed stock and selling it at the market price, they knew they could buy new Glenfed stock for 5% less and make an instant profit.
The practice pushed Glenfed’s stock down, according to Keith P. Russell Jr., the savings and loan’s chief operating officer, because large amounts of stock were being sold and skittish investors reacted to the growing “short interest” in Glenfed. A large short interest, which is the number of shares borrowed, sold short but not yet returned, is often a sign that some investors expect bad news from a company.
Anxiety about possible real estate losses among banks and S&Ls; generally also hurt Glenfed’s stock, according to Allan Bortel, an analyst with Sutro & Co. in San Francisco.
After Glenfed fell $1.25 a share, to $12.50, on June 22, the S&L; noticed that some of the same brokers who were taking advantage of the discount stock-buying were also selling Glenfed stock short, Russell said. Some brokers also seem to have evaded the $5,000-per-shareholder limit in the reinvestment program by opening 50 to 75 separate accounts, Russell added. He declined to identify the specific brokers involved.
To curb arbitragers’ interest in Glenfed, the company will change the reinvestment plan by cutting the discount to 2% for stock purchases made with the next dividend or with voluntary cash contributions after Aug. 1.
