It owned a foreclosed bordello, a mine that produced a Kitty Litter-like gravel for cats and a collection of securities and loans that at one point were worth a staggering $3 billion less than their original value.
In short, American Savings, once the nation's largest savings and loan, up until the end of 1988 was the thrift industry's equivalent of a huge toxic waste dump. It was a mess in need of a mind-boggling clean-up job, with nasty surprises lurking everywhere.
What a difference a year and a $1.7-billion bailout make. A little more than one year after the Stockton-based savings and loan was sold by regulators to Texas billionaire Robert M. Bass, American is not only in the black, it's returning the kind of profit that most savings and loan executives dream about.
American last week disclosed that it earned $214.2 million in 1989. No other thrift in California, and probably no other nationwide, is likely to report as large a net income figure for 1989, although comparisons are misleading because American doesn't pay taxes. Instead, its agreement with federal regulators calls for a chunk of the profit--$64 million last year--to be sent to a holding company. Most of the funds collected there over 10 years are eventually paid to a government agency.
American's turnaround is partly a tribute to the hard work and drastic cost cutting of Chief Executive Mario J. Antoci, a well-respected manager who previously worked for one of American's chief rivals. Free of having to deal constantly with regulators, and blessed with Bass' deep financial resources, Antoci moved swiftly to eliminate unneeded branches and operations while restoring American's public image. Antoci and American also benefited from good timing, as falling interest rates last year boosted earnings on its loans.
But American's profit comeback can also be laid to government generosity. Regulators, under pressure to dispose of weak or failed thrifts, granted generous concessions in 1988 and early 1989 to investors who agreed to take the thrifts off the government's hands. Some of these investors, including Bass, are among the nation's wealthiest individuals.
Now some members of Congress, particularly House Banking Committee Chairman Henry B. Gonzales (D-Tex.), want to review those deals to see if the regulators were overly generous. The Resolution Trust Corp., the government agency created to sell assets of troubled thrifts, is even reviewing bid proposals from experts it will hire to analyze the thrift deals.
So far, the Bass-American deal has attracted far less criticism than one by New York investor Ronald O. Perelman, who acquired a collection of failed Texas savings and loans. Some estimates have Perelman making 170% on his $160-million investment.
Edwin J. Gray, former chairman of the Federal Home Loan Bank Board, now the Office of Thrift Supervision, argues that Bass got a great deal because regulators were negotiating from a position of weakness after talks with Ford Motor Co.'s First Nationwide unit broke down.
"The Bass group has some of the best negotiators in the world. I think they kind of took the bank board to the cleaners because they got such a good deal," said Gray, who left his post the year before the agreement was reached and now is head of a Miami thrift.
Two former bank board members who were key in negotiating the deal, Roger Martin and Lawrence J. White, bristle at suggestions that the agency failed to negotiate a good enough agreement. They note that there were no better offers, there was no money at the time to pay off depositors, the cost of pulling the plug on American would have been much higher than selling it to Bass, and the government benefits if American does well because it retains a 30% ownership stake.
"As the years go by, history will be very good to us," said Martin, now a Wisconsin investment banker.
Federal officials dismiss fears among some thrift investors that they will renegotiate contracts extensively and make wholesale changes to the deals. Still, Bass and others have already found that what the government grants, it can take away.
Last month, regulators, citing provisions in last year's thrift bailout bill, wiped out some $300 million of American's capital, the financial cushion that thrifts maintain to protect against losses. That capital came in the form of various accounting sweeteners that it had been given in the deal. Eliminating them will make it more difficult for American to pursue expansion plans.
Although Bass didn't make out as well as Perelman apparently did, Bass clearly cut a good deal. The cost to taxpayers of the bailout was $1.7 billion, and the government took American's problem assets and put them into a so-called bad bank whose assets are being sold over time. In contrast, Bass spent $400 million of his own money on the deal--$350 million into the thrift and $50 million in acquisition costs. In return he got a 70% stake in American, with the government owning the other 30% for now.