Living on Borrowed Time at Battered Glenfed : Banking: As a deadline nears for a government seizure, the giant S&L; is fighting for its life in court. Glenfed claims the U.S. reneged on a key deal.
Stephen Trafton is a mountain climber and explorer who’s made several trips to King William Island in the Canadian Arctic, retracing the ill-fated expedition of British Capt. John Franklin that vanished in 1845.
Trafton also is chief executive of Glendale Federal Bank. And nearly 150 years after Franklin last was seen, Trafton’s giant financial institution is also in danger of disappearing.
Glendale Federal and its holding company, Glenfed Inc., are in deep financial trouble, having been battered by real-estate slumps in Southern California and Florida. It’s a mess that Trafton, 46, has been trying to clean up since he joined the financial institution in mid-1990.
But time is running short. Glenfed’s financial condition falls far below levels the company must achieve by the end of next month, as required by the Office of Thrift Supervision.
Trafton claims that Glenfed is doing better, but even he concedes that it will not meet the June 30 deadline, after which the OTS could seize the thrift and sell its assets. If the OTS is inclined to take over Glenfed, it’s likely that only the White House could stop it.
But that would be a ticklish call for the Clinton Administration. Shutting down Glenfed would be a much bigger issue than simply the seizing of one more sick financial institution in the nation’s continuing savings and loan bailout.
Glenfed would be among the largest savings and loans ever to fail. The nation’s fifth-largest thrift, Glenfed has $18 billion in assets, 3,700 employees and 215 branches in California, Florida and Washington state. Trafton contends that a takeover would cost U.S. taxpayers another $3 billion to $4 billion.
A key element in the Glenfed saga is a legal dispute with the U.S. government that the banking industry is watching very closely. Glenfed claims that its financial weakness is largely the government’s fault, and it is suing Uncle Sam for $1.4 billion in damages for reneging on a deal made 12 years ago.
One federal judge already has agreed with Glenfed; if the company ultimately prevails, its capital problem will disappear. But the Justice Department is appealing, and it is unlikely the case will be resolved within two months.
So for now, Glenfed’s fate is in the OTS’ hands.
“This is a really hard one to call,” said Bert Ely, a banking consultant in Alexandria, Va. “The government’s in a real tough situation. If they grab Glenfed before the legal process is played out, it looks like they’re afraid of losing the case and end up violating the sense of what’s fair.”
White House officials had no comment on the case. Neither did Frank N. Newman, a former BankAmerica vice chairman who is close to being confirmed as domestic-finance undersecretary of the Treasury Department, which oversees the OTS.
OTS officials also declined comment. But the agency has occasionally extended its capital deadlines if it found thrifts were showing significant improvement.
At least publicly, Trafton is maintaining the determination of one who has encountered harsh challenges. He predicts that the OTS will extend the deadline.
“My own personal opinion is that . . . the June 30 date will be pushed back substantially,” he said.
Trafton has been fighting on two fronts--financial and legal. On the financial side, he said Glenfed is reducing its problem loans and, most importantly, bolstering its capital--its cash cushion against future loan losses. Glenfed has done that by, among other things, negotiating debt-for-equity swaps with some of its big bondholders.
Despite the gains, however, Glenfed’s capital is still about $400 million below government-mandated minimums; it is that capital problem that Glenfed cannot fix by June 30 on its own.
Trafton has pitched several offers to Washington in hopes of settling the lawsuit before then. In one scenario, the government would invest $700 million in Glenfed by purchasing preferred stock, thereby lifting the company’s financial state to legal levels. Glenfed in turn would drop its suit. But there’s been no agreement.
Meanwhile, dozens of Trafton’s employees have gone so far as to organize a grass-roots campaign, sending thousands of letters to officials in Washington with pleas for a truce that would keep Glenfed alive. The workers have held garage sales to raise cash for postage.
For decades, the 74-year-old institution was a respected, if stodgy, purveyor of home mortgage loans in Southern California. After the savings and loan industry was deregulated in the early 1980s, Glenfed jumped heavily into real-estate development and commercial lending. Assets swelled to $25 billion by mid-1989.
As the real estate slump began to accelerate in 1990, Glenfed’s sour loans began piling up. Among them: a defaulted loan on the Southfork Ranch in Texas used in the television show “Dallas.”
Although the S&L; shifted its focus back to home mortgages, it was forced to take huge charges to cover its existing bad loans, producing losses of nearly $450 million during the last 2 1/2 years.
Enter Trafton, who got into finance after majoring in zoology at Washington State University.
After a stint with Goldome Bank in Buffalo, N.Y., that earned him a reputation as a financial repairman--though Goldome ultimately was seized--Trafton joined Glenfed in mid-1990 as chief financial officer. Two years later, Norman M. Coulson quit as chief executive and Trafton replaced him.
Trafton’s current legal fight stems from an agreement in 1981, when Glenfed bought First Federal Savings & Loan of Broward County, Fla.--one of many mergers encouraged by the government to save failing thrifts. At the time, a government-approved accounting gimmick allowed Glenfed to take over $734 million in First Federal’s bad debts and add it to Glenfed’s capital. The added capital was known as “supervisory goodwill.”
But in 1989, Congress changed the rule on supervisory goodwill: From then on, it said, thrifts could not count the goodwill as part of their capital. Glenfed responded with its suit, claiming that the government had effectively reneged on its contract.
“Congress had every right to change the law,” Trafton said. “But if Congress does pass the law, it has the effect of breaching our contract, and the government is clearly liable for the damage it does to the institution.”
Meanwhile, Trafton has taken other steps that, if not crucial to Glenfed’s survival, are designed to keep up his troops’ morale.
He eliminated the company’s executive cars and parking spaces, country-club memberships and executive dining room. Trafton has no contract with Glenfed and no stock options. He did earn a handsome $442,300 last year, but that was half what chief executives of other major S&Ls; were paid.
He arrives each work day by 6 a.m., and, he said, “there isn’t a member of senior management that isn’t there by 7 a.m.”
Troubles at Glenfed
The financial condition of Glenfed--parent company of Glendale Federal Bank and once one of the country’s most formidable savings and loan companies--has deteriorated markedly in recent years. As assets have shrunk and bad loans grown, Glenfed has sustained heavy losses since 1991.
Assets:
1993*: $17.9 billion
Net Income:
1993*: $96.2 million loss
Provision for loan losses:
1993*: $141.0 million * Six months ended Dec. 31, 1992; other figures are for fiscal years ended June 30
Source: Glenfed Inc.
