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VIEWPOINTS : FCA Is a 'Financial Zombie' That Can't Live on Its Own : Transfusions by FSLIC Are Only Prolonging the Inevitable

February 07, 1988|MARTIN MAYER | MARTIN MAYER is the author of "The Bankers," "The Lawyers" and, most recently, "Making News."

Back in December, as a speaker at the annual conference of the Federal Home Loan Bank of San Francisco, I offered what seemed to be the one sure solution for the woes of the Federal Savings and Loan Insurance Corp. The worst losses are in the Texas savings and loans, so give Texas back to the Mexicans.

As the net position of the state as an economic entity is probably still positive (though just barely), such a gesture of neighborliness also would be of some value in solving the Mexican debt problem, which would be very good for the big banks and thus, no doubt, for our economy. Nobody thanked me for this suggestion, but pioneers have to expect to go unappreciated in their own lifetimes.

One of the most disturbing aspects of Financial Corp. of America's recent plea for a $1.5-billion federal bailout of its operating subsidiary, American Savings & Loan, is the shadow it casts over my cure for the FSLIC disease. I don't wish to frighten anyone, but it is beginning to look as though we may have to give back more than just Texas.

FCA is a financial zombie. Its position since 1984 has been roughly that of the Denver Broncos in the second half of the Super Bowl against Washington: When you're that far behind, you throw the ball whenever you can release it, and, even if you're talented, you get intercepted a lot.

Nothing Left for Holders

If American Savings were anything but an S&L, the shutters would have been put up years ago and the postal service would have been told to refer the mail to the dead letter office. But if it shut down, a government-sponsored insurance fund would have to pay off the depositors, and the fund doesn't have enough money. It can't get enough money without an appropriation by Congress, and Congress won't willingly allocate dollars to an old, shopworn problem like this. So the government keeps it breathing, if not really alive.

The question that jumps to mind at the sight of FCA is why the stock of this corporation still trades on the New York Stock Exchange, and why stockholders are being encouraged to believe that, when the music stops, there will be a chair for them. Four years have passed since the Federal Home Loan Bank of San Francisco sequestered a high fraction of the best assets of FCA as collateral for the loans necessary to keep the doors open in the face of a run on its deposits; those loans still are outstanding and those assets still are pledged.

What's left is ludicrously inadequate as a source of payments to the FCA creditors and depositors, let alone the stockholders--FCA's net worth already is negative.

Sophisticated observers had sympathy for Charles W. Knapp when he ran State Savings and then FCA through the late 1970s and early 1980s with a strategy of fast and furious. The S&Ls were suffering because they had portfolios of low-yielding mortgages and had to fund them with certificates of deposit and money market accounts at interest rates that rose with inflation.

Knapp's solution was to acquire huge quantities of new mortgages at higher rates to increase his average return. When that didn't create quite enough income, he began acquiring assets that offered even higher yields for the usual reason: They were riskier. Those shoes began to drop in the weak commercial real estate market last year, and one suspects there's another huge rack of shoes ready to fall when the general business slowdown trips up "junk bonds."

Something certainly seems to be spooking FCA's current chairman, William J. Popejoy. In my reading of banking history, since deposit insurance came with the Glass Steagall Act in 1933 (that's the act the big-time bankers now say should "vanish," as you'll notice if you read their ads), Popejoy is the first custodian of a depository who ever warned his customers not to leave in his bank a penny more than the government insured.

A Game of Chicken

The only apparent customer for FCA was Ford Motor Co.'s First Nationwide Savings. Anthony Frank had grown the great oak of First Nationwide from the little acorn of his Citizens Savings in San Francisco, in large part with the help of fertilizer from the Federal Home Loan Bank in one of the great sweetheart deals of the early 1980s. But Frank is leaving First Nationwide to be postmaster general, and one doubts that Ford would want to try anything ambitious with an S&L right after losing the forester. FCA and the government seem to be on their own.

Right now, FCA is what the British call a "quango," for Quasi-Autonomous National Governmental Organization, and Popejoy is a quangocrat playing chicken. The problem with this game of chicken is that other thrifts, builders and home buyers are trying to use this road to get from here to there. It cannot have been helpful that Popejoy put out so large a begging bowl on the same day that FSLIC went to market for the third portion of the giant "refunding" Congress authorized last year in a gimmick to keep the agency's losses off the published deficit.

Sometimes the world is better off if a crisis is called a crisis. Now the big New York investment banks make a little money by lending to FCA so that American Savings can try a new variation of the old Knapp strategy. The brokers and specialists still make a little money by selling FCA stock (to whom?, one wonders). The rest of us, without realizing it, are bleeding dollars to transfuse this zombie.

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