Ahmanson’s Legacy and Its Lessons

How did Ahmanson blow it? Washington Mutual Inc., a Seattle-based savings and loan holding company, last week won the battle to take over Great Western Financial and now will rank third in California in total deposits, with 17% of the market, just behind Wells Fargo at 19% and Bank of America at 22%.

H.F. Ahmanson, the parent company of Home Savings, remains back at 8% of the state’s deposit totals. It set out in February to expand its customer base by acquiring Great Western but seems not to have reckoned on fighting, or winning, a battle.

“When you go to war, you better win,” says a banker privately of Ahmanson’s debacle.

Yet Ahmanson’s stock has risen 10% to more than $44 a share since its defeat, which indicates that the company is in good shape. Its $50 billion in assets makes it the nation’s largest S&L; company--until the Washington-Great Western merger is completed.

Investor reaction also signals that Ahmanson is a potential acquisition for a major bank, such as Charlotte, N.C.-based NationsBank or Columbus, Ohio-based Banc One, eager to get into the suddenly attractive Southern California market.

To be sure, for most people the continual rounds of bank mergers seem disturbing and useless. But it’s actually a process that benefits the economy. And there are lessons for all business in Ahmanson’s situation and in the new Southern California market, which is deceptively strong despite losses of major bank headquarters.

Ahmanson, an insurance company that acquired Home Savings in 1948, grew with Southern California, financing homes that stretched over valleys and hills, creating equity for the masses.

But the company’s growth and profits began to lag a decade ago, as it failed to fully comprehend the quickening of finance that has taken the home mortgage, once a revered symbol of middle-class life presided over by august financiers, and turned it into an electronic blip on a computer screen.

The home mortgages of America today are granted in four hours. That’s how fast market leaders such as Norwest Corp., which is based in Minneapolis, or Countrywide Credit Industries, based in Pasadena, can receive borrower records, decide on the terms and fund the loan.

To understand, think back to the savings and loan crisis of 1982. Mortgage lenders were teetering toward bankruptcy because they had to pay depositors high interest while still receiving their low-interest income from fixed-rate mortgages, which they held as assets on their balance sheets.

So the U.S. government stepped in to save housing markets and mortgages, but not necessarily S&Ls.; The government encouraged the formation of a mortgage securities market in which investors bought certificates representing pools of mortgages. That relieved S&Ls; from having to hold 30-year loans.

The government also encouraged the Federal National Mortgage Assn. and the Federal Home Loan Mortgage Corp. (Fannie Mae and Freddie Mac, as they are known) to increase funds available for mortgages.

The result was a profound change in the mortgage business. Some entrepreneurs understood that with government backing for capital markets and investors, all that mortgage lending needed were efficient middlemen.

Countrywide, a firm founded in 1969 by Angelo Mozilo, who had studied marketing and real estate at Fordham and New York universities, and David Loeb, a member of a prominent Wall Street family, suddenly came into its own.

It devised a system in which a borrower’s tax returns, home appraisal and other documents could be quickly scanned by computers, categorized for credit-worthiness and then approved or disapproved for a loan. From the mid-1980s, Countrywide grew rapidly from a tiny company to the United States’ largest mortgage lender.

Ahmanson--and most S&Ls--didn;’t realize what was happening. The company specialized in variable-rate mortgages, thinking it had solved the problem of long-term lending in a time of fluctuating interest rates. The company’s chairman in the 1980s, Richard Deihl, used to say there were “no shortcuts” in his business.

But there were shortcuts, and Ahmanson didn’t realize that the costs of taking deposits from individual customers and lending them out to mortgage borrowers, along with government-imposed capital requirements, had made it uncompetitive in the new era. Ahmanson’s profits stalled.

Meanwhile, homes got bought and sold, and the new mortgage bankers financed them just as well or better than under the old system.

“Mortgages are a good business if you know how to do them. Washington Mutual knows,” says analyst Todd Pitsinger of Friedman, Billings, Ramsey, an Arlington, Va., investment firm that is expanding in California.

Washington reformed its mortgage operations years ago, but, importantly, it also became an aggressive lender to small business.

That’s a transition Ahmanson, too, has been making. Chairman Charles Rinehart invested in a computer system to streamline mortgage lending and hired top people from First Interstate bank to give Home Savings an array of expertise in small-business lending and services such as cash management.

The effect is visible. “The people in their branches have broader business skills,” observes a bank economist. It’s a factor that could make Ahmanson a target of out-of-state acquirers, although banks often shy away from S&Ls; because of difficulties in melding cultures.

Regardless, Ahmanson has many opportunities on its own or with a local partner because small-business lending is the hottest area in banking today. Sophisticated computer systems are doing for small-business loans what they did for mortgages--turning them into quick turnaround credits.

And that is making capital available for small business, which in turn is one reason California is once again a beehive of small companies in computer technology, the biomedical industry and entertainment. The market is attracting fresh finance. Mellon Bank of Pittsburgh has expanded activities here. Bank of America is intent on expanding its facilities in Southern California, “our largest single market,” says Executive Vice President Thomas Decker.

And where did all this capital come from? Partly from a long evolutionary chain that began with the buildup of equity in homes and land development that Ahmanson financed years ago, plus the streamlining of finance that makes money work harder today.

The process continues.