American S&L;’s Sale to Bass Could Be Light at End of Tunnel

Financial Corp. of America Chairman William J. Popejoy found he had something personal in common with Texas billionaire Robert M. Bass when they first met last year in Ft. Worth.

“He married his high school sweetheart and I married mine,” Popejoy recalled the other day with reporters after FCA’s annual meeting in Irvine. “It was just a get-to-know-each-other kind of meeting.”

The informality notwithstanding, the encounter bore fruit. After negotiations to sell FCA’s ailing American Savings subsidiary to Ford Motor were abruptly broken off in January, Bass moved in.

Last month, the Robert M. Bass Group signed an exclusive contract with the Federal Home Loan Bank Board to negotiate the purchase of insolvent American Savings within 75 days, and expectations are growing by the day that, this time around, the sale will go through.

The stakes are high. If Bass is successful in buying American Savings--and he has a large cheering section behind him--it will remove a major stain that has darkened the face of the thrift industry for years.

“We just want to see the problem taken care of,” said Robert E. Lackovic, president of Ford Motor’s First Nationwide Bank subsidiary in San Francisco. “If someone beats our bid, terrific.”

A sale might also improve the image of the Federal Home Loan Bank Board, the thrift regulatory agency in Washington that has been trying in vain for more than a year to broker a sale. The bank board and its Federal Savings and Loan Insurance Corp. arm are the chief regulators for the nation’s 3,150 federally insured savings and loan firms.

“I’m pulling for them,” said one former staff member of the bank board, now an executive at an East Coast thrift. “They need a win.”

The bank board and Bass have draped a shroud of secrecy over their talks. Though the parties are in general agreement about a sale, key tax and financial matters remain unresolved, industry sources believe.

“A lot of things are still in a state of flux,” one source emphasized.

It is generally believed, though, that American Savings will be divided into two separate organizations, known in banking jargon as a “good bank” and a “bad bank”--a framework that has been used recently in Texas to bail out commercial banks.

According to industry sources and one reorganization plan reviewed by The Times, here is how the deal for American Savings is shaping up:

Bass investors would take over the “good bank” through an injection of capital of perhaps $500 million to $600 million. This new institution stands to take over about $15 billion in assets, about half American Savings’ present size, and $15 billion in deposits. It would also operate most of American Savings’ 185 California retail branch offices.

The good bank’s assets would include American Savings’ performing loans and possibly a portion of its large mortgage-backed securities portfolio. The “bad bank” would assume questionable and non-performing loans.

Who would own and operate the bad bank is one of the matters still being hammered out. But it is entirely possible that present shareholders of FCA may be compensated with a so-called hope certificate to allow them to share in the bad bank’s future profits--if there are any. It is also possible that American Real Estate Group, FCA’s real estate liquidation arm known as AREG, will get a contract to gradually liquidate the bad bank’s assets.

Inexact Exercise

The reorganization would also give the Bass investors protection against shareholder litigation as well as rising interest rates on fixed-rate assets, while allowing FSLIC to share in American Savings’ future profits.

One major question is how the bank board and FSLIC plan to handle more than $1.5 billion in tax deductions that FCA has on its books, accrued largely from heavy operating losses in past years.

These deductions may be worth between $400 million and $500 million for a large corporate taxpayer, which could use them to offset earnings. But the tax deductions must be used in a manner acceptable to the Internal Revenue Service.

To be sure, predicting what will happen at American Savings is a decidedly inexact exercise.

Earlier this year, following weeks of business-journal reports that Ford Motor had all but sewn up a deal to buy American Savings, the bank board abruptly suspended talks with the auto company, apparently in part because of internal disagreements.

Some bank-board watchers say the three members of the diverse panel have a lot of difficulty agreeing among themselves. The board includes Chairman M. Danny Wall, a long-time Washington insider who is both politically savvy and extremely cautious; Lawrence J. White, a cerebral, Harvard-educated economist, and Roger Martin, a businessman from Wisconsin with little patience for bureaucracy.

Though unanimous bank board approval for a sale is not necessary, unanimity might help the board defend whatever decision it makes. “It’s not at all clear if all three can agree to this deal,” said one official with the U.S. League of Savings Institutions, a trade group.

Rising interest rates are also making it more expensive for FSLIC to consummate a sale because they depress the market value of American Savings’ mortgage-backed securities, which now have a book value of about $16 billion.

Though American Savings is undisputably the largest troubled thrift in the nation, there is growing evidence that its maladies now pale beside those of the Texas savings and loan industry, whose financial condition has deteriorated sharply in recent months.

Minimum Cost

On May 18, FSLIC provided a record $2-billion assistance package by which Southwest Savings in Dallas took over four failing Texas thrifts whose assets total about $4 billion. The four thrifts had a total negative net worth of more than $900 million.

In the case of Southwest, FSLIC received a 50% interest in the thrift’s common stock and 90% of its first $60 million in profits. Southwest, itself inadequately capitalized, agreed to contribute only $25 million in long-term debt as capital for the newly formed financial institution.

The bank board’s principal mission with American Savings is to execute the sale at minimum cost to FSLIC. Industry sources say such an assistance package may cost from $2 billion to $4 billion, given the size of American Savings’ problems, which include $7 billion in questionable or non-performing loans and nearly $1 billion in an intangible, non-earning asset known as good will.

According to the latest audit by the General Accounting Office, the FSLIC fund faces potential losses of $36 billion on 500 ailing thrifts. And more problems may be uncovered as the depressed Southwest real estate market chews away at the value of loan portfolios.

It is Martin who has spearheaded the effort to find a buyer for American Savings, a process that has not always been smooth. Chatty and blunt, Martin has gotten in hot water occasionally with some public remarks.

He once said in an interview that American Savings was like an alcoholic who was trying to recover a day at a time--a hyperbolic comment that was not well received in Stockton, where most American Savings employees work.

Without being specific, Martin now predicts that the American Savings sale will be wrapped up within the 75-day negotiating period, which ends in early July. Part of his confidence stems from the fact that Bass has given full negotiating powers to his Washington associates, which greases the bargaining process.

Difficult Task

According to Martin, the tortuous, and ultimately unsuccessful, talks with Ford foundered because different parts of the Ford Motor bureaucracy had conflicting interests. The bank board would work out details with one group of attorneys, only to be confronted by new demands from another group of Ford lawyers, he said.

“That’s a lot of bull,” replied one source close to Ford, who added that the auto maker stands ready to reopen negotiations if the Bass bid fails.

“We’re waiting with interest,” the source said. “We always have been.” Ford has made offers to take over all American Savings assets with a capital injection of as much as $1 billion in cash.

Martin may have fewer lawyers to talk to now, but the task is still difficult. The Bass investors are savvy businessmen who are fully aware that the bank board is under great pressure to resolve the problem.

Meanwhile, though, Martin’s optimism is sweet music in Stockton, where American Savings has 1,800 employees and a new headquarters under construction. The Bass group is buying FCA “as an investment,” said Rep. Norman D. Shumway, the district’s Republican congressman. “They expect to continue it virtually intact.”

In a recent meeting with Martin and an unidentified Bass representative, Shumway and Rep. Richard H. Lehman (D-Sanger) were assured that the thrift will not move its headquarters. Some branches will be closed and some employees will lose their jobs, but the Bass group “does not want to buy (American Savings) and dismember it,” Shumway said.

The congressman acknowledged, however, that the transaction must be concluded quickly. “If American Savings is not preserved as an asset, there is nothing to sell . . . ,” Shumway said. “There is some urgency in concluding all of this.”

Finally Settled

One unknown is Rep. Fernand J. St Germain (D-R.I.), chairman of the House Banking Committee, who has begun a probe of the regulatory handling of the entire affair. The Rhode Island lawmaker is miffed at the bank board and its staff for ignoring his repeated requests for documents about FCA.

But St Germain’s staff insists that he is not trying to torpedo the Bass negotiations.

“We’re not asking for any information about these particular negotiations,” one staff member said. “We want to know what happened in the past, what happened with Ford and other potential buyers. We’re not trying to interfere with the current talks . . . .”

Once the FCA/American Savings affair is finally settled, it may become a case study of bank regulatory futility and frustration. Former regulators conceded privately that government oversight of this financial institution has been inadequate and inconsistent.

As a result, American Savings has been ballooning up and down in recent years like football lineman William (Refrigerator) Perry, of the Chicago Bears. (Perry just reported to a training camp at 377 pounds, 57 pounds over his playing weight.)

Regulators sat by in 1983 and 1984 while FCA rapidly expanded its assets under the leadership of Charles W. Knapp. Then they ordered the thrift to shrink after forcing Knapp to resign as chairman and chief executive in August, 1984, then allowed the company to grow again under Popejoy in mid-1986 and finally called for a shrinkage again earlier this year.

One window to understanding regulatory indecision regarding FCA is contained in a confidential report that was commissioned by the bank board in early May, 1983. The report has been obtained by The Times.

The bank board wanted an independent evaluation of a proposed merger of FCA, which at the time owned State Savings & Loan in Stockton and First Charter Corp., which owned American Savings in Beverly Hills.

The study was carried out by Wallace Associates, a real estate investment, management and consulting firm in Salt Lake City. And the report shows that regulators were informed in blunt language of the major problems facing FCA that were to bedevil its savings and loan operations in later years.

State Savings had “an enormous exposure to losses from interest rate fluctuations” and an asset-quality problem that “alone was potentially sufficient to jeopardize (its) long-term viability,” the report stated.

“State has been a high-risk lender by design over most of the past three years,” the 42-page document noted. “State must improve its reputation for high-quality loan underwriting and must make every effort to reduce exposure to losses arising from the business booked since 1980.”

At the same time, though, the report stopped well short of total condemnation, and indeed described Knapp and his top executives as impressive and able. The thrift has “a talented senior management team” and its “dispatch in confronting problems and seizing opportunities is remarkable considering their size.”

After hearing the consultants’ interim findings, the bank board approved the FCA-First Charter union in August, 1983, creating what was then the nation’s largest thrift. The merged company took Financial Corp. of America as the name of the parent company and American Savings as that of the thrift subsidiary.

But the merger was not a year old before the serious problems surfaced. Since then, American Savings has survived three separate deposit runs--two minor and one major--and added $1.7 billion to its reserves for loan losses. The thrift has also run aground on rising interest rates, which have been generally going up since early 1987.

FCA losses hit $590 million in 1984 and $468 million in 1987, with the in-between years being modestly profitable. By March 31, 1988, American Savings had no more capital--by even the most elastic accounting standards.

Edwin J. Gray, bank board chairman at the time of the merger and now a thrift official in south Florida, recalls that he bowed to tremendous pressure exerted on him by his board members and senior staff to approve the merger.

“It’s one of those decisions,” he said in a recent telephone interview, “that I wish I could make again.”

FINANCIAL CORP. OF AMERICA: A Five-Year Chronology of Events

1983:

Jan. 11: Financial Corp. of America, parent company of State Savings, strikes deal to merge with First Charter, which owns American Savings & Loan, in a deal valued at $734 million.

May 2: Under SEC pressure, FCA restates and reduces 1982 earnings by 26%.

Aug. 4: Regulators approve merger. New company keeps FCA and American Savings names. Charles W. Knapp is chief executive.

1984:

May 11: FCA unveils plan to buy back 25% of its common stock.

June 22: Knapp cancels stock buyback, indicating he has serious problems with federal thrift regulators. There is “continued concern about the viability” of American Savings, one regulator says.

Aug. 14: Faced with mounting deposit losses, American Savings borrows $500 million from Federal Home Loan Bank of San Francisco.

Aug. 15: FCA announces $107-million second-quarter loss due to earnings restatement mandated by SEC.

Aug. 18: Regulators considering ousting Knapp as chief executive.

Aug. 20: FCA steps up borrowings to fend off worsening deposit run.

Aug. 22: Knapp relinquishes daily control of company.

Aug. 28: Knapp is forced to resign as chairman and CEO and is replaced by William J. Popejoy.

Aug. 29: Popejoy vows to end rapid growth and heavy reliance on fixed-rate lending.

Sept. 4: J. Foster Fleutsch, Knapp’s No. 2 man, resigns.

Sept. 18: It is disclosed that Knapp received $2-million severance pay when he quit.

Sept. 21: FCA stems huge deposit outflows. “Confidence appears to have been restored,” Popejoy says. “Our problems are behind us.”

Sept. 28: FCA drops Arthur Andersen & Co. as outside auditor.

Oct. 11: FCA will lay off 1,500 people in cost-cutting move.

Oct. 25: FCA lost $6.8 billion in deposits in third quarter. “We’ve been through hell and we’re out of it,” Popejoy says.

Nov. 15: Knapp forms his own investment banking firm in Los Angeles.

Nov. 29: FCA sues Knapp to recover $2-million severance.

1985:

Jan. 30: Popejoy estimates FCA will lose more than $100 million in fourth quarter, adding “the good news is the bad news should be behind us soon.”

March 8: FCA sharply revises loss estimate, saying it might post annual loss of $700 million.

March 28: Knapp makes offer to buy FCA problem loans valued at more than $1 billion.

April 1: FCA loses $512 million in fourth quarter, bringing annual loss to $590 million, an S&L; industry record.

April 9: Company rejects Knapp’s bid to buy troubled loans.

May 14: Popejoy says FCA is going to start growing again.

May 16: American Savings discloses that it lost $1 billion in deposits in April.

1986:

Jan. 30: 1985 earnings are $53.3 million.

April 29: Company sues Arthur Andersen & Co., alleging negligence.

April 30: Problem loans reach nearly $2 billion.

1987:

March 20: Bank Board hires investment firm of Salomon Bros. to find buyer for FCA.

April 21: FCA hires own merger consulting firm, Kaplan, Smith & Associates.

June 12: Ford Motor, through First Nationwide Bank subsidiary, emerges as a buyer for FCA.

July 23: FCA reports $177-million second-quarter loss.

Sept. 21: SEC discloses FCA accounting and lending abuses from 1980 to 1986.

Oct. 20: FCA posts $75.8-million third-quarter loss.

Nov. 6: Citicorp enters bidding for FCA.

Nov. 18: Citicorp drops out.

1988:

Jan. 8: Bank Board suspends sale talks with Ford.

Jan. 21: FCA net worth wiped out by $225-million fourth-quarter loss. Red ink for 1987: $468 million.

Jan. 27: FCA requests $1.5-billion bailout from FSLIC for American Savings.

Feb. 4: Rep. Fernand J. St Germain (D-R.I.) begins probe into regulatory handling of FCA.

Feb. 7: Regulators confirm that they might break up American Savings and sell it in pieces.

Feb. 10: Bank Board member Roger Martin meets in Los Angeles with thrift executives who want to buy chunks of American Savings.

Feb. 12: Martin shelves American Savings’ breakup idea for “tax reasons.”

March 18: Regulators insure all deposits at American Savings, even those over $100,000.

April 21: Regulators confirm that they have signed an exclusive pact to negotiate sale of American Savings to Texas billionaire Robert M. Bass. Renewed talks with Ford broken off.

May 4: FCA posts $63.2-million first-quarter loss.