Is There Any Bottom To The Thrift Quagmire?

A few months ago, executives at Great American Bank thought they had a shot at survival. After teetering on the edge, the management of the troubled San Diego thrift put together a sweeping--and painful--plan to stay alive. It called for Great American, once the nation's eighth-largest S&L, to sell two-thirds of its 211 branches to Wells Fargo & Co. In return, Great American would receive $491 million, enabling the thrift to come closer to the tough new capital requirements imposed by regulators after the onset of the savings and loan crisis.

Now, however, that plan is in doubt. And so is Great American's future. On Feb. 6, the thrift announced that because of growing real estate loan losses, it was an additional $100 million short of its capital requirements. Patience at the Office of Thrift Supervision, which has allowed the thrift to stay open despite its capital deficit, may be running out.

The life-and-death struggle of Great American is far from unique. Since the S&L bailout law was passed in August, 1989, 553 institutions have collapsed and been seized by the government. But that, it's becoming clear, may be only the beginning. An alarming number of the 2,389 survivors, perhaps 500 or more, are a lot like Great American: hanging on by their fingernails (table). Many of these institutions will not make it, which means more bad news for taxpayers. The S&L bailout, say analysts, could end up being more prolonged and costly than even today's almost incomprehensible estimates. "The OTS talks about 2,300 private-sector thrifts," says James R. Barth, former OTS chief economist, "but most of those are not healthy, viable institutions."

Evidence of the industry's continuing misery is everywhere. After years of ill-conceived diversification, thrift executives are now watching even their core loan portfolios deteriorate because of the recession and shrinking real estate values. In the first nine months of 1990, 38% of the nation's thrifts weren't making any money, vs. 29% in 1988, according to Sheshunoff Information Services, an Austin (Tex.) consultant. Many thrifts in desperate need of new capital to stay in business have been unable to find willing investors.

BLANK CHECK? On Jan. 23, the Congressional Budget Office warned that the S&L bailout could involve as many as 1,600 thrifts. The Administration's estimate is around 900. The CBO puts the cost of the cleanup at $155 billion, not including interest on debt incurred to pay for the cleanup. That's three times the Administration's estimate in 1989 and nearly 20% higher than the cost of the U. S. Treasury's worst-case scenario. Adding interest over the decades sends the cost of the bailout into the stratosphere: upwards of $500 billion, according to the General Accounting Office. Says Bert Ely, an Alexandria (Va.) thrift consultant: "They ought to give Treasury a blank check on this one."

Even the healthiest thrifts are finding little to cheer about. Although half of the industry is currently doing well, many experts still believe that the S&L business is headed for extinction. Thrifts are steadily losing ground to commercial banks, particularly in what was traditionally their biggest strength: home mortgages. Thrifts also lack banks' broad product line, as well as their customer mix, which allow banks to tap both commercial and consumer depositors.

'A DOWNER.' Ironically, the latest setbacks come when many thrifts have gone a long way toward mending their ways. Gone are the days of outrageous excesses. Pressured by regulators, S&Ls have tightened lending standards and disposed of many of the risky investments that led to the industry's downfall. For instance, Goldome, a Buffalo savings bank, sold $700 million in junk bonds and dumped an additional $2.5 billion in low-quality corporate bonds.

S&Ls have also spruced up their sullied public image. To overcome lingering suspicions about safety, some have stricken the term "savings & loan" from their corporate logos. Others are more direct. Home Unity Savings Bank of Lafayette Hill, Pa., has assigned a troubleshooter in each branch to calm skittish depositors. "It's a downer," admits Richard Deihl, chairman of H. F. Ahmanson & Co. of Los Angeles, the biggest S&L in the country. "You've always been thought of as the institution of the people, with the Jimmy Stewart image from It's a Wonderful Life." Largely because of the thrift bailout law, which requires 70% of an S&L's business to be related to home mortgages, the industry, after straying far afield during the deregulated 1980s, is returning to its roots.

Unfortunately, these efforts aren't likely to help much. Demand for single-family homes is softening. In December, existing-home sales were down almost 10% from a year ago. The recession is also taking its toll on existing mortgages. Roughly 5% of home mortgages were 90 days or more past due at the end of the third quarter, compared with 4.5% in the first half. Delinquencies have almost certainly risen since then.

Thrifts are facing stiffer competition than ever from commercial banks. Banks are aggressively pursuing the retail mortgage market, which they hope will be more lucrative once the economy rebounds, and now originate more home loans than do thrifts.

But the real bane of the thrifts is commercial real estate, which is exacting a heavy toll on earnings. Even though most thrifts halted lending to commercial projects several years ago, many existing loans are becoming burdensome. After narrowing substantially in the first half of 1990, industry losses suddenly worsened. The 2,389 thrifts still in private hands lost $631 million in the third quarter of 1990, more than twice the figure for the second.

The OTS expects even worse numbers for the final quarter. Many of the nation's strongest thrifts have been reporting disappointing yearend results in recent weeks. In the fourth quarter, profits at Ahmanson, long considered one of the industry's healthiest thrifts, plummeted 99%, to less than a penny a share, following a $68 million increase in bad loan reserves. And few analysts foresee a quick turnaround in the real estate market. A recent survey of real estate developers, lenders, and brokers by the National Real Estate Investor and Arthur Andersen & Co. showed that most expect the slump to drag on for at least the next two to five years.

Real estate woes have confounded efforts by thrifts to meet tough new capital requirements. With investors snubbing cash-raising campaigns by Citicorp, the nation's largest bank, S&Ls don't stand much of a chance. In the year ended last June 30, banks, on average, earned a relatively respectable 15.8% return on equity. By contrast, the S&L industry is operating in the red (table). Even the strongest S&Ls recorded a miserly 9.6% return.

Theodore H. Roberts has felt the market's rejection first-hand. The chairman of Talman Home Federal Savings & Loan Assn. in Chicago has yet to snag any investors, though his thrift is unusually solid. Talman earned $13.2 million in 1990. Even better: Its nonperforming assets are just 0.5% of its $6.9 billion in total assets. "We're not like people who have been blown out of the water doing real estate development, or doing fraudulent activity," says Roberts dispiritedly.

With little chance of recruiting outside investors, thrifts are slashing costs and slimming down. Harbor Federal Savings & Loan Assn. of Fort Pierce, Fla., has met most of its capital needs through cutbacks. Harbor Federal has closed three of its 25 branches. With $750 million in assets, the S&L has shrunk by 17% since 1989. "I've seen the worst," says Harbor President Michael J. Brown hopefully, "and I'm making headway."

REFORMS. Shrinking alone won't save the industry, however. Now that banks and other lenders are offering plenty of home loans, many analysts question the need for a separate S&L industry. And the Administration is proposing reforms that would give commercial banks even more competitive advantages. Bank holding companies would be permitted to expand their consumer reach by offering everything from auto loans to mutual funds. Indeed, analysts believe that the few hundred thrifts that are expected to survive the 1990s may eventually just evolve into banks.

That means the once-ubiquitous S&L industry may fade away. But unfortunately for taxpayers, the costly residue of the industry's foolhardy expansion in the 1980s will linger for incalculable years to come.

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