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THE ROCK IN PIECES : How Gibraltar Savings Made a Mess of Itself, Ending Up in the Hands of Federal Regulators

April 16, 1989|TOM FURLONG, | Times Staff Writer

Herbert J. Young was flat-out wrong in early 1987 when he predicted the future for Gibral-tar Savings, a financial institution in Beverly Hills that he had run for more than 25 years.

"The key fundamentals are in place for a successful year. . . . ," Young said in his annual written report to shareholders. "All indications point to continued interest rate stability and a healthy real estate market in the company's principal lending areas."

In fact, in the ensuing 24 months, soaring interest rates and severe down drafts in the real estate market sparked nearly $250 million in losses at Gibraltar Financial, the parent company, and ultimately led to large withdrawals of deposits at Gibraltar Savings.

Whether it was a bad forecast or an attempt to mislead, as shareholders would later charge, Young's failure to guard against these events helped to trigger what would become the collapse of Gibraltar Savings, a well-known local financial institution that billed itself as more than 100 years old and as "solid as the Rock of Gibraltar." Neither claim was quite accurate.

Gibraltar Savings is now in a government conservatorship, a virtual ward of the Federal Deposit Insurance Corp. Regulators seized the undercapitalized company on March 31, saying it was in the grip of a serious deposit outflow.

Gibraltar's downfall was also the undoing of Young, a well-known and well-liked local boy who went to Fairfax High School and spent nearly his entire adult life building the firm into one of the nation's 10 largest thrifts. He was forced to resign more than a year ago as Gibraltar Financial's chief executive amid charges that he mismanaged the company.

A close look at what happened at Gibraltar Savings unmasks a case study in how not to operate a savings and loan in today's hostile and unpredictable climate of financial deregulation.

Its recent past is strewn with major mistakes and miscalculations in investments in real estate and mortgage-backed securities, according to outside experts and court records detailing its business practices.

Gibraltar has had lending woes on condominiums in Dallas, commercial offices in New Orleans and, according to one lawsuit, on a "world-class" equestrian center in Griffith Park that was supposed to have condominiums for horses. Its huge collection of mortgage-backed securities, valued at $5.6 billion at the end of 1988, now hangs like a millstone around the company's neck.

Meanwhile, shareholder suits charge that Young misled stockholders about the firm's real financial condition, particularly in those remarks to stockholders in early 1987. Gibraltar Financial recently established a reserve of $4 million to pay for pending litigation, indicating a settlement of those suits may be at hand.

Gibraltar Savings has also had a series of embarrassing and damaging differences with business partners and customers who later sued the lender on the grounds they were cheated, court records show.

The firm is a "monument to the ineptness of its management," said Jonathan Gray, thrift-industry analyst for Sanford C. Bernstein & Co. in New York.

That was not readily apparent in the years following World War II, when the company emerged from obscurity and swelled in size by helping finance California's prolonged housing boom.

It was early in the post-war years that Young, born and raised in Los Angeles, was attending several local colleges, including USC and UCLA. He was also part of a California Air National Guard group that was activated during the Korean War.

After nearly two years in the military, Young joined Gibraltar in 1952 at a time the company was headed by new president and chairman, Sydney R. Barlow. Learning the business from the ground up, Young worked as teller, lending counselor and property appraiser.

Married to Barlow's daughter at the time, Young rose to become chief executive in 1961, a time when the company had its only office in Beverly Hills and assets of some $200 million. Today, its assets exceed $15 billion and retail offices number about 100 in California, Florida and Washington state.

Always acquisition-minded, Young expanded Gibraltar's operations rapidly throughout the 1960s and 1970s. Its first branch office outside Beverly Hills opened in Baldwin Hills in 1961, followed by later openings in cities such as San Marino and Panorama City.

It was in those days that an actor named Harold (Hal) Peary, who played the early radio roles of "The Great Gildersleeve," had the job as celebrity spokesman for Gibraltar Savings.

Gibraltar Savings went through mega-growth spurts from 1969 to 1976 after Congress passed legislation approving mergers between savings and loans. The law allowed Gibraltar to buy thrifts all over the state, from Pioneer Savings in the Los Angeles area to Frontier Savings in the San Joaquin Valley. By 1982, Gibraltar had 81 offices in California, just slightly fewer than the 83 that it has now.

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