Federal savings and loan regulators are again exploring a long-simmering proposal for leading Wall Street brokerages to raise funds for troubled S&Ls nationwide by selling certificates of deposit to investors.
S&Ls that might benefit from such a program include ailing Financial Corp. of America, suffering from mounting losses at its American Savings & Loan unit.
However, industry officials said, the program is most likely to aid troubled S&Ls in Texas and other oil-patch states, where the industry's problems are most severe.
The proposal was discussed Thursday at a meeting in Washington by officials of the Federal Home Loan Bank Board, which regulates S&Ls, and four leading brokerages, Merrill Lynch, Shearson Lehman Hutton Inc., Prudential-Bache Securities and Dean Witter Reynolds, bank board spokesman William Fulwider said.
Insured CDs to Be Sold
Results of the meeting, held late in the day, were not immediately available but Fulwider said the gathering was "exploratory" and thus no decisions or agreements were expected. Because of the potential political, economic and logistical questions, many industry officials are skeptical that such a program will get off the ground soon, if at all.
Although specifics of the proposal are yet to be worked out, industry officials said it is likely that it would involve participating brokerages selling insured CDs of $100,000 or less to wealthy individuals and other clients. The CDs would have maturities of at least a year, so as to provide some stability to the S&Ls. Decisions on distribution of the proceeds would be made by the Federal Savings and Loan Insurance Corp., an arm of the bank board.
Sales of such "brokered" CDs are not new, as many individual S&Ls collect deposits that way for their own vaults. Irvine-based FCA, for example, raised about $1 billion through a brokered CD program led by Prudential-Bache in 1984, when the savings and loan firm suffered from a severe outflow of deposits following initial disclosures of its massive problem loans and other woes.
But such a brokered CD program has never been employed on a large scale for the industry as a whole.
Paying 'Too Much'
The Federal Home Loan Bank of Dallas operates a CD program that has raised about $1 billion to aid ailing S&Ls in its district, which--because of the institutions' shaky conditions--must pay relatively high savings rates to attract deposits. Those CDs provide badly needed cash to those Texas S&Ls and carry lower rates than they pay for deposits, thereby lowering their cost of funds.
"The industry is paying too much for deposits right now," said Allan Bortel, S&L analyst at Shearson Lehman Hutton in San Francisco. "To increase industry profitability, you need to bring down the cost of funds."
William J. Popejoy, chairman of FCA, said his institution would be interested in receiving such funds but only if the rates were lower than what it currently pays through its American Savings branch network. American Savings pays far less for its deposits than many Texas S&Ls.
"I doubt we'd be very interested if the cost of money is much higher than in our local market," Popejoy said. He added that there was a "good likelihood" that FCA would not be eligible for the funds anyway.
Popejoy said FCA currently has more than enough cash and collateral to back up about $12 billion in short-term loans called reverse repurchase agreements, made to it by such Wall Street brokerage houses as Salomon Bros., First Boston and Goldman, Sachs. Some of these lenders, however, want FCA to increase collateral even more.
For additional cushion, FCA could use money from brokered CDs to pay off those loans and free up even more collateral, Popejoy said. The collateral is mostly in the form of mortgage-backed securities.
FCA has not suffered a significant deposit outflow since it announced Jan. 27 that it had lost $468 million in 1987 and posted a negative net worth for the first time ever. The net outflow since then has totaled only $160 million, less than 1% of its $16.9 billion in deposits, Popejoy said.