Some of California's most troubled savings and loan associations have asked for another $500 million to $700 million in government-backed notes so they can remain solvent, U.S. banking regulators confirmed Wednesday.
The capital notes are needed to offset additional operating losses and loan write-downs at "most" of the 11 savings and loans that have been taken over by federal banking regulators since last spring, according to James Cirona, president of the Federal Home Loan Bank of San Francisco. These institutions' assets total more than $12 billion.
Industry sources warned that the new notes, if approved, would have a major impact on the fund operated by the Federal Savings and Loan Insurance Corp., which liquidates insolvent S&Ls and insures customer deposits up to $100,000 per account.
They say the notes would result in a dollar-for-dollar reduction in the FSLIC's unobligated reserves, which have recently grown to close to $4 billion. These are the funds the agency has available to handle forced mergers and liquidations of troubled S&Ls .
All 11 savings and loan associations are part of the federal "management consignment program," which has allowed these financial institutions to remain open for business under new management while regulators decide how to dispose of the assets. In a telephone interview, Cirona declined to name the institutions asking for the additional capital notes.
The need for more capital comes at a time when growing numbers of powerful industry officials are asking privately whether these infusions of "paper" capital serve any purpose. They charge that these notes, which are backed by the FSLIC, are merely accounting gimmicks that distort the true health of the financial institutions involved.
Further, they point out, hundreds of savings and loans across the country are open today even though their net worths are negative, according to generally accepted accounting procedures. An S&L has a negative net worth when its liabilities exceed its assets.
"This is all a paper shell game," one consultant said. "They do it so money managers can read the (S&Ls) year-end financial reports that show a positive net worth."
Cirona agreed that this kind of bail-out may be an outdated way to maintain public confidence but said that, even so, the notes will probably be approved by the Federal Home Loan Bank Board "in a few days." The bank board is the principal U.S. regulatory agency for savings and loans.
"These companies are all solvent, if you define solvency as the ability to pay your bills," Cirona said. "The fact that they have negative net worths is no great problem."
In return for the capital notes, the FSLIC gets what are called income capital certificates (ICCs) from the S&Ls. These, in effect, are corporate IOUs stating that the S&Ls will pay off the notes from future profits.
Critics say, however, that there is little chance of these S&Ls making good on the IOUs because they are in such poor financial condition.
The FSLIC has already pledged about $1.4 billion in capital notes to S&Ls in the management consignment program. The additional $500 million to $700 million is needed in California, Cirona said, because the S&Ls have sustained heavy losses in writing down their loan portfolios to market value.
Twenty-six S&Ls across the country are in the management consignment program. They were taken over because of their prodigious amount of troubled assets, largely real estate development and construction loans, regulators say.
The largest--and first--savings and loan in California placed in the program was Beverly Hills Savings, taken over in April, 1985. The latest--and second smallest--was Manhattan Beach Savings, seized last Thursday.
Former FSLIC director Peter Stearns, who resigned in November, estimates that the California institutions alone have about $4 billion in problem loans that the FSLIC will have to sell off at a heavy loss.