S&L; Blunder May Cost U.S. $150 Million
Senior federal officials, struggling to escape the consequences of a $3-billion blunder in a New Jersey savings and loan rescue operation, are diverting billions of dollars in assets from other failed thrifts in a maneuver that may cost taxpayers as much as $150 million.
The assets, which otherwise would have been sold by the government in the open market, are being stripped from seized savings and loans in California and other states, according to knowledgeable sources and internal documents detailing the operation.
Senior government officials defended their actions as sound policy but critics said that they are shortchanging the Treasury and unnecessarily fattening the profits of Goldman, Sachs, a Wall Street investment banking firm involved in the original New Jersey bailout.
Critics within the Resolution Trust Corp., the agency in charge of the S&L; cleanup, said that the deal represents an effort by RTC managers to escape the potential political embarrassment of acknowledging the miscalculations that created the problem in the first place.
In the process, RTC sources said, the agency has compounded its original mistakes in ways that will significantly increase the cost to taxpayers.
“It doesn’t make any economic sense,” one official said. “It doesn’t make any sense for the taxpayer. And we are throwing our money away.”
The case illustrates the enormous complexity and confusion associated with the S&L; mess, as well as the difficulty of devising good strategies for dealing with it. The case also shows how seemingly routine government decisions can end up adding hundreds of millions of dollars to the ultimate cost of what is now universally recognized as the biggest financial debacle in U.S. history.
One recent RTC memorandum openly questions the legitimacy of the RTC unilaterally transferring assets from other failed thrifts to Goldman, Sachs without allowing other potential buyers to bid on the properties.
“The most problematic aspect of this transaction is that . . . (it) may give the impression that we are not complying with the requirements of competitive bidding and impartial treatment of bidders,” a March 2 analysis said. “Most who hear of this transaction for the first time question how it is that Goldman is able to get preferential treatment.”
The memo’s author warned: “We should expect that this transaction will receive rigorous review at some point by the General Accounting Office.”
Deal Is Defended
RTC spokesman Stephen Katsanos defended the deal and disputed the claims made by its critics. “We felt comfortable with it then and we feel comfortable with proceeding on this course,” Katsanos said. “There will be no disadvantage to taxpayers.”
Goldman has not been accused of any misconduct in the transaction and even the deal’s critics hold the government, not the investment firm, responsible for what has happened. A Goldman spokesman declined to discuss the matter.
The problem began last year with the collapse of City Savings of Somerset, one of the largest thrifts in New Jersey. Fearing that an outright liquidation of such a large institution could spread panic in the already troubled East Coast financial community, the RTC decided to try to sell City Savings to other institutions instead of simply shutting it down. The decision was consistent with RTC policy at the time.
But what happened next set the stage for the actions that are now drawing fire. When initial efforts to sell City Savings attracted no takers, the RTC sweetened the deal by offering prospective buyers the right to purchase $3 billion in high-quality residential mortgage loans from the government’s inventory at a guaranteed profit.
This time, a willing buyer stepped forward. First Fidelity Bancorp. of Newark bought most of City Savings’ branch operations, deposits and the option to purchase the $3 billion in mortgage loans. It immediately sold the option to Goldman for an undisclosed sum.
After the deal had been made, the RTC discovered that it did not have $3 billion worth of good residential mortgages among City Savings’ remaining assets. Even worse, it could not find that many high-quality loans anywhere else in the vast collection of assets that it has accumulated in the process of closing down troubled thrifts from coast to coast.
The RTC, which was legally obligated to make good on its offer, had to find a way out.
It decided to allow Goldman to pick and choose from among other, lower-quality loans held by the RTC. Because these substitute loans are not the same type or quality as those called for in the original contract, Goldman is being permitted to buy them at deep discounts and without competitive bidding.
Bargain Seen for Firm
Many of those loans already were scheduled to be sold by the government on the open market, where they almost certainly would have commanded higher prices than Goldman will pay for them, according to critics inside the RTC.
These critics said that senior agency officials have chosen the most expensive--but politically expedient--solution to their dilemma and have shunned cheaper alternatives because they would involve more exposure and potential embarrassment.
The RTC, they said, could simply have written a check from the U.S. Treasury to pay off its obligation to Goldman, an option that critics said ultimately would have saved the government as much as $150 million. Or, the government could have sold the same loans itself on the open market, paid off its obligation to Goldman in cash and still had money left, the sources say.
Either of those courses, however, would have been far more visible and would have left the RTC open to criticism when it had to explain to the Bush Administration and Congress why it needed to write such a large check to a Wall Street investment house.
The strategy now being pursued--letting Goldman pick and choose $3 billion worth of loans from other S&Ls--probably; will ensure that the Wall Street firm reaps an even larger profit than was anticipated in the original option contract.
The unusual arrangement is referred to as the “Goldman megadeal” in internal RTC correspondence obtained by The Times. One document described it as “a transaction that by its nature departs from our normal sales process.”
In fact, the deal appears to violate current RTC policy guidelines requiring the agency to package and sell loans to investors in the open market rather than to use middlemen such as Goldman. Several RTC officials said they believe that the sale violates the agency’s mandate to put the interest of taxpayers first.
These critics, who spoke on condition that they not be identified, contended that the Goldman contract should be renegotiated.
The government has broad precedent for renegotiating controversial S&L; deals: It recast a series of thrift sales executed in late 1989 after Congress charged that the transactions were far too generous to buyers.
While the Goldman deal is broadly attributable to the government’s effort to salvage City Savings, the highly unusual $3-billion option that is now causing problems springs from the RTC’s gross overestimation of the value of the failed thrift’s assets. In fact, none of the assets being used to satisfy the obligation have come from the New Jersey thrift, sources said.
An estimated $1.2 billion in good loans held by thrifts in Western states, mainly California, are expected to be transferred to Goldman, according to RTC records. About $1 billion already has been diverted from seized thrifts in the East, and another $800 million will be shifted from S&Ls; in that region to complete the deal.
Loans Detailed
RTC documents indicate that the loans from the West will be taken from dozens of California S&Ls; that have either been liquidated by the RTC or are being managed by the agency. Some of the target institutions and the dollar value of loans to be transferred: Santa Barbara Savings, $39.4 million; Imperial Savings, $61.4 million; Great American Savings, $285 million; Westwood Savings, $66.5 million, and Gibraltar Savings, $69.1 million.
In addition to the loss in potential revenue for the government, the sale of those loans to Goldman at deeply discounted prices could hurt creditors of the other failed S&Ls; by reducing the remaining value of those thrifts, RTC sources said.
The Goldman deal has drawn fire from critics within the RTC, which was created by Congress in 1989 to manage the disposition of assets seized from failed S&Ls; across the country.
“What I see appalls me,” said one RTC source, who requested anonymity.
He and other critics of the deal suggested that RTC senior managers, under pressure to dispose of hundreds of billions of dollars worth of assets from failed S&Ls; quickly, have placed too much emphasis on cutting huge deals with big investors, especially large Wall Street firms. That strategy, in turn, has led the government to let big investors reap extra-large profits to ensure their continued involvement in the asset disposal process.
Goldman, for instance, already has done hundreds of millions of dollars worth of business in other deals with the RTC, both in direct asset purchases and as an agent for the RTC in sales to others, according to agency records.
The internal dispute over the Goldman deal reflects the RTC’s increasing sophistication in disposing of loans and other assets inherited by the government from insolvent S&Ls.; Over the last year, the RTC has determined that the most efficient and most profitable way for it to dispose of those assets is to sell them directly to individual investors through the nation’s financial markets.
That process is called “securitization” and works this way: The RTC assembles a bundle of S&L; assets, such as mortgage loans made to homeowners who are making their payments promptly, and uses them to back up securities that are sold in the open market much like stocks or bonds. The payments from the homeowners are used to make payments to the buyers of the securities, who are able to earn competitive interest rates from a diversified portfolio of mortgages.
Treasury Secretary Nicholas F. Brady told Congress recently that securitization has saved more than $650 million for taxpayers since the program began last spring.
By contrast, in the RTC’s early days, it generally sold S&L; assets directly to large investors, usually at deep discounts. Those buyers then would go through the securitization process themselves.
Critics of the Goldman deal said that the agency should be using securitization for the $3 billion in loans itself or in conjunction with the brokerage firm, rather than allowing it to do the job and reap the profits alone.
“By definition, the assets presented to Goldman are securitizable assets,” said the RTC’s internal analysis. “Since Goldman expects to turn around and securitize these assets themselves, it would be better for the agency to have a ‘joint-venture type transaction’ with Goldman.
“This structure would give the RTC the opportunity to obtain sales prices nearer to the proceeds we would have achieved if we had securitized the loans ourselves.”
RTC spokesman Katsanos defended the agency’s decision, insisting that the loans involved are not “assets that would be eligible for securitization.”
Yet many of those loans were slated to be sold by the RTC through the securitization process in April or May, sources said. Instead, the Goldman deal has resulted in the virtual closing of the securitization sales office of the RTC’s Western region.
Katsanos complained that critics of the deal should come forward publicly if they believe the transaction is improper. “If they are indeed whistle-blowers, then they should have the strength to go on the record to express their convictions,” he said. “Should they do so, there should be no fear of reprisals, for whistle-blowers are accorded a very special place.”
Yet RTC sources said that they are fearful of reprisals from upper management and that the RTC’s inspector general is currently conducting a broad investigation of press leaks from within the agency.
BACKGROUND
Last year, the federal agency in charge of the nationwide savings and loan bailout made an unusual offer to prospective buyers of a failed New Jersey thrift: Any bidder willing to take over the S&L;’s deposits and branch operations would also obtain the right to purchase $3 billion worth of mortgages that it could then resell at a guaranteed profit. But when the time came for the government to make good on the deal, it found that it had no such loans to deliver. As a result, the Wall Street firm that holds the contract is being allowed to pick and choose among loans removed from other failed thrifts and critics say that the deep discount it is receiving will wind up increasing the cost of the S&L; bailout by as much as $150 million.
