S&L; Regulators Balk at Bush Bailout Plan

WASHINGTON —  California savings and loan associations needing emergency cash infusions will be supplied with funds from Federal Home Loan Banks in Seattle or Dallas because regulators in San Francisco are refusing to participate in a Bush Administration S&L; support plan, federal officials said Friday.

Although the revolt by the San Francisco Home Loan Bank is extraordinary, it will not cause liquidity problems for California institutions, according to an official of the Federal Home Loan Bank Board.

“There is no threat whatsoever to any California institution,” said the high-ranking official, who asked not to be identified. “There is not a strain at all.”

No funds have yet been drawn under the emergency plan adopted a week ago to calm depositors, but money will be available whenever needed.

Because of depositor nervousness during the current S&L; crisis, federal agencies agreed on a cooperative plan to supply money to compensate for any dangerous outflow of deposits at individual S&Ls.; The Federal Home Loan Banks would supply 45% of the funds used for emergency loans, the Federal Reserve Board, 45%, and the Treasury, 10%.

However, the San Francisco bank, alone among the 12 regional banks, refused to participate because of fears about the possibility of suffering losses on loans it makes to weak S&Ls.;

“Everybody wants to cooperate; nobody says, let’s screw things up,” said Herbert M. Sandler, a director of the San Francisco Home Loan Bank. “But why in God’s name should the Federal Home Loan Bank system take the losses--it’s not their job, it’s the Federal Reserve’s job.”

Sandler agreed to discuss only public aspects of the controversy, without disclosing details of private meetings and discussions at the bank.

The Administration is asking the regional home loan banks, which are owned by member S&Ls;, to take excessive risks, according to Sandler. Healthy S&Ls; have about 30% of their capital invested in the stock of the regional home loan banks. Any problems with the home loan banks could therefore jeopardize the S&Ls; themselves.

Collateral for emergency loans to insolvent S&Ls; would be notes from the federal S&L; deposit insurance fund, which is broke. A second form of collateral would be the assets acquired by the government from failed S&Ls.; “I call this garbage collateral, raw land and other related garbage with no liquidity value, stuff that no sane lender would accept,” Sandler said in a telephone interview. He is chairman and chief executive officer of World Savings and Loan, based in Oakland.

If the home loan banks suffer losses on the “garbage collateral,” Sandler said, this could imperil healthy S&Ls; that are members of the home loan banks.

Money Drawn From S&Ls;

The Administration wants the home loan banks to participate in the backup plan to assure normal activity at S&Ls; while Congress considers the President’s plan to close or sell hundreds of insolvent thrifts.

More than $15 billion in deposits was withdrawn from S&Ls; during the last two months of 1988. The higher interest rates offered by money market funds presumably were the major attractions that drew money from the S&Ls.; However, some members of Congress believe that the torrent of publicity about S&L; financial problems also contributed to a “quiet run” by worried depositors.

S&L; accounts are guaranteed up to $100,000, a promise of security that has been emphasized repeatedly by President Bush, members of Congress and federal financial regulators.

The Federal Home Loan Bank Board, the three-member Washington agency responsible for regulating S&Ls;, does not have the power to remove the San Francisco bank’s rebellious board of directors. The Bank Board could strip James Cirona, the San Francisco bank president, of regulatory authority, but this would not stem the revolt among directors.

The San Francisco bank serves S&Ls; in California, Nevada and Arizona. While the revolt continues, any S&Ls; from the San Francisco bank’s region needing special help under the Administration support program can draw money from the regional banks in Dallas and Seattle.

Carl Covitz, chairman of the San Francisco Home Loan Bank, said Friday he hopes to reach a compromise with the Bank Board in Washington.

“We are still discussing it and negotiating and hope to work it out on a mutually satisfactory basis,” he said.

The bank directors want to “consider the options and find the approach that serves our fiduciary responsibility,” Covitz said.

Covitz is president of Landmark Communities, a Los Angeles diversified real estate firm.

Earlier in the day, the bank issued a statement noting that, while it continues discussions with Washington, “there is sufficient liquidity available to meet the needs of the insolvent institutions, and the Federal Home Loan Bank of San Francisco continues to make advances to members in accordance with its normal lending programs.”