FCA Chairman Strikes a Hopeful Note : But Firm Is Haunted by Troubled Past and Fresh Controversies
In announcing Financial Corp. of America’s whopping $468-million loss for 1987, Chairman William J. Popejoy spoke confidently Wednesday of FCA’s “ability to earn its way out of its problems over the next few years.”
That’s a trick Popejoy has been working on with little luck since Charles W. Knapp, FCA’s maverick former leader, was ousted more than three years ago. Although some progress has been made, the burden of a behemoth collection of bad loans left over from the Knapp years and interest rate reverses early last year have combined to keep FCA under Popejoy the biggest problem child in the savings and loan industry.
“What happened to this company?” Jonathan E. Gray, an analyst with Sanford C. Bernstein & Co. brokerage firm in New York, asked rhetorically. “The answer is simple. ‘Twas beauty killed the beast--bad loans made by prior management.”
The huge loss at FCA--and its Wednesday proposal for a federal bailout--is just the latest episode in a banking melodrama that began in the early summer of 1984 when FCA’s operating subsidiary, American Savings & Loan, found itself in a banker’s worst nightmare: a prolonged deposit panic.
In the ensuing months and through the winter of 1985, American Savings encountered problems never even imagined in the once-placid savings and loan industry. There were major deposit runs and a continuing series of dismal earnings reports that reflected a bottomless pit of bad loans at the nation’s largest savings and loan association.
The deposit runs began in earnest after federal savings and loan regulators publicly questioned the way FCA was being managed by Knapp. They ended only after a new management team, headed by Popejoy, borrowed heavily to pay off depositors who wanted their money back. Knapp was ousted in August, 1984, by regulators who were angry at what they viewed as FCA’s reckless lending practices and fast growth.
Though American Savings survived the frantic brushes with near failure, it proved to be so crippled by troubled loans that regulators eventually decided that there was no longer any hope. They needed a buyer with lots of money to bail out the once-proud California financial institution.
Even Popejoy, who had stated repeatedly that he wanted American Savings to survive as an independent, shareholder-owned financial institution, became resigned to getting the best deal he could for the firm’s 12,400 stockholders.
But that plan, too, has met with failure so far. Negotiations to sell American Savings to Ford Motor were abruptly ended three weeks ago following speculation that a deal was at hand.
American Savings’ swift decline was accompanied by a disenchantment in some quarters with Popejoy, a one-time golden boy in California savings and loan circles. Once, few industry insiders had much negative to say about the boyishly handsome and likable executive.
But certain powerful competitors and some savings and loan regulators came to lose faith in Popejoy because they felt that his fast-growth survival policies represented a grave danger to the Federal Savings and Loan Insurance Corp., which insures deposits in S&Ls; and conducts expensive rescue operations at failing institutions.
Popejoy’s early vows to shrink American Savings and rely less on risky fixed-rate loans proved hard to fulfill because the company needed earnings to rebuild its badly eroded capital base.
In fact, during Popejoy’s tenure, American Savings grew dramatically at times and always relied heavily on financing profitable, but risky, fixed-rate assets. Popejoy argued that he had no alternative, that otherwise American Savings would slowly bleed to death under an unending onslaught of bad-loan-related losses.
But others did not see his strategy that way. Indeed, in perhaps the unkindest cut of all, competitors have compared Popejoy to Knapp in the way he managed FCA--a comparison Popejoy detests.
Popejoy also has his staunch defenders.
“He and the team he has surrounded himself with have done as much as humanly possible,” said Donald K. Crowley, a San Francisco-based analyst with the Keefe, Bruyette & Woods brokerage firm. “It’s a little like being a doctor. The prognosis for your patients depends on whether your specialty is pediatrics or oncology.”
The effort to rescue American Savings certainly has had its benefits.
Keeping the financial institution alive in 1984 provided banking regulators with precious breathing room and may have saved the Federal Savings and Loan Insurance Corp. from a total collapse.
“Had FCA failed and gone into receivership, FSLIC would not have survived,” then-Bank Board Chairman Edwin J. Gray said privately after Knapp was ousted.
Gray had blistered Knapp in a dramatic confrontation that occurred as the deposit run was gathering steam in mid-August, 1984. “I merely said he was running the company in an unsafe and unsound manner, and he had to stop one way or the other,” Gray said. “He was bringing down the entire system. He was an inveterate gambler.”
Though American Savings endured a run of $6.8 billion in the summer of 1984 and one of $1 billion in the spring of 1985, it could not cope with its huge collection of bad real estate loans.
These were major loans, typically on condominiums and office buildings in California and Texas, on which the borrowers were far in arrears on their payments or had quit paying altogether. It was this collection of troubled assets, whose value ran in the billions of dollars, that doomed FCA to a life of marginal profitability despite a highly favorable environment of falling interest rates.
FCA has added $1.7 billion to its reserves for loan losses since late 1984, including $235.5 million added in the fourth quarter of 1987 alone. These reserves cut directly into operating profits and prevented the financial institution from raising the capital needed to bring the firm back into the good graces of federal regulators, who require certain minimum levels.
FCA was further hurt in 1987 by an inability to sell loans and mortgage-backed securities at a profit because of a rise in interest rates starting last March. Such sales were the primary source of FCA’s earnings in 1985 and 1986.
Not long ago, in the 1970s, Financial Corp. of America was an obscure, Los Angeles-based financial services holding company known principally for its ownership of both a commercial bank and a savings and loan. The right to own both was grandfathered into 1970 bank legislation that banned subsequent cross-ownership.
FCA later sold the commercial bank but its savings and loan, under Knapp’s leadership, grew quickly through unorthodox lending and deposit practices.
Knapp’s real coup came in late 1983 when federal savings and loan regulators allowed a still controversial merger between Financial Corp. of America, which owned State Savings & Loan at the time, and Los Angeles-based First Charter, which owned American Savings. It was a merger that eventually made the new financial institution the nation’s largest savings and loan.
Popejoy acknowledged Wednesday that FCA’s problems have been “enormous,” but added that the company is “competing aggressively and effectively for business in the marketplace. . . . In 1988, we will continue to compete for business, while further reducing our non-performing assets and running a lean shop. With our perseverance, continuing support of the (Federal Home Loan Bank Board) and a cooperative interest rate environment over time, I believe it’s possible for FCA/American Savings to earn its way back to fiscal health with little or no cost to the FSLIC.”
Main story, Part I, Page 1
