S&Ls find government bailout agency makes survival tougher than its contracts promised.

S&Ls find government bailout agency makes survival tougher than its contracts promised

It may come as no surprise to those who follow the savings and loan crisis closely, but many savings and loan associations have found life under the Office of Thrift Supervision (OTS) leaves a lot to be desired.

The big beef of many S&L executives is that the agency, formed last August to oversee the troubled thrift industry, has reneged on numerous promises the government, through the now defunct Federal Savings and Loan Insurance Corp., had made before. What makes the government's breaking its word especially flagrant is that many of the promises were laid out explicitly in written contracts.

The government makes no bones about what it has done. Known for his candor, L. William Seidman, the head of the Resolution Trust Corp. (RTC), the thrift bailout agency, has been quoted as saying something to the effect that when you do business with your government, you should be prepared for them to renege.

The most frequently heard complaint is from institutions which made acquisitions of troubled S&Ls before the passage of the Financial Institutions Recovery, Reform and Enforcement Act last August. Among these companies are GlenFed, CalFed and Western Federal, based in Marina Del Rey, to name just a few. These institutions were told, among other things, they could amortize goodwill from the premium they paid over the book value of smaller S&Ls that they acquired over a time span as long as 25 years. For computing capital, they were promised that they could count the amount of equity represented by goodwill.

OTS has also repudiated yield maintenance and loan amount agreement FSLIC had made before Dec. 31, 1988 with a number of buyers of troubled thrifts. In yield maintenance agreements FSLIC guaranteed that loan portfolios would earn competitive rates, or FSLIC would subsidize the difference. A loan amount agreement guaranteed the market value of a loan portfolio.

"These were promises made to encourage them to buy troubled institutions, and the government had gone out of their way to induce them," said Sal Serrantino, president of Santa Monica-based California Research Associates.

The issue has resulted in a spate of lawsuits this year, none of which are known to have reached the trial stage.

"These cases involve constitutional issues because there is the question of a government taking without due process of law or adequate compensation," said Ernest Leff, of counsel at the Beverly Hills law firm of Weston & Sarno. Leff distinguished these cases from the typical case involving a government grant because of the government's inducement of active conduct and the existence of a the contractual obligation by the government.

Although the OTS is the defendant in these actions, it may not entirely deserve being made the scapegoat, since its hand is forced under FIRREA. The agency is merely carrying out the provisions of the bailout law.

However, on issues in which the OTS has broader discretion, the agency has proved itself intransigent, according to many thrift executives, and the complaints are not confined to acquirors.

They are especially indignant about the subjective enforcement of accounting principles, which they claim are consistently interpreted against them. "The accounting firms have been burned so many times, they are now going to the other extreme and have become overly cautious in determining market values," said one industry source. That means institutions will have greater difficulty meeting capital ratios and reserve requirements.

That sort of antagonistic approach to the thrift industry has crept into all the OTS's relations with the industry. Of the capital plans prepared by S&Ls which failed to meet FIRREA capital ratio standards which went into effect last December, only two percent have been approved. Besides constricting the flexibility of institutions whose plans were rejected, their stocks have been further battered because stock analysts have sounded an alarm every time a capital plan has been rejected, noted an industry source.

Despite the widespread disillusion in the industry, few are willing to express their views openly. "Many are hesitant to pinpoint the problems because to complain may make you the target of the OTS," the source said.