Gold Among the Ruins

By Christine Gorman

Most investors make money by avoiding financial disasters. But a growing number of savvy business executives have begun seeking fortunes in the ruins of the savings and loan industry's insolvent institutions. Since 1984 investors have bought 260 failed S and Ls, most of them in the West and Southwest, where thousands of loans to the depressed real estate and oil industries have gone bad. Last week Robert Bass, 40, one of Fort Worth's billionaire Bass brothers and an accomplished takeover artist in his own right, joined the trend. He led a group that agreed to put up $550 million in capital to take over the financially comatose American Savings and Loan Association (assets: $30.8 billion) of Stockton, Calif. If he can turn American Savings around, Bass, like many other new owners who have paid fire- sale prices for their S and Ls, stands to earn an enormous profit. The deal seems virtually guaranteed to succeed: as part of the rescue, the Federal Home Loan Bank Board pledged a record $2 billion to help prop up American Savings.

Why buy a troubled S and L? For starters, once the bad loans have been excised, the thrift institution's traditional business of writing mortgages can be quite profitable. Now that many home loans have adjustable interest rates, few S and Ls should be savaged, as they were in the early 1980s, by having to pay high rates to depositors while receiving low yields on long-term mortgages. Furthermore, real estate prices in the Southwest cannot stay depressed forever. "We're at or near the bottom of the cycle for the Texas economy," says William Gibson, a former Continental Illinois banker who, with other investors, last month paid $48 million for twelve troubled Texas S and Ls (combined assets: $2.4 billion).

But the greatest incentive for investors to buy large bankrupt S and Ls is that the Government will often promise to reimburse the new owners for any existing loans that are not repaid. Reason: the Federal Savings and Loan Insurance Corporation, a Bank Board unit that insures S and L deposits, would soon run out of money if it simply shut down the troubled giants. Paying off all American Savings' F.S.L.I.C.-insured depositors would have cost an estimated $4 billion to $5 billion, twice the price tag for last week's rescue. Thus the Bank Board must find buyers for the distressed S and Ls and, in the worst cases, offer huge loan guarantees to make the transactions virtually risk free. In Gibson's deal the Bank Board agreed to provide $1.3 billion in guarantees and other assistance that will allow the investors a decade to return their newly merged S and Ls to financial health.

Critics charge that the Government is getting robbed. Democrat Fernand J. St. Germain of Rhode Island, chairman of the House Banking Committee, accused the Bank Board last week of simply giving American Savings to Bass without seriously entertaining a competing bid from First Nationwide Bank, a San Francisco-based subsidiary of Ford Motor. And Democratic Senator Donald Riegle of Michigan is worried that Bass might use money from the federally supported S and L to unfairly augment his corporate-raiding power. The Bank Board's chairman, M. Danny Wall, defends his bailout, calling it the best deal the Government could get. Furthermore, he notes, the federal agency holds a 30% share in the California S and L, and will profit handsomely if it recovers.

The Bank Board needs as much money as possible from private investors, since the cost of bailing out the savings industry could run as high as $100 billion. Fortunately, the message seems to be getting out. In San Francisco last month, more than 350 potential investors attended a Bank Board seminar on how to buy an S and L, and 500 others were turned away for lack of space in the meeting room. Just as important to the S and L industry as transfusions of money, though, are infusions of management skill. The economic convulsions suffered by the savings industry in the 1980s have proved that it is no place for amateurs with get-rich-quick schemes.

With reporting by Jerome Cramer/Washington and Richard Woodbury/Houston