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Columbia S&L Thrives on Taking Risks : Junk-Bond Trading Pays Off Big but Critics Question Operation

October 20, 1985|TOM FURLONG | Times Staff Writer

During his first year of law school at Loyola University in Los Angeles, Thomas Spiegel made so much money in the stock market--about $100,000--that he dropped his studies and became a broker on Wall Street.

"I've been trading since I was 16 or 17 years old," he said. "I have always been fascinated by the market."

Spiegel, now 39, remains a market junkie, and he's making more money than ever trading securities. Only now he's doing it in the rather unlikely role as chief executive of Columbia Savings & Loan Assn., a family-controlled financial institution that has emerged from obscurity in recent years to become one of the most aggressive, controversial and profitable savings and loans in the nation.

Columbia late last week reported nine-month net income of more than $104 million, no mean accomplishment for an S&L that never made more than $1 million a year before 1982. The profits were achieved chiefly because falling interest rates have allowed Columbia to sell assets at a profit.

Outsiders of all stripes--competitors, regulators, investment bankers and financial analysts--are eyeing Spiegel's Beverly Hills-based S&L with varying degrees of admiration because of its profits;jealousy because of its rapid rise;alarm because of its profitable but risky investments in the junk-bond market; and derision because of its maverick ways.

"They're like the guy who wears a loud suit at a conservative party," says one banking regulator.

To some industry insiders, Columbia Savings is the country's premier example of how a savings and loan association can operate sanely and profitably in a deregulated banking environment.

"His operations aren't any risker--in fact, I think they're less risky--than those of the traditional savings and loan," maintains Richard Pratt, a former chairman of the Federal Home Loan Bank Board, the country's principal S&L regulatory body.

The more skeptical suggest that Spiegel is simply a shrewd opportunist whose operations are not only highly questionable in the long run, but have run far afield from mortgage lending, the original purpose of the S&L industry. He is simply running a brokerage house with depositors' money, they say.

"I personally don't think what they are doing is appropriate," says Allan Bortel, a financial analyst with Shearson Lehman Bros. "It's the job of a savings and loan to service the housing industry."

"They have done something very astronomical, but they're not functioning as a savings and loan," adds a lender in Beverly Hills. "They're really in the junk-bond business."

Junks bonds are low-rated or unrated corporate securities that have proliferated in the past two years, often as funding vehicles for hostile corporate takeovers. More than $30 billion in junk bonds were sold last year through public and private placements, a third of which were connected with mergers or leveraged buy-outs.

Columbia Savings has about $1.5 billion invested in low or unrated bonds, a level that's less than a quarter of its total assets but dwarfs what other S&Ls have invested. The entire S&L industry owns about $5 billion of these bonds, regulators estimate.

Some money men worry that the junk bonds, which have very high yields, will be vulnerable to default during the next recession because cash-strapped companies will have difficulty meeting the payments.

"A bad roll of the dice (with the economy) and (Columbia) could be in big trouble," one top West Coast investment banker warns.

Junk bonds have also drawn fire from Congress and several top banking industry regulators, including Federal Reserve Board Chairman Paul A. Volcker. Many commercial banks are barred by regulators from investing in junk bonds, while savings and loan associations with a federal charter may only put up to 1% of their assets in these investments.

But Columbia Savings has a state charter, and in California that means an S&L may invest its depositors' money where it wishes. Such liberal powers were granted by the California Legislature in 1982 as a means of giving struggling S&Ls more ways to make money.

Columbia has taken full advantage of the statute. Its assets have grown to $6.6 billion on Sept. 30, from $373 million at the end of 1981, an increase of nearly 18-fold that was achieved largely by acquiring bonds and stocks.

Columbia's $173 million in nine-month-operating profits included $105 million from the sale of loans, mostly mortgage securities, and $37 million from the sale of stocks and bonds. But earnings were reduced because of an $8.59-million provision for losses on the investment portfolio, including $4.59 million that was added in the third quarter.

Mortgage Investments

Columbia's assets on Sept. 30 included $2.29 billion in investment securities, $1.07 billion in mortgage loans and $2.48 billion in mortgage-backed securities. The mortgage securities are almost all Ginnie Maes, which are pools of mortgages packaged as bonds and guaranteed by the Government National Mortgage Assn., a federal agency.

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