Thrift regulators' rejection this week of the $3-billion sale of Columbia Savings & Loan's junk bond portfolio sets the stage for an eventual taxpayer bailout of the maverick thrift, likely to cost between $300 million and $700 million, thrift experts said Tuesday.
The cost estimates are based in part on losses that Columbia will incur when its bonds are eventually sold for far less than their value on its books, experts said.
The rejection by Office of Thrift Supervision Director Timothy Ryan and his request that more bids be solicited--based on his conclusion that the sale as structured may not be in taxpayers' best interests--carries plenty of risks.
One is that reviving interest among prospective bidders may be hard. The small number who can afford Columbia's high-risk, high-yield securities may be discouraged from bidding again because of the softening economy and uncertainties caused by the military buildup in the Persian Gulf.
Beyond that, some argue, Ryan's decision may ultimately put a chill not only on the sale of Columbia's junk bonds, but on other deals between thrift regulators and investors. Even before the sale, prospective bidders said privately that they were concerned that regulators or members of Congress would someday criticize or even reopen deals.
"We don't want bureaucrats second-guessing us," said a senior executive at one group that bid unsuccessfully for Columbia's bonds.
OTS spokesman Robert Schmermund said the agency does not believe that Ryan's decision will have a chilling effect.
"It shows that we are a professional organization that is trying to structure the best and most realistic deal, ultimately to protect the taxpayers," he said.
The Columbia sale would have required the ailing Beverly Hills-based thrift to finance 90% of the sale to a group led by Gordon Investment Corp. of Toronto. The Gordon group would make a $300-million down payment, with Columbia holding a $2.7-billion note.
Critics said the Gordon group could default and walk away from the transaction, leaving Columbia--and eventually taxpayers--with the bonds. They also said that because Columbia continued to carry that risk, the Gordon deal could be worth much less than the official $3-billion purchase price.
Regulators turned it down because all-cash bids were not solicited. They also noted that Columbia would not benefit if the bonds eventually regained value. In addition, they cited the possibility that the 10-year deal could violate federal law requiring thrifts to sell their junk bonds by 1994. Regulators also said that the government could eventually take possession of the bonds and that it currently has no policy on seller financing of non-real estate assets.
The rejection shocked those close to the deal, who had been led to believe as late as Friday that it could be approved. Several sources said investment bankers Kidder, Peabody & Co., hired by the OTS to evaluate the deal, favored the sale, albeit with some tinkering. In addition, sources said, the sale was backed by regulators at the OTS regional office in San Francisco.
The rejection virtually guarantees that Columbia will be seized, although how soon is open to debate. Regulators are so involved in its operation that it is tantamount to being run by the government anyway. In addition, regulators are eager to quickly dispose of the junk bond portfolio assembled by former Columbia Chief Executive Thomas Spiegel, one of the industry's most controversial figures.
Sources familiar with the Columbia deal said Ryan's rejection does not rule out the possibility that he may eventually accept a Columbia-financed deal if substantial bids fail to materialize. Still, no one expects Columbia to get close to $3 billion for the bonds.
"There are not many guys who can write out a 10-digit check," said one prospective bidder.
Those familiar with the portfolio said the best all-cash offer would probably be $2.2 billion. A sale at that price would require Columbia to recognize a huge loss of about $700 million because the bonds are valued on Columbia's books at about $2.9 billion.