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Regulatory Directive Casts Pall on Glenfed : S&Ls: The thrift says it needs up to $450 million to avoid seizure, which could cost taxpayers $4 billion. Dilemma could prove a key test for Clinton Administration.


In what is shaping up to be the Clinton Administration's first major savings and loan dilemma, Glendale Federal Bank disclosed Thursday that it needs to come up with as much as $450 million in fresh capital within just five months or risk seizure by regulators at a potential $4-billion cost to taxpayers.

The nation's fifth-largest thrift said it has been issued a "prompt corrective action directive" from the federal Office of Thrift Supervision. Glendale Federal said the directive--which analysts and thrift executives read as an ominous sign from regulators that Glenfed is moving closer to seizure--was issued because it is considered "significantly undercapitalized" under federal bank and thrift laws enacted in 1991.

The news sent Glenfed's stock tumbling $1.50 a share to close at $2.50 on the New York Stock Exchange.

Glendale Federal's mounting troubles could quickly pose a sticky problem for President Clinton, whose policies toward ailing thrifts are unclear because he has yet to fill the top thrift regulatory job.

Executives with the thrift--part of Glendale-based Glenfed Inc.--estimate that its failure could cost taxpayers $3 billion to $4 billion, which would make it by far the most expensive thrift collapse in the nation's history. In addition, about 3,500 jobs with the thrift are on the line.

"My personal feeling is that the Clinton Administration doesn't want to go around closing banks. This will be a good test," said Peter Treadway, who follows savings and loans for Smith Barney, Harris Upham & Co. in New York.

Glenfed poses a special dilemma for the new Administration because the thrift has been pressuring regulators and the Justice Department to settle a legal claim that could possibly bring it into government compliance in one fell swoop. Bush Administration officials opposed such a settlement.

The claim stems from a ruling last July by a federal judge who said the government is liable for wiping out in 1989 $734 million in Glenfed "goodwill"--an intangible asset the thrift regulators allowed Glenfed to put on its books when it acquired a troubled thrift in the early 1980s at the government's behest. Glenfed executives have submitted a $1.38-billion damage claim, and say they will be happy to get half that amount in a settlement.

"They can flush $3 billion to $4 billion down the toilet, or spend $700 million negotiating a settlement with us," Glenfed Chief Executive Stephen J. Trafton said. He added that members of Congress and some regulators seem receptive to some kind of settlement.

Glenfed's capital--the financial cushion against losses--has deteriorated largely because of real estate-related losses. On Thursday, Glenfed posted a $79.4-million loss in its second fiscal quarter ended Dec. 31. The thrift also unveiled a financial restructuring of notes and subordinated debt that would boost its capital by $128 million. It also said it doesn't have enough cash to pay the interest due March 15 on some debt.

Glenfed is now scrambling to sell control, or all of the thrift, to a major investor or financial institution within three to six months. Experts believe, however, that California's soft real estate market will dissuade investors unless the government provides some kind of protection against unforeseen losses.

"Glenfed is like a coin standing on its edge. It has a superior branch system in California and Florida that you can't duplicate today. But it has a lot of risk with its problem assets," said Jonathan Gray, thrift analyst with Sanford C. Bernstein & Co. in New York.

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