Capital Plan Denial Angers FarWest Chief : S&Ls;: Regulators rejected the ailing thrift’s proposal to add assets from subsidiaries. The turndown may place it on the verge of insolvency.

The president of struggling FarWest Savings strongly objected Friday to federal regulators’ rejection of the thrift’s capital plan, contending that the regulators made a serious error in judgment.

The regulators’ action could deprive the Newport Beach-based thrift of $60 million in capital and place it on the verge of insolvency.

FarWest President Charles Green said regulators erred in blocking the firm’s proposal to liquidate a subsidiary carrying its junk bonds and equity real estate holdings and fold those assets into the institution.

The plan would allow the thrift to maintain its current capital base without having to replace the $60 million. But regulators with the Office of Thrift Supervision and Federal Deposit Insurance Corp. in San Francisco vetoed the proposal. The regulators declined comment.

Industry sources said rejection of FarWest’s plan--filed with authorities last December--appears to be an effort by regulators to force a cash infusion into the S&L; by FarWest’s majority owners, the wealthy Belzberg brothers of Canada.

A knowledgeable industry source said FarWest’s plan, although submitted nearly eight months ago, wasn’t ruled on until after a July cutoff date became effective for excluding certain subsidiary assets from a thrift’s capital base.

The rejected plan, which FarWest is appealing to regulators in Washington, promised to reduce the S&L;’s assets to about $2.7 billion. It also called for FarWest to sell off its huge portfolio of risky high-yield junk bonds and bolster capital with a stock offering to shareholders of its parent, FarWest Financial Corp. in Beverly Hills.

But a key ingredient in the plan called for FarWest to liquidate the subsidiary holding its junk bonds and other assets, including direct real estate investments. FarWest would then absorb those assets.

Last year’s thrift bailout law prohibits S&Ls; from acquiring additional junk bonds or direct real estate investments. It also requires institutions already holding such assets to divest them by 1994. And, in a provision that took effect last month, the bailout law also requires S&Ls; to set aside reserves equal to 10% of a subsidiary’s prohibited assets.

Because FarWest’s subsidiary holds about $600 million worth of junk bonds and other prohibited assets, the S&L; will be required to set up a $60-million reserve if its appeal fails. And that would reduce its current capital level of $37.7 million to negative $23 million, driving it into insolvency.

By moving the subsidiary’s assets directly into the S&L;, FarWest would avoid the need for a $60-million reserve.

But the FDIC’s regional office rejected the plan, maintaining that in making the shift FarWest would effectively be acquiring forbidden assets.

The S&L;’s appeal to the FDIC in Washington, Green said, is based on its position that the S&L; already owns the assets and thus isn’t making any new acquisitions.

“We own those assets, and we own all of the stock in the subsidiary, and the regulators know it,” Green complained. “They have required us to write (their value) down to market value and to divest them, so they recognize the fact that we own and control them.”

Green steadfastly maintains that the only issue is the FDIC’s contention that assets of a wholly owned S&L; subsidiary cannot be merged into the S&L; itself, because the move would constitute acquisition by FarWest of forbidden assets.

The overriding issue is the viability of FarWest’s capital improvement plan, required by regulators because the thrift, with $3.7 billion in assets, does not have sufficient capital--the cushion against future losses--to meet regulatory minimums.

Although FarWest is solvent and is posting an operating profit, rejection of its appeal would plunge it deeply into insolvency.

Still, even if that happens, FarWest believes that it can eventually meet the regulatory capital requirements, Green said. “We are under no pressure to act hastily,” he said, “and there is no concern that regulators are prepared to swoop down on us.”