Investor Perelman Still Benefits From ’88 Deal : Thrifts: He proposes to use tax breaks derived from Texas purchase to help shelter likely profits from First Nationwide.
When federal regulators awarded a series of extraordinarily generous deals to private investors to take over a group of failed savings and loans in late 1988, an outraged Congress forced the government to pare back the agreements.
But despite the congressional intervention, one of the biggest beneficiaries of the ’88 deals is still reaping large rewards from the bargain he struck with Washington. Now he is proposing to use nearly $500 million in tax breaks derived from his 1988 agreement to take over a failed Texas S&L; to help shelter the profits he is likely to generate from his takeover of one of California’s largest thrifts.
New York investor Ronald Perelman and his partners have agreed to buy San Francisco-based First Nationwide Bank in a deal valued at $1.1 billion and expect to take advantage of the tax breaks they have retained from their 1988 deal with federal regulators, according to documents filed in the First Nationwide acquisition.
The tax breaks “certainly will enhance the profitability” of the investment in First Nationwide, noted Gerald J. Ford, who is to become chairman of First Nationwide and is a Perelman partner in the acquisition. “They will be used in this transaction to offset earnings, and we expect to be profitable at First Nationwide from day one.”
Those breaks represent about half the $992 million in total tax benefits they received from a December, 1988, agreement to purchase First Gibraltar Bank of Texas, according to the documents and interviews with Perelman aides.
Perelman’s First Nationwide purchase has been approved by federal regulators and is scheduled to be completed Sept. 30.
The new documents, filed with federal thrift regulators, suggest that investors such as Perelman are continuing to benefit from the 1988 deals long after the deals were supposedly renegotiated by the federal government. And they also show how regulatory policy can have long-lasting--and unintended--consequences, congressional censure notwithstanding.
“People make this out like it is something sinister . . . ,” said Ford, “and we received these benefits under the law.”
In fact, Perelman’s acquisition of First Gibraltar was just one of a wave of controversial last-minute agreements hammered out by federal regulators with investors at the end of 1988 to take advantage of special tax breaks scheduled to expire on Jan. 1, 1989.
The Federal Home Loan Bank Board, then the regulatory agency trying to sell off the bankrupt savings and loans, was short of funds needed to dispose of the thrifts quickly and in a cost-efficient way. So it struck long-term deals with private investors that required little up-front cash from the federal government--but that exacted a steep price later on.
The price was that investors were given what Congress later charged were overly generous tax breaks, plus pledges from regulators that the government would cover their losses and guarantee a set return on troubled real estate and other assets that buyers inherited.
What’s more, the government agreed to allow the investors to take tax breaks on the losses generated from the thrifts--even though the government was covering those losses.
That tax break was scheduled to be phased out at the end of 1988. It was lucrative enough to attract big investors such as Perelman, which prompted regulators to cut deals in haste with investors.
“Given the lack of options we had at the time, the lack of money, they were the best we could do,” observed Danny Wall, a Salt Lake City consultant who was chairman of the Federal Home Loan Bank Board at the time of the 1988 deals.
But soon press accounts of the deals’ staggering costs quickly led to congressional outrage. In early 1989, for instance, Perelman’s acquisition of First Gibraltar was said to have the potential to require the federal government to provide the thrift $5.1 billion in assistance. With the nearly $1 billion in tax breaks, that brought the total to more than $6 billion.
Perelman had invested only about $160 million in funds from his Revlon cosmetics empire, and First Gibraltar borrowed another $155 million in new capital to bring the total investment up to $315 million.
Once the First Gibraltar acquisition was complete, Perelman--through his investment vehicle, MacAndrews & Forbes--was free to use the tax breaks flowing from the Texas thrift to help shelter income elsewhere in his investment empire. Now, in fact, in addition to Revlon and his financial holdings, Perelman is becoming a significant presence in the entertainment industry.
He is chairman of New World Communications Group and is involved in a wide range of entertainment and media activities, owning a TV production operation and a string of broadcast TV stations.
Jim Conroy, a senior vice president and special counsel for MacAndrews & Forbes, said that the tax breaks from First Gibraltar have been used throughout Perelman’s operations. And although the Federal Deposit Insurance Corp. eventually did renegotiate the original agreement with Perelman, the firm was still able to keep the nearly $1 billion in tax breaks.
