Too Far Gone To Bring Back

Even in an era of perilously go-go thrifts, the two California savings and loan associations seemed to be looking for trouble. One of them loaned money for energy schemes ranging from windmill farms to cow-manure incineration, while the other served as a whimsical and allegedly fraudulent investment machine for its owner, a former dentist. Last week federal regulators said they would liquidate the two ailing S and Ls, a drastic step for institutions so large. The Federal Savings and Loan Insurance Corp., which guarantees thrift deposits, will spend a record $1.35 billion in cash to pay off insured depositors (up to $100,000 for each account) of Costa Mesa's North America Savings and Loan Association and the American Diversified Savings Bank. The payout, which temporarily slashes the federal insurance fund's cash balance by 40%, to $1.9 billion, is likely to heighten the debate over the adequacy of the FSLIC's resources to deal with the troubled thrift industry.

The Federal Home Loan Bank Board, which regulates savings and loans, tries to avoid cash bailouts, preferring to merge insolvent institutions with healthier ones. But the two California thrifts were poor prospects for such a rescue because they lacked loyal, small depositors. Instead, the two institutions attracted funds from money managers who demand higher-than- average interest rates.

Under the ownership of Ranhir Sahni, a former airline pilot, American Diversified squandered the assets of the S and L on ventures ranging from synthetic-fuel schemes to a national paging system. North America Savings was founded in 1983 by a dentist, Duayne Christensen, who made real-estate investments on behalf of relatives and his girlfriend. Christensen was killed in January 1987 when the car he was driving slammed into a bridge abutment a few hours before the regulators seized his S and L.

The assets that the thrift operators gambled away on risky loans are mostly long gone, leaving the FSLIC to pick up the tab. The Government is suing the managers of both thrifts for more than $100 million, charging them with fraud and negligence. But most of the $1.35 billion payout will come from the FSLIC's reserve fund, which is largely composed of premiums collected from S and Ls.

Federal regulators said last week that liquidations will remain a last resort in resolving the industry's widespread insolvencies. Of 3,100 federally insured thrifts, some 200 are considered hopelessly insolvent. The FSLIC's liability for these S and Ls now significantly exceeds its assets on hand, so that the fund posted a deficit of $13.7 billion at the end of 1987, contrasted with $6.3 billion the previous year. But the FSLIC aims to narrow that gap over the next few years, relying on income from premiums and other sources. The FSLIC estimates that it will have $20 billion available for bailing out thrifts over the next three years, an amount it deems adequate for the task provided there is no economic downturn. Yet some experts, including Bert Ely, a Virginia-based financial consultant, believe the cost could exceed $50 billion. They fear that the FSLIC will need a multibillion-dollar infusion from taxpayers to restore the thrift industry to health.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Joe Lertola

CAPTION: THAT SINKING FEELING

The FSLIC's total reserve has gone into deficit because its liabilities for insolvent institutions now exceed its assets on hand

DESCRIPTION: Federal Savings and Loan Insurance Corporation's total reserve, 1982-1987; Color illustration: FSLIC building floating in life preserver.