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For Regulators, S&L 'Hospital' Is No Cure-All

September 21, 1986|TOM FURLONG | Times Staff Writer

The old management at Centennial Savings & Loan in Guerneville, population 900, apparently liked to conduct its business affairs in style--to put it kindly.

Before the Northern California savings and loan was taken over by federal savings and loan regulators 13 months ago, its expenses included $48,000 a year for a European chef and its assets included a corporate airplane and a Mercedes limousine. The S&L had a Christmas party in 1983 that cost $132,000.

"It was just crazy," said Jack Steele, dean of the USC business school and a member of Centennial's new board of directors.

Law enforcement agencies are now investigating Centennial Savings in connection with allegations that the S&L laundered drug money and received kickbacks on high-risk real estate loans, FBI and company officials confirm.

Further, the FBI recently arrested two people earlier this month and accused them of embezzling $1.8 million from the company. One of those arrested was Centennial's branch manager in Santa Rosa, while the other is a former executive vice president of the S&L.

Centennial is one of the so-called MCPs, a sorry fraternity of failed S&Ls that remain open across the country as virtual wards of the federal government. (Twenty of the 46 S&Ls put into the program are in California.)

MCP is bureaucratic shorthand for "management consignment program," a controversial plan of semi-nationalization that began again in California last year when regulators swooped down on Beverly Hills Savings & Loan on a Tuesday afternoon in late April.

In what became a general pattern for later takeovers, regulators ousted the old management and board and replaced the state charter with a federal one.

The following day, when Beverly Hills S&L opened its doors to lines of anxious depositors, new management from a healthy financial institution--First Nationwide Financial in San Francisco--was in charge.

At the time, the management consignment program was hailed in established industry circles as a temporary and relatively painless way to rein in unhealthy growth at high-risk S&Ls whose loan portfolios were riddled with problems.

It was intended primarily as a holding action to spare the money-short Federal Savings and Loan Insurance Corp. the immediate and hefty cost of either closing the S&Ls or arranging shotgun mergers with healthy financial institutions.

(FSLIC, an arm of the Federal Home Loan Bank Board, insures customer accounts up to $100,000 should an S&L shut down.)

Though praised 18 months ago, the program long ago lost its novelty and today it is being pelted with flak from a variety of industry insiders, including some staunch early supporters.

Decline in Value

The longer the delay, the more the assets of a troubled S&L are likely to decline in value, particularly in overbuilt markets, some lending experts say.

Buttressing this belief is a recent report from the General Accounting Office, Congress' research unit, warning that it may cost more in the long run to keep sick savings and loans open than to shut them down.

Further, industry executives complain angrily that ailing S&Ls offer high rates for savings in order to fund their operations.

Though great for consumers, it drives up costs for all S&Ls because they have to raise their savings rates to stay competitive.

"It was an A-plus the first six months, a B-minus in the second six months and a C-minus the third six months," said Anthony Frank, chairman of First Nationwide, summing up a general frustration felt by some of his colleagues.

As the MCP was first envisioned, the new management from healthy thrifts would analyze the ailing institution's loan problems while regulators found new owners, all within three to six months. Recruited by the FSLIC, the new managers are paid a fee to cover expenses.

Now, the program has taken on a life of its own.

"It was supposed to be a three-month program but we have been here 15 months," said Peter Pickslay, who has been installed as president of Eureka Federal Savings & Loan in San Carlos, Calif., under the program. "If it had been known that we would be here (this long), they would not have gotten any managers."

Estimates Proved Incorrect

Initial time-resolution estimates proved incorrect because regulatory and industry officials underestimated the depth of the problems.

They also said their hands remain tied until the FSLIC finds the money it needs to close or sell the insolvent institutions.

"The problems are a lot greater than anyone thought and it takes a lot longer to work them out," said industry consultant David Smith, partner in Kaplan, Smith & Associates in Glendale.

The latest financial reports show that liabilities of the California MCPs exceeded their assets by anywhere from $444 million to $1.53 billion, depending on the accounting system used. Together, they owned about $653 million worth of foreclosed real estate as of March 31, the latest public reports show.

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