For much of the last three years, executives at savings institutions have complained--both publicly and privately--about the federal regulatory agency that examines their books and sometimes restricts their activities.
Demonstrating that the bureaucracy is not immune to change, the Federal Home Loan Bank Board and its 12 district banks have streamlined operations and changed the way they review the nation's savings and loans.
A number of S&L executives have said they like the new changes.
Executives and regulators alike said the bank board and the district banks have instilled a greater sense of professionalism in their staffs. One major reason for the new attitude has been the emergence of former banking regulators--primarily from the Office of the Comptroller of the Currency--as top S&L regulators.
Michael Patriarca, 37, is one of those former banking regulators who controls regulatory functions for the Federal Home Loan Bank in San Francisco, the district bank that supervises savings institutions in California, Arizona and Hawaii.
Patriarca joined the comptroller's office in 1976, shortly after graduating magna cum laude from the University of Santa Clara College of Law. He rose through the ranks to become deputy comptroller for multinational banking, a job that put him in charge of supervising the country's largest national banks, such as Bank of America and Citibank.
He switched to the district bank in San Francisco in August, 1986, and soon began planning the restructuring of the district bank's regulatory functions, aligning them more like an S&L than a regulatory agency.
He merged two key divisions--supervisors and examiners--into one because they often had ignored each other's concerns in telling S&Ls what problems they found on the books. And he divided S&Ls into three categories for review purposes--about 20 of the largest and more innovative ones are in one group. About 160 of the smaller, non-problem S&Ls are in another group. The third group is composed of some 50 troubled S&Ls, including those that have failed but are being operated by the Federal Savings and Loan Insurance Corp., an arm of the bank board. About 45 California savings institutions, including 10 failed Orange County S&Ls, are in the third group.
Q. So far this year, 10 savings and loans in California, half of them in Orange County, have been seized by regulators. Why are so many still failing?
A. Well, an institution doesn't do a bad deal and then have the effects show up immediately on its income and its capital. Depending on the nature of the activities, it can take years for deals that would be uneconomic or fraudulent or just plain stupid to result in damage, especially in damage that prompts the regulators to close the institution and take it over. So there are still a number of institutions this year that have failed, for the most part, for reasons that date back to inappropriate activities in previous times.
Q. Has there been an evolution in the causes of S&L failures since 1982, when financial institutions were deregulated?
A. We looked earlier this year at the institutions that have failed and concluded that the causes of the failures were nothing particularly surprising--poor management decisions, management entering into areas beyond its expertise, inadequate supervision by directors, inadequate policies and procedures for doing the lines of business that they were doing, and inadequate capital to absorb losses when they were encountered. It's a pretty common way most institutions have gone down the tubes.
Unfortunately, there's another common element that's in there as well, and that's fraud. There are any number of grand juries investigating activities that went on in S&Ls, and regulators have initiated lawsuits in many of the cases.
Q. In the last three years, regulators have seized 10 Orange County-based S&Ls and publicly imposed orders on two more. FSLIC has sued former directors and officers at seven of 12 S&Ls, and the FBI has opened bank fraud and embezzlement investigations on 10 of them. Has civil or criminal fraud become more prevalent in S&L failures?
A. In the last several years, fraud has been a significant factor in more than a few failures. As a matter of fact, we've been doing what we can to assist the FBI and the U.S. Attorney's office in the prosecution of some of the frauds that have been discovered and that have led to the eventual demise of some of these institutions. The principal problem is that those agencies don't have enough resources to bring all the prosecutions that are warranted.
Q. Has the cooperation between the regulators and criminal authorities improved since a House subcommittee hearing in Los Angeles last spring first revealed the lack of communication and cooperation between the two groups?