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HomeFed Seizure a Warning Shot for More Big California Thrifts

July 7, 1992

LOS ANGELES (AP) _ Regulators gave HomeFed Bank a year to raise capital, then pounced when the thrift failed to do so - even though the government has no money to fix it up for resale.

The Monday seizure of HomeFed of San Diego, the eighth-largest U.S. thrift, is a warning shot for two other huge California S&Ls, Glendale Federal Bank and California Federal Bank. While far from insolvent like HomeFed, they’ve been given one year to fortify their financial shock absorbers against loss.

No one is consigning CalFed and GlenFed to the graveyard of seizure; even under the worst circumstances a forced merger would be more likely. To meet Office of Thrift Supervision demands for more capital, they’re courting investors and trying to get bondholders to swap their securities for stock.

But the S&Ls that once seemed synonyms for California prosperity - Dinah Shore’s comforting smile graced GlenFed’s ads - are wounded like the state’s economy. Analysts and the thrifts’ managers agree that until California’s health improves, the investors they need likely will bide their time.

″I wasn’t losing any sleep over CalFed and GlenFed being seized because the regulators hadn’t done anything with HomeFed. Well, now they have, and their attention is going to go to the next group of big thrifts that are undercapitalized,″ said E. Gareth Plank, a Dean Witter Reynolds analyst.

″The government is hanging a notice on the town square bulletin board that says: ’Hear ye, hear ye, raise capital or else.‴

The big problem for the thrifts is bad loans on offices and other commercial real estate, along with real estate projects they developed themselves.

Many of HomeFed’s worst loans were made in Washington, D.C., where Congress has yet to act on a Bush administration request for $42 billion in new funding for the RTC - the very agency that inherited HomeFed.

Numbers convey the vast problems the government inherits from HomeFed: 750,000 depositors, 206 branches, 3,100 employees, $1 billion in losses in two years, 40 percent of its $13 billion in assets troubled.

With no money to pour into HomeFed’s vaults, regulators could find no financial institution willing to take it over.

″Anyone who’s going to do a deal isn’t going to do it without government money, and the RTC’s broke,″ said Bert Ely, a banking industry consultant.

Plank said that with the seizure, regulators sent a message to Congress: ″It’s insolvent. You told us to close these down. Now what are you going to do about it?″

While Congress ponders that question, officers and directors at the CalFed Inc. and GlenFed Inc. holding companies are pondering how to increase their banks’ ratios of capital to assets, the standard of soundness.

California Federal is the nation’s fifth-largest S&L, with assets of $17.5 billion. It agreed last week to goals of core and risk-based capital ratios of 5 percent and 9 percent respectively by June 30, 1993. The risk-based ratio is supposed to rise to 10 percent by Jan. 1, 1995.

At March 31, California Federal Bank’s ratios were 3.92 percent and 7.34 percent.

On June 25, Glendale Federal said it had been given until June 1993 to increase its core and risk-based ratios from 3.1 percent and 6.9 percent to 5 percent and 10 percent. It’s the fourth-largest thrift, with about $19 billion in assets.

GlenFed’s chairman and chief executive, Stephen J. Trafton, and his counterpart at CalFed, Jerry St. Dennis, said the economy and real estate markets will have to improve before the stringent goals can be met.

″Their attainability depends in large measure on investor perception of the real estate markets, the California economy, and CalFed’s continuing progress,″ St. Dennis said in a statement.

Possibilities for raising cash include a takeover and infusion of capital by another bank or thrift, sale of securities to private investors or the public, or an offering to existing shareholders of a chance to buy more stock.

One option discussed over the years would be to merge CalFed, based in Los Angeles, and GlenFed, based in suburban Glendale. That would save money as duplicate operations were pared, but analysts question whether the problems of two relatively weak thrifts could be solved by combining.

″That deal’s fallen apart at least twice,″ Ely said. ″It makes sense for somebody else to come along.″

He finds most probable a takeover by a California bank like Wells Fargo or one of the state’s healthy ″Big 3″ of giant S&L companies: H.F. Ahmanson & Co., parent of Home Savings; Great Western Financial Corp., which owns Great Western Savings; or Golden West Financial Corp. and its World Savings.

″Once there’s feeling in the marketplace that the bottom has been touched and there’s resolution in sight, that’s when institutions go into play,″ Ely said.

The question is whether the bottom is sighted before the year is up.

″A year is a very short time,″ Plank said. ″And real estate markets do not improve overnight.″

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