Bad Loans, Bad Blood : The Deadly Rivalry Between San Diego’s HomeFed and Great American Savings Wasn’t Just Business. For Their CEOs, It Was Personal.

THE TWO MEN DIFFER SLIGHTLY IN THEIR RECOLLECTIONS OF the fateful 1955 chance meeting in the old Rexall Drugstore in downtown San Diego. Kim Fletcher, board chairman of HomeFed Bank, San Diego’s largest savings and loan--where things have not been going well of late--remembers being with his wife, Marilyn. Gordon Luce, for 20 years the chief executive officer and motivating force behind HomeFed’s chief competitor, Great American Savings--where things have been worse--remembers Fletcher being with his dad, Charlie, a legend in the local S&L; industry.

In the essentials, however, they agree. Luce, then working for Carnation Corp., was sipping coffee and bemoaning the fact that he’d have to accept a series of transfers away from his beloved San Diego in order to progress up the corporate ladder. Fletcher, a fellow Stanford MBA alumnus, seated next to Luce at the counter, said, “You know, Gordon, we’re growing over here at Home Federal. Why don’t you come over for an interview?”

The invitation resulted in a job offer, which begat a working relationship between two bright, ambitious men, which, after Luce left HomeFed to pilot a then-tiny San Diego Federal, became a fierce rivalry. There followed an eerily similar pattern of reckless competition on the part of both banks that has left San Diego’s two most heralded financial institutions in ruins: Luce’s is in federal receivership; Fletcher’s not far from that. In the process, thrift shareholders--including thousands of employees who entrusted their retirements to the thrifts’ stock-ownership plans--have watched their investments go from weighty to nearly worthless. Separate class-action litigation on behalf of thousands of shareholders is under way against both men and their directorates, who are accused of, among other things, misleading stockholders about the solvency of their respective institutions. (Some of the materials and depositions relating to the civil cases are covered under a protective order, which prevents the attorneys and the parties involved from disclosing their contents. Luce declined to be interviewed; Fletcher declined to discuss his case.)

But in their glory years of the not-so-distant past, the two institutions waged a seesaw battle for supremacy in San Diego’s ultracompetitive thrift industry. At their height, each listed assets above $15 billion; HomeFed was ranked sixth nationally among S&Ls;, Great American (as San Diego Federal was renamed in 1983) oscillated between seventh and eighth. HomeFed operated 210 branches to Great America’s 213, while both boasted precisely 60 branches in San Diego. “It was uncanny,” recalls one former Great American director. “Every time we had a successful branch developed, they plopped in next door.”

That wasn’t all. When HomeFed instituted a mobile banking unit to serve San Diego’s then-outlying areas in 1970, Luce did the same and then went Fletcher one better by installing a minibranch in a supermarket. Recognizing the coming role of women in the marketplace, HomeFed spearheaded the appointment of females to supervisory posts. Luce flourished his sense of social responsibility by opening a branch in rugged South East San Diego, a neighborhood that banks had redlined. In the mid-1970s, when San Diego caught hot-air balloon fever, there ensued a contest to see which thrift could gets its logo-bearing balloons up first and photographed most often.

Says Charles (Red) Scott, chairman of Fuqua Industries and a longtime friend of both Luce and Fletcher: “They were the two prime movers and shakers in San Diego. If they didn’t shake it, it didn’t get shook.”

This, then, is a story of what might have been. Of two thrifts that could have--probably should have--stood shoulder to shoulder at the pinnacle of the West Coast financial industry but instead wound up marching in lock-step toward oblivion. Above all, it is a story that proves that, in banking at least, fools can be every bit as dangerous as knaves.

SAN DIEGO IS A CITY PASSIONATELY--xenophobically, some would say--protective of its identity. Anything that comes from elsewhere, especially from Los Angeles, is considered tainted. No better proof exists than the maelstrom unleashed in 1988 when Southern California Edison attempted to take over San Diego Gas & Electric. At the highest levels of city government, sober-minded bureaucrats painted the Edison maneuver in language more appropriate to sexual battery. As Los Angeles banking analyst Michael Abrahams puts it, “It’s a bizarre, tightly knit world down there.”

In a city that lionizes its native sons, young Gordon Luce and Kim Fletcher were about as native as they come. Luce’s grandfather, Moses, was a Civil War Medal of Honor winner and signatory of San Diego’s city charter. In 1885, Moses wrote the the charter for the city’s first savings and loan, San Diego Federal. Luce’s father, Edgar, was a prominent judge who had served in the turn-of-the-century California Senate.

Kim Fletcher’s grandfather, another Ed, had served two terms in the state Senate, while Kim’s father, Charles Kimball Fletcher, represented San Diego in the U.S. Congress for one term. But it was through the founding of Home Federal Savings & Loan, since shortened to HomeFed, that Charlie Fletcher would achieve his most enduring local renown.

These parallel legacies were not the only characteristics shared by Luce and Fletcher. Says San Diego Historical Society President Kay Porter, who knows both men: “They were very tall, they were very good-looking, they had married well”--none of which would exactly hinder their progress through San Diego’s social circle in years to come.

The HomeFed that 30-year-old Gordon Luce joined in 1955 was a single-branch neighborhood thrift. The next year, HomeFed’s increase in deposits led the nation. Between 1955 and 1960, branch openings got to be a regular affair, while employment at HomeFed soared ninefold. In those days, the thrift was run as an extended family; Charlie, known affectionately as C.K., would lead employees on gleeful caravans to watch the expansion process unfold here and there about town. By 1966--the year Luce left to accept an appointment as Secretary of Transportation from Gov. Ronald Reagan, for whom he had ardently campaigned--branch openings were coming so fast and furious that it was no longer practical to take everybody to every construction site. That same year, the thrift’s new 18-story tower became the first authentic high-rise in downtown San Diego’s skyline, as befitted the city’s largest S&L.;

Insiders say that the timing of Luce’s arrival and the thrift’s good fortune was no coincidence. “He was a marketing guy,” recalls Bob Adelizzi, the graying, sharp-eyed ex-Easterner who joined HomeFed in 1961 and eventually became the president. “He had a feel for the consumer end of the business.” Luce’s was a key voice in the development of such industry-wide innovations as telephone transfers, automated bill paying and the encoded plastic cards that replaced passbooks, paving the way for ATMs.

But founder Charlie Fletcher, with his adoption of risk as a modus operandi , got the credit for much of HomeFed’s prosperity. After all, the thrift had been chartered in 1934 when Charlie, then 32, convinced friends to advance him $7,500 in working capital, which he promptly converted into a relatively chancy construction loan. Years later, Charlie’s affinity for thumbing his nose at risk would be trumpeted with a certain audacity in a brochure distributed in honor of the thrift’s 50th anniversary. “Some would have called it a foolish act, opening a savings and loan in 1934 during the Depression era,” says the copy. “It was a risk, but risk taking would be repeated again and again as a value cherished by Home Federal.”

Apparently, by the early ‘60s, Luce felt that his role in HomeFed’s emergence was underappreciated. He is said to have been particularly crestfallen when he was passed over for the presidency upon Charlie’s retirement in 1963; the job instead went to Fletcher, who had joined the thrift in 1950. Luce had to content himself with a vice presidency, which in the title-addicted world of banking is considered a step above janitorial duties. As one associate puts it, the inference that “only a Fletcher could rise to the very top in that organization” was heavy in Luce’s thoughts when he left HomeFed to accept the offer in Sacramento--and again in 1969 when he was asked to preside over the revitalization of San Diego Federal, the institution his grandfather had chartered nearly a century earlier.

PRE-GORDON LUCE, FEDERAL WAS AN UNIMAGINATIVE four-branch company with no real designs on territorial expansion. Luce changed that, with help from two loyal allies: former HomeFed confederate Jim Schmidt, who had accompanied Luce on his journey to Sacramento and back; and Marc Sandstrom, a second Sacramento colleague recruited to act as chief counsel and overseer of the branch system. Luce began a spirited battle of one-upmanship with HomeFed that, in time, touched almost every aspect of San Diego culture. “If you look at half the T-shirts people are running around in for the 10-K runs and whatnots, it’s something either one or both of them sponsored,” says Max Schetter, senior vice president of the San Diego Chamber of Commerce.

Deregulation, starting in 1978, brought wholesale changes to the banking industry, chief among them that the distinctions between savings and loans and banks effectively disappeared. Great American and HomeFed are among the many thrifts nationally that eventually rechartered themselves as federal savings banks. HomeFed leaped headlong into the consumer credit business, becoming the West’s first federally chartered S&L; to offer a VISA card. San Diego Federal quickly followed suit. At one point in 1978, HomeFed was promoting 40 different types of accounts. Luce and Federal matched them virtually passbook for passbook.

The economy spawned more ominous forms of competition as well. With local housing prices escalating by as much as 2% a month in some areas, underwriting standards throughout California were relaxed. Home loans that once would have been written at 80% of value, repayable over 15 years, now were written at 90% repayable over 30 years. At the same time, the thrifts began moving away from single-family-home lending and into the dicier realm of commercial properties. Mayoral candidate Tom Carter, who served stints at San Diego Federal both before and after deregulation, recalls that when he first left the thrift, “they had a 20% cap on non-single-family residential investments. When I came back, they were at 40%.” Both institutions spent millions advertising their liberalized lending policies.

Even in this supercompetitive industry, the rivalry between HomeFed and San Diego Federal was something special. By 1980, Luce’s consumer savvy had built Federal into a legitimate challenger for HomeFed’s market share. Federal’s cheerful sea gull logo was considered a metaphorical representation of the San Diego spirit, while its “career apparel”--the fashionable mix-and-match, red-white-and-blue outfits provided to retail employees--became a familiar aspect of San Diego culture. “Luce and Fletcher were two of the coast’s biggest players at what they saw as the most exciting time of their industry,” says former San Diego Mayor Roger Hedgecock, a mutual acquaintance. “It was head-to-head for maximum profits.”

It was also clearly a case of the apprentice eclipsing the neighborhood big shot. Luce’s Sacramento appointment had been a highly visible plum, and Luce continued to keep his political options open through a first-name-basis friendship with Reagan--Luce had, in fact, served as state GOP chairman in 1973. Closer to home, Luce was arguably the premier financial contributor and flag-waver in San Diego’s metamorphosis from a lackluster Navy town to a city with genuine civic pride. The driving force of many cultural and charitable organizations, Luce was president of the San Diego Downtown Assn. in 1965 and San Diego’s “Distinguished Citizen of the Year” in 1981. It would have been hard for Fletcher not to notice that a former recruit now interrupted meetings to take calls from the President, and was asked out on gala harbor cruises with the Queen of England.

HomeFed board meetings would sometimes digress to a discussion of Luce’s latest exploits. According to a former HomeFed staffer, Fletcher and Adelizzi considered Luce’s antics “theatrical” and “somewhat . . . out of character with the world of banking.” Even Luce’s attire was not what you’d expect of a dyed-in-the-wool banker. He was a light-gray blazer in a fraternity of navy-blue pin-stripes--as if he always had one foot on the yacht he kept moored out at the bay (where, in truth, he likely as not would have run into Fletcher, himself an avid sailor and member of the America’s Cup Committee).

Luce’s chumminess with the Reagans allowed him and his wife, Karon, entree to the Tinseltown scene. “Gordon was always charmed by Hollywood,” says Fletcher, with a somewhat patronizing inflection. Fletcher and Adelizzi were amused when Luce decided to cluster several branches right outside studios in Los Angeles.

Likewise, staffers thought they detected a special spring in Luce’s step whenever Federal outflanked HomeFed in some manner. A former senior vice president who asked that he not be named, compares Luce’s demeanor in such instances to that of “the utility player who finally gets traded away, makes first-string somewhere else, comes home and hits a home run to beat the team that traded him. And you’d see a look in his eye that was like, ‘If you’d only kept me. . . .’ Clearly, every time we moved ahead of them there was quiet glee.”

Sometimes not so quiet. One executive who was called upon to address the board regarding HomeFed’s credit card difficulties describes the mood in the room that day as “boisterous” and “joyful.”

As joyful as anyone was Jim Schmidt, Great American’s workaholic president and faithful Luce disciple. “The desire to outpace HomeFed drove Jim like nothing else,” says the senior vice president. “If HomeFed got active in a business that we weren’t in, I’d get a call from him asking me, ‘Why not?’ ”

Tellingly, the calls did not come regarding other interlopers. “We didn’t talk about Imperial, we didn’t talk about CalFed, we didn’t talk about GlenFed, we didn’t talk about any of them,” he adds. This remained true even after major players from out of state--Citibank, for one--moved onto Great American turf. “There was no interest,” he recalls. “It was always and only HomeFed.”

As he puts it, paraphrasing a line from “The Godfather,” “Where HomeFed was concerned, it wasn’t just business--it was personal. I think if Gordon had come into the family business the way Kim had, it would have just been two locals running two banks. (But) Gordon had been head of marketing at HomeFed, and he saw himself as being more qualified for the top job than Kim. It was not healthy competition between two institutions. It was between ‘Kim and me.’ ”

IN 1983, BOTH SAVINGS AND LOANS BECAME PUBLIC COMPANIES, and San Diego Federal re-christened itself Great American Bank. By doing so, Great American and HomeFed gained about half a billion dollars from new shareholders to fund their expansionist inclinations. But mostly the move was a matter of image.

“Going public was the last step in the process,” recalls Kay Porter. “They were in the national arena now. You could see it was thrilling for them, but some of us had mixed feelings about what this would mean in terms of the direction the banks would take.”

Meanwhile, Luce provoked more snickers over at HomeFed by hiring hip and handsome John James of “Dynasty” fame to anchor the bank’s media campaign. ATMs were now coming in vogue, spurring a contest over who could get more of them on-line, with promises of superior service made by both sides in print and on TV.

In the early 1980s, the boundaries of the playing field continued to expand--Great American had grown in both size and stature, but HomeFed was growing in reach . By 1985, Fletcher had storefront lending operations under way in Atlanta, Washington, D.C., and Florida. “We carefully selected the markets based on a demographic analysis of the entire country, and where the best potential for growth was,” Adelizzi says.

Luce decided to catch up. Which led to what may someday be adjudged one of the most poorly timed acquisitions in California financial history: Great American paid $103 million for Home Federal Savings of Tucson at the precise moment in 1985 that Arizona’s overheated real estate market was about to implode. “It was supposed to be win, win,” recalls a chagrined former director. “From the day we bought it, everything went wrong, wrong.”

Recent scrutiny of the blunder by rankled shareholders-turned-plaintiffs has focused on a process known as due diligence. At Great American, it was the function of those charged with due diligence to mount every conceivable argument against a contemplated business move, in hopes that the merits of the move will rise to the surface in the debate. In charge of the process aimed at evaluating the Tucson acquisition was chief financial officer Roger Lindland. Lindland’s team found that the most complex--and disquieting--facet of Tucson’s operations was its loan portfolio. Of 32 large loans reviewed, 25 were labeled substandard or suspect, as judged by Great American’s in-house criteria. Loans had been written without property appraisal or full credit analysis; credit had been extended based on “location,” when the location turned out to be second-rate; commercial development loans were predicated on unrealistic lease rates.

Senior management seemed to be making enormous loan decisions on a handshake, while lesser loan officers enjoyed relatively unconstrained authority to make commitments as high as $10 million. According to the report, Senior Vice President Barry Newman and Ray Silliman, senior loan officer, who were part of the due-diligence team, deemed that the loans themselves were concentrated in too few properties, in too large amounts.

Below the surface, says the lawsuit, things were even murkier. It became apparent that the Tucson thrift’s profit projections were overstated, while its loan loss reserves were probably inadequate. That in itself, plaintiffs say, should have suggested a ticking time bomb.

According to Newman, who was asked to leave the thrift in 1987, Schmidt had little patience for the due-diligence process, which he viewed as bureaucratic obstructionism. “The notion of due diligence was personally offensive to him,” Newman says. “He resented having to prove himself in that way.” As Newman recalls of the Tucson bank, “They were quick, free-swingers, they were doing big, exciting properties--exactly the kinds of properties he loved.”

To some the deal seemed predestined; as early as 1982, Luce, at banquets, was introducing his buddy Tom Weir, chief executive officer at Home Federal of Tucson, as “the man who’s going to help us get into Arizona.”

But others dismiss the idea that the investigation was handled in anything but a thorough, professional manner. The branch system’s Marc Sandstrom says he has “too much respect for the integrity of both men (Lindland and Schmidt) to think they would represent something they didn’t believe in just because they knew it was something Gordon wanted to do.”

What is known is this: The due-diligence inquiry Lindland oversaw produced a curious document whose point-by-point analysis of the merger was either damning or inconclusive--and yet, in his precis of that inquiry, Lindland reached the conclusion that there were no “significant” impediments to finalizing the deal.

“Everyone thought this was a wonderful deal,” says Charles Bird, one of the lawyers representing Luce in the civil case. “Nobody was remiss in recommending executing this deal.”

Which the board did, thereby sealing Great American’s fate, on Sept. 27, 1985.

Personal chemistry may also have played a role in the weight assigned to the danger signs. Associates describe a severe clash between Newman, the top loan analyst, and his Arizona counterparts.

“Barry’s a difficult personality,” says a former member of the inner sanctum. “Instead of having the California ‘let’s all get along’ attitude, he was very organizationally conscious: ‘This is in my box, don’t mess with it.’ You tried to cooperate with him, and pretty soon you just worked around him.”

Shortly after the acquisition, Bill Hinz, president of Home Federal of Tucson and an old associate of Schmidt, was brought into corporate and given responsibility for the institution’s burgeoning portfolio of troubled loans--formerly part of Newman’s “box.” The civil suit alleges that delinquencies that had been reviewed by the committee suddenly were being handled outside the normal channels. The stockholders contend that Hinz was restructuring bad loans to defer the problem and to ameliorate Great American’s profitability picture. The plaintiffs also have suggested that loans were upgraded from the “loss” category to the less pejorative “substandard” category in an effort to make the portfolio appear healthier to auditors and stockholders than it was.

“Everything Gordon Luce said or wrote to the stockholders, he believed to be the truth,” Bird says. “At any financial institution at any time, there will be loans and borrowers with problems. You try to solve the problems.”

The backdrop of all of this was a prevailing mood of optimism. California had just been through a historic land boom. The feeling seemed to be that almost any loan, no matter how ill-advised, eventually would be vindicated by soaring property values. As Newman puts it, “The thinking was, ‘So what if I make a $100,000 loan on an $80,000 house that’s been appraised at $120,000! Give it a few years, and it’ll be worth $120,000 anyway!’ ”

Another factor in the thrift’s laissez-faire approach to underwriting, some say, was management’s obsession with arbitrary growth targets. “They were absolutely driven in their volume goals,” says Vincent Siciliano, who watched the nemeses slug it out from his vantage point as president of International Savings Bank. “They were going to be this big this year, and this big next year, and this big the year after that. In that framework, something has to give. And when there’s a conflict between credit discipline and goal achievement, the credit discipline is what gives.”

What also gave was the bottom line--although no one outside the Great American hierarchy would have known it at first. The institution continued to promote its well-being over the next few years, as in the 1987 press release in which Luce not only assured shareholders that “loan quality remained high” but gushed that “this year will be one of the most profitable the bank has ever had.”

According to the suit, there was deepening concern behind the scenes. Loans inherited from Home Federal in Tucson were going bad left and right; day-to-day profits were disappearing into the black hole of Arizona. Typical among the properties inherited from the Tucson S&L; was the half-empty, 15-acre Saguaro Mall outside Tucson, characterized by one insider as “virtually unleasable.”

The first real public fallout from all this came in 1988, when Great American’s earnings of $50.3 million were almost half that of the previous year. Luce tried to soothe depositors and stockholders, causing some shareholders and insiders to infer that he couldn’t bring himself to admit defeat, while over at HomeFed, Fletcher was (ostensibly) doing so well. Then in 1989, Great American’s losses mushroomed, reaching $263.4 million. “The chickens came home to roost,” industry analyst Abrahams says, “and they were huge, angry chickens.” The savings and loan had to set aside more than a half-billion dollars to offset losses, the majority of them directly attributable to problem loans in Arizona.

“The decline in Arizona real estate hurt Great American, but it didn’t kill Great American,” argues Bird. “On top of Arizona, the bottom started falling out in California, where Great American had been making loans that appeared to be sound.”

Depositors began defecting to other banks--including HomeFed, which had stepped up its marketing to capitalize on its archrival ‘s travails.

On June 29, 1990, Great American announced that chief executive officer Luce, 65, was to be replaced by former Wells Fargo executive Robert Kemper. Luce took with him a $2.1-million golden parachute. The changeover was portrayed as the “retirement” to which Luce had been alluding for some time. Lindland, who had not planned to retire, would be leaving as well.

The trade, though, was unimpressed. Abrahams recalls asking a colleague: “What can one guy do? He can’t take bad loans and make them good.”

No, he could not. And so, in October 1990, Great American sold its entire California branch network to Wells Fargo for $492 million, which was considered a good price.

Interestingly enough, Krinsk observes, “You look at the due diligence that was undertaken in conjunction with Great American’s acquisition with the Arizona property as compared with Wells Fargo’s acquisition of the Great American property, and it’s the equivalent of an eyedropper compared with two quarts of liquid.”

Luce’s thrift thus became a shell of its former self, retaining just a few local lending offices and its out-of-state branches.

In late January, work crews with cherry-pickers replaced all the cheerful Great American sea gulls with the golden letters of Wells Fargo’s bold, thoroughly businesslike sign. It was not a quick process, given the weight of the signs, and many longtime Great American employees stood for a tearful moment to observe as they took their lunch breaks. Says one, “I just couldn’t get out of my mind that the only thing really left now was the part in Arizona. It seemed like such a crazy irony.”

BACK IN THE SPRING OF 1990, WHEN THE FISCAL WOES OF GREAT American were an ongoing soap opera in the financial pages of San Diego dailies, HomeFed had been on virtually everyone’s list of America’s best-run thrifts. Singled out for special praise were the bank’s “exemplary” loan-writing practices. In the spring of 1991, HomeFed made a different list: It was now among the largest thrifts in the nation having trouble meeting capital requirements. In its most recent five quarters, HomeFed had lost $422 million, thanks principally to $1 billion in not-so-exemplary loans.

Fletcher and Adelizzi admitted to shareholders that maybe the S&L;’s vaunted out-of-state lending program hadn’t been such a hot idea after all. But Adelizzi assured stockholders he’d get a handle on it.

Suddenly, on May 7, came news of Adelizzi’s departure “as soon as a suitable replacement could be found.” The HomeFed president’s decision reportedly was hastened by pressure from the U.S. Office of Thrift Supervision, which had examined the thrift’s books in April. OTS chief Michael Patriarcha was making it known that he would not necessarily wait for banks to fail before seizing them. He would take whatever preventive measures were required to protect depositors’ interests, an attitude dubbed carpe bankem by trade watchers.

Adelizzi’s surprise announcement showed just how far the once mighty thrift had fallen. For HomeFed stockholders, the institution’s record 1989 earnings of $115.7 million seemed a distant, puzzling memory. “We’re not talking about a promising situation that went sour over the course of five or 10 years,” says Bert Ely, a Washington, D.C.-based analyst. “We’re talking about a situation that, in business terms, looked great on Monday and went bust on Tuesday. It makes you wonder, how could it have looked so good on Monday?”

Abrahams thinks he knows the answer. “In their rush to get into the out-of-state markets, they got everybody else’s leavings,” he says of HomeFed. “You can’t just buy up loans willy-nilly without investigating what you’ve got.” Beyond that, HomeFed’s delinquency-management procedures were insufficient for dealing with deadbeats in such disparate, far-flung locales, he says.

Throughout the summer, Fletcher continued to search for the solution Adelizzi had promised to find the previous December. In June, HomeFed sold Union Bank its entire $800-million home-equity-loan portfolio; to Detroit-based Comerica went HomeFed’s $40-million worth of auto paper. Even so, by the end of June, HomeFed’s loan losses had hit $1.6 billion. An astonishing 10% of HomeFed’s remaining loans and other assets were in arrears. The percentage for healthy thrifts rarely exceeds 1.5%.

This necessitated having to set aside an additional $150 million in reserves. Worse, customers were abandoning the bank; large depositors in particular were bailing out, often heading right over to their local Great American branch (now doing business as Wells Fargo). All told, the thrift had lost some $2.4 billion in deposits.

In one year, HomeFed had seen its net worth plummet by more than two-thirds.

Adelizzi now has been replaced by turnaround artist Tom Wageman, 57, a battle-hardened veteran of the Texas S&L; wars. When out and about in San Diego, Wageman has found it expedient to project a more avuncular image. In one lengthy interview, he said he would like depositors to think of him as “grandpa.”

Whether Grandpa Wageman can turn things around is doubtful. The enormity of HomeFed’s out-of-state loan problem is sobering: In dollar terms, nearly one-third of the loans went bust. “I sat up in my seat when I heard that,” a sardonic Abrahams says. “I mean, you gotta really work to get that crappy a portfolio.”

Not a few observers feel that only the traditional “honeymoon period,” during which new management is given a chance to prove itself, separates Charlie Fletcher’s old bank from seizure. Says Abrahams: “I have to think that if it was still Adelizzi’s ballgame, it would be all over by now.”

For Great American, it is all over. The inevitable finish was written on Friday, Aug. 9. In a terse directive, Patriarcha placed what was left of the bank in federal receivership. The magnitude of Great American’s continuing desperation had become clear with the reporting of its performance for the second quarter of 1991, when the savings and loan admitted new losses of some $70 million. This was crushing to shareholders, for Kemper had projected that Great American would be back in the black by then.

The government will now sell off the thrift’s remaining branches in Arizona and Washington. Sandstrom imagines they’ll get a pretty good price. “To the very end, the branch system was doing well,” he says.

WHEN DISCUSSIONS OF blame come up, bankers tend to circle the wagons. They downplay questions of unhealthy competition or tactical blunders. Instead, they curse fate, in the form of a malevolent economy. Or they curse the Fed, whose mercurial policies on tax incentives and cash reserves have had the industry constantly “retrofitting” existing strategies with awkward new conditions.

“You have to remember that when you’re talking about construction, you’re dealing with something that’s not easily liquid,” Adelizzi laments. “Once you get in, it’s not that easy to get out.” Of the mid-1980s tax-law changes, he says, “If you lose the tax incentives on investment property and the economy goes bad, you lose interest in repaying the loan. That’s what happened to us in Florida and Washington.” (“At least we missed out on Texas,” he quips.)

A particular sore spot with bankers is the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which enacted far more stringent capital-reserve standards. In the case of institutions with high-leverage portfolios, this amounted to immediate, ex-post-facto punishment for aggressive lending. Explains International Savings’ Siciliano, “FIRREA basically says, ‘Your capital reserves shall be X, and now .’ And just like that, you have no cushion.” Says Adelizzi, “If I had known there was going to be FIRREA, we wouldn’t have made some of the development loans we made.”

However, change in the regulatory climate was in the wind for some years prior to that law; to say one got caught flat-footed seems disingenuous. “The regulators didn’t do anything but come in and force them to finally undertake prudent banking practices,” says Jeffrey Krinsk.

He alleges that during the period from 1986 to ‘88, when Great American was proclaiming its strength and solvency, the thrift was actually pyramiding debt upon debt, while selling off good assets to subsidize bad ones. He makes the analogy to the consumer who chronically borrows from one credit card to pay off another until there’s nothing left to borrow and the whole scheme collapses.

“These guys held themselves out to be experienced bankers,” Krinsk says. “They didn’t need regulators to tell them how to run a bank.”

Support for Krinsk’s logic comes from Alex Sheshunoff, whose Texas-based bank-consulting firm rates industry performance. According to Sheshunoff, 89% of the nation’s banks and 78% of its thrifts remain profitable, despite the present turmoil. The 1,955 profitable thrifts posted combined earnings of $1.3 billion in the first quarter of 1991 alone. The problem is, the 536 unprofitable thrifts were staggeringly unprofitable during that same period: They managed to lose $2 billion, saddling the industry with a net loss of some $700 million for the quarter.

Others point out that such national stats are meaningless, as economic problems have been concentrated in certain areas. To be sure, the Great American fiasco in particular has highlighted certain problems in the regulatory system, a good-old-boy network (to use Krinsk’s words) in which banking activities are overseen by former colleagues and proteges of the bank moguls themselves. Abrahams and others describe Ed Gray, chairman of the Federal Home Loan Bank board at the time of the Tucson purchase, as having been handpicked by Luce for the job, through his considerable political connections; Gray is a former publicist for Great American. Then-regional supervisor James Cirona was also a former colleague of Luce. In any case, FHLB’s approval of the merger does not speak well of regulatory acumen, because most now agree that the Tucson deal was doomed from the start. “Once they bought it, I don’t think there was anything they could’ve done to stop the bleeding,” analyst Bert Ely says.

Alas, say shareholders, this was not communicated to them until after the point became moot. The class-action complaint accuses Great American management of “artificially” propping up the price of company stock through the “issuance and dissemination of false and misleading financial and investment information.” The alleged misstatements chiefly involved the health of Home Federal of Tucson at the time of its purchase, the status of Great American’s capital adequacy in the years 1986 to ’88 and the thrift’s projections of future growth.

According to Krinsk: “The language of the (financial statement) in no way reflected the true condition of the bank at the time the reports were made. To watch the precipitous decline as each revelation came out incrementally has been one of the classic cases of hubris and insensitivity to shareholders’ interests.”

“Luce didn’t set this up to fail,” Bird argues. “There were honest, hard-working people trying to survive in a terrible environment.”

The decline of HomeFed is somewhat harder to assess. “There’s no clear equivalent to Great American’s Arizona purchase,” says International Savings Bank’s Siciliano. “You get the feeling with them that they got into areas where they didn’t know the turf. They seem to have a lot of non-specific problems here and there in their portfolio.”

One is reminded of the 50th-anniversary brochure: Risk taking would be repeated again and again as a value cherished by Home Federal. Live by the sword, die by the sword.

Certainly, the most poignant footnote to the story concerns Gordon Luce. The man who has said he “can’t think of a better place to live than San Diego” spent four decades in public life, piling success upon success, receiving accolade upon accolade from his local constituency. For 20 years he worked at building a great S&L;, only to see it fail in the last 18 months of his reign.

A close friend, Fuqua Industries Chairman Charles (Red) Scott, summed up Luce’s plight: “When he is 87 and sitting rocking on the front porch, he will say, ‘What a cruel twist of fate. . . .’ ”

The question is whether fate twisted on its own, or Luce and associates gave it a little nudge. Luce’s society pals largely have stood by him, contending that if he is guilty of anything, it is of “being out of touch” or “having too much faith in his lieutenants.” Krinsk, for his part, charges that a multibillion-dollar pissing contest was the impetus for the taking of risks that were unsupported by objective data. Even Luce admirers, like San Diego Chamber of Commerce’s Schetter, concede that “there was certainly a tremendous personal competition between the two to bring their particular bank in on top.”

Luce’s lawyer denies that personal motives had anything to do with the fiasco. “The public has a tendency to put personal blame on the people involved,” says Bird. “They (Luce and Fletcher) were victims of circumstances.”

It certainly wasn’t that Luce and Fletcher took rash steps because they wanted to fail, of course. It’s that, in a very real sense, they may have believed they couldn’t fail. Indeed, the disaster in the financial industry may be less a tale of swindling and deceit than of a certain egocentric detachment on the part of leadership.

Pre-deregulation, the thrift industry was, as Newman labels it, “a no-brainer.” S&Ls; were restricted to single-family residential loans within a certain radius of their branch. Post-deregulation, the thrifts embraced business lending, commercial real estate and large-scale consumer lending, lines that were outside their basic area of expertise. But years of profitable operations had convinced them they were good businessmen. “It’s not necessarily that they’re trying to con you,” says the former Great American senior vice president. “It’s that they’ve conned themselves.”

That critical self-delusion--compounded by a willingness to indulge their well-developed egos, as in the case of Fletcher and Luce--led their banks down the path to ruin. In the process, bankers have saddled America’s collective depositor base with a debt that will need to be paid for decades to come.

In recent years, the financier’s life has become a colossal Catch-22: Believing himself above fiscal cataclysm, he takes increasingly imprudent risks with funds that have been entrusted to him by innocents. The notion of invulnerability make him vulnerable.

Or, as a deposed Great American executive puts it, “The problem is, we never stopped to ask ourselves, ‘What if we’re wrong?’ ”