Regulators Seize O.C.’s FarWest, Malibu S&Ls; : Thrifts: Failure of the larger institution, controlled by wealthy Canadians, could cost taxpayers $500 million.

Federal regulators Friday seized insolvent FarWest Savings & Loan Assn., the large thrift controlled by the wealthy Belzberg brothers of Canada, because of mounting losses from junk bonds and bad real estate loans.

The failure of Newport Beach-based FarWest, which had $3.8 billion in assets, ranks among the largest in Southern California. Federal regulators would not estimate the cost of the collapse to taxpayers, but one industry analyst said it could approach $500 million.

Federal regulators also on Friday seized Malibu Savings Bank, a Costa Mesa-based thrift with three offices and $154 million in assets. The thrift, crippled by bad real estate loans, was placed in receivership and will resume operations as Malibu Savings Bank, FSB.

FarWest’s demise means that taxpayers will be stuck bailing out a savings and loan controlled by one of the wealthiest families in North America. The net worth of the three Belzberg brothers has been estimated at about $400 million.

Because of the Belzbergs’ vast wealth, the FarWest takeover raises further questions about a system that has allowed thrift owners to use federally insured deposits to make lucrative but risky investments, knowing taxpayers ultimately would be there to pick up the bill if the investments went bad.

“If they win, they win. But if they lose, they still don’t lose. Taxpayers lose,” said Miami savings and loan consultant Kenneth H. Thomas.

The takeover, which had been expected for several months, came after the thrift’s owner, FarWest Financial Corp., refused to pump more than $300 million into the institution to restore its capital base.

The takeover is a blow to the Belzbergs, who were among the most feared and savvy corporate raiders in the 1980s. The Belzbergs owned 57% of the stock of FarWest Financial.

FarWest is another institution whose failure is linked to junk-bond king Michael Milken and Drexel Burnham Lambert Inc. At one time, the institution held more than $600 million in junk bonds, which have since been sold or lost much of their value.

The Office of Thrift Supervision placed FarWest in a conservatorship to be managed by the Resolution Trust Corp. Its operations will continue as normal with all 28 branches open and deposits up to $100,000 insured.

An estimated 3,000 of the 86,269 depositor accounts at the thrift contained $100,000 or more. Regulators would not disclose Friday the amount of uninsured deposits, and would not say whether those funds would be paid to depositors.

As of Sept. 30, 1990, FarWest reported assets of $3.83 billion, liabilities of $3.86 billion, and its tangible capital is a negative $109.8 million. Full-year financial figures will not be available until next month, a regulatory agent said Friday. The thrift lost $42 million in 1989 and $119 million in the first nine months of 1990.

FarWest Savings President Charles H. Green, a former FarWest Financial executive and the thrift’s fourth president since mid-1988, resigned immediately after Friday’s takeover. Regulators appointed banking industry veteran J. Alan Blodgett to serve as managing agent of FarWest Savings.

Other executives remain with the thrift, according to a RTC spokesman. Officials at FarWest Financial, including Chairman William Belzberg, could not be reached for comment Friday.

FarWest’s demise was caused largely by its real estate lending policies and its huge investments in junk bonds. A 1989 federal thrift law required S&Ls; to eventually dispose of their junk bond holdings.

Once-profitable junk bonds have plummeted in value in the past year, at the same time that regulators began pressing thrifts to carry the bonds on their books at their market value rather than their purchase price.

Most of FarWest’s junk bonds were purchased and held through a subsidiary, American Capital Fidelity Corp. As of Nov. 30, 1990, federal regulators said the market value of the junk bond portfolio had fallen to $279 million.

In addition, a number of real estate loans FarWest made to developers of commercial and multifamily properties in California, Texas, Colorado, Arizona, New York and Nevada have gone into default in the past two years as the real estate industry has plunged into recession.

FarWest’s financial reports show that as of Sept. 30, 1990, when it posted a nine-month loss of $119 million, income property loans and investments in the junk bond subsidiary amounted to 62.6% of its $3.8-billion in assets.

The thrift classified $505.5 million of its assets, or 13.2% of the total, as substandard, doubtful or outright losses. Among other things, FarWest took a $58.3-million writedown in July when it marked its junk bond portfolio to actual market value. And declining real estate values forced the thrift to set aside $14.6 million in loan loss reserves for the first nine months of 1990.

FarWest is a spectacular failure for Hyman, William and Sam Belzberg--Canadian financiers once so feared as corporate raiders that companies they invested in regularly paid them off to go away.

Operating through their flagship, Vancouver-based First City Financial, the Belzbergs made an estimated $250 million in the 1980s on “greenmail,” a term used to describe the money raiders made from fearful companies they threatened.

The family made $48.7 million in 1981 after it bought 23% of Bache & Co., a New York brokerage that later sold itself to Prudential Insurance Co. of America.

Using FarWest Financial, the Belzbergs teamed up as investors in Texas oilman T. Boone Pickens Jr.’s bid for Gulf Oil Corp., making an $8-million profit when Gulf was sold to Chevron Corp.

And in one of the decade’s most blatant examples of greenmail, the Belzbergs made a $14-million profit when Ashland Oil paid them off to leave the Kentucky oil refiner alone.

The collapse of the Drexel Burnham Lambert brokerage last year has blunted the Belzbergs’ force. They lost an estimated $14 million in 1990 in an unsuccessful attempt to take over Armstrong World Industries, a floor covering firm in Pennsylvania.

The Belzbergs and FarWest also were key members of Wall Street’s tight-knit takeover club in the 1980s.

Using federally insured deposits from FarWest Savings, the Belzbergs became important buyers in the risky high-yield junk bond market pioneered by Drexel and its junk-bond wizard, Michael Milken.

In addition, FarWest Financial’s funds were routinely available to finance takeover attempts by Milken clients, such as the time when FarWest and two other Belzberg companies committed nearly $300 million to finance Carl C. Icahn’s aborted bid for Phillips Petroleum in 1985. The Belzbergs also invested in a firm headed by stock speculator and convicted felon Ivan F. Boesky.

FarWest now joins the list of savings and loans that have failed since buying into Milken junk-bond market. Others on the list include Centrust Savings in Miami and Gibraltar Savings. The government has sued Drexel and Milken on behalf of several of the thrifts to recover some of the junk bond losses, and those of FarWest are likely to be included.

Drexel’s biggest customer, Columbia Savings in Beverly Hills, is expected to be seized soon once it arranges to sell its junk-bond portfolio.

“All of the bigger junk-bond holders have been taken over or are doomed to be,” Thomas said.

It was real estate that drove Malibu Savings into insolvency. Nancy Meuret, the RTC agent overseeing the takeover, said the thrift--which has an office in Costa Mesa and two in Malibu--needed $6 million in cash to bring its capital up to regulatory minimums.

The 9-year-old S&L;, which moved its headquarters from Malibu to Orange County in the mid-1980s, was owned by U.S. Shelter Corp., a South Carolina real estate syndicator, and was heavily involved in high-risk commercial and apartment construction lending.

FARWEST SAVINGS: A CHRONOLOGY

1889--State Mutual Savings & Loan opens in Los Angeles, and, 81 years later, is moved to Newport Beach.

1974--The Belzberg brothers of Canada--Samuel, Hyman and William--buy controlling interest in State Mutual’s parent firm, FarWest Financial Corp., and change thrift’s name to FarWest Savings.

1976--William Belzberg moves to Los Angeles to oversee operations of thrift and other family investments.

1983-86--FarWest Financial is one of several Belzberg entities used in series of corporate takeover attempts, including Bekins Co. in Glendale and Gulf Oil Corp.

1988--Fred Kayne, a longtime securities broker and William Belzberg’s investment adviser, is hired as president and chief executive of FarWest Financial and vice chairman of FarWest Savings to oversee securities investments, including junk bonds.

1989--New federal law requires S&Ls; to sell all real estate holdings and equity stocks, including junk bonds, within five years. Value of FarWest’s $667 million in junk bonds quickly plummets. FarWest posts $46.1 million loss for the year, citing sharp drop in junk-bond prices.

1990--Regulators reject FarWest’s capital plan, which includes transfer of its junk-bond activities from a thrift subsidiary to the thrift itself. Fred Kayne resigns from company and S&L.; In October, FarWest reveals it is insolvent after regulators force it to set aside $65 million in reserves for bad real estate loans and foreclosed properties and $26.8 million for its junk-bond holdings. FarWest losses $119 million in first three quarters.

1991--Regulators seize FarWest.

Source: Times files