LOS ANGELES -- A year after arriving on the scene at California Federal Bank, Edward G. Harshfield is as brash as ever. The in-your-face attitude of California Federal's president and chief executive is reflected in his Wilshire Boulevard office.
In one corner is a giant plastic dinosaur whose head is covered by a photo of Herbert Sandler, the Northern California thrift executive who unsuccessfully tried to buy him out.
Atop a shelf is a framed copy of a wire transfer for more than $3 million, Mr. Harshfield's share of the profits made by a partnership he directed for Merrill Lynch & Co., which bought and sold thrifts in Ohio and New Jersey.
The 58-year-old Mr. Harshfield can also boast a strong record of accomplishment at California Federal. His five-part restructuring plan, now virtually completed, has recapitalized one of the nation's biggest savings institutions, cleansed its balance sheet, and restored it to profitability.
Analysts speculate that Mr. Harshfield will soon cash in on the turnaround by selling the thrift.
Never shy about expressing his views, California Federal's chief spoke about the thrift's future in an interview, peppering his remarks with pithy comments on regulators, lawmakers, and rivals.
Q.: Are you satisfied with the way your restructuring plan worked out?
HARSHFIELD: I am hard-pressed to think of anything that we said we would do that we didn't meet and better.
In the case of the sale of the Florida branches [to NationsBank], we got a higher premium than we thought. With respect to the bulk sales, we said we would sell $1.2 billion and that it would cost us $280 million. We sold $1.3 billion, and it cost us $270 million or $275 million.
Q.: Didn't you have to penalize your shareholders to complete the plan?
HARSHFIELD: I would argue that the shareholders gave up nothing and that they improved their position substantially. Those shareholders who participated in the rights offering didn't suffer any dilution to speak of.
The real value of the company has probably grown at an internal rate of return of about 50% or 60%. I get there by valuing the company as we knew it before the restructuring and valuing the company today.
Q.: In your zeal to sell problem assets in bulk, didn't you leave some value on the table?
HARSHFIELD: The problem was that we were losing capital at a rate of roughly $40 million to $50 million per quarter because of the problem-asset overhang. If we had gone below 4% capital, we would have had to default on our preferred dividend. We would have breached those ratios some time last spring. Once we had defaulted on the preferred, it would have been very difficult to go to the capital markets.
Q.: Why didn't you sell a little bit at a time?
HARSHFIELD: Over time, we might have gotten a better face-value price, but our costs would have been higher. We would have had the additional carrying costs in a rising interest rate environment.
At the end of the day, getting rid of it up-front did cost us something. But it sure wasn't $275 million. I would be surprised if it were more than $20 million or $25 million.
Q.: Couldn't you have proceeded like Glendale Federal, which completed bulk sales without taking hundreds of millions of dollars in writedowns?
HARSHFIELD: People often point to my friend [Glendale Federal chairman and chief executive] Steve Trafton and say, "See, he's protecting shareholder value." The facts are that he cherry-picked the bulk sales so he wouldn't have to take losses. And he isn't getting any better prices than we got four or five months ago.
Q.: Now that you have cleaned up California Federal, what is its earnings power?
HARSHFIELD: It's a thrift. It's in the single-family-housing business. It's in a highly competitive market. It's a plain-vanilla, inch-a-day business. It's probably capable of a 0.50% return on assets at the low end and 0.85% at the high end.
Q.: Is that good enough?
HARSHFIELD: California is a highly competitive market. You can get a better return in the middle of Ohio or New Jersey. But in this environment, those are the best numbers you are going to get.
In addition, our industry is being penalized in at least two ways. [Congressman James] Lynch says losses from the private sector should not be put on the backs of taxpayers. I would suggest to Mr. Lynch that it is the mistakes that Mr. Lynch and his cohorts have made over the last 15 years, starting with the tax act of 1986, coming through FIRREA [Financial Institutions Reform, Recovery, and Enforcement Act] and FDICIA [Federal Deposit Insurance Corp. Improvement Act] that created the situation that caused the bulk of these losses.
In addition, when we talk about the difference between the Bank Insurance Fund and the SAIF [Savings Association Insurance] fund, there is some risk that we will be penalized by increased insurance premiums vis-a-vis banks, meaning less profitability and less capital generation.
Q.: But doesn't the thrift industry now have too much capital, given that returns on equity are consistently below 10% for most institutions?
HARSHFIELD: We will go through a wave of mergers and acquisitions. Some capital will get chewed up by that. Beyond that, those thrifts that are O.K. will stan to return capital.
Q.: Will regulators permit that?
HARSHFIELD: I don't think they have a choice. They can't tell you not to retire capital as long as you are profitable and have a fairly predictable earnings stream.
Q.: Why aren't we seeing much merger activity among California thrifts?
HARSHFIELD: I think we are going to go through two stages: first, the internal consolidation among thrifts and then an external rush, But I could wake up tomorrow morning and find out that Wells Fargo is buying out [Great Western Financial Corp. chairman and CEO James] Montgomery.
The point is that there isn't anything going on right now. The reason for that is twofold: Number one, there isn't a general acceptance that the California economy is improving versus just stabilizing.
Furthermore, in this industry, we are still suspicious of each other's balance sheets. The last thing you want to do is buy somebody else's credit problems.
Q.: So when will consolidation pick up?
HARSHFIELD: My guess is we are probably talking late 1995, early 1996 when people stan to get active.
We are in a marketplace environment that has to change, both in terms of our suspicious nature of other people's balance sheets and the skepticism about California.
Q.: Is there still too much wariness about California thrifts?
HARSHFIELD: We've all been rescued from the dead here. Even those institutions that weren't threatened with failure have deep-seated problems.
Nobody believes that Herb Sandler has got a franchise up there at Golden West. He's behind the curve in technology; he's behind the curve in customer service. Both Great Western and [H. F.] Ahmanson have been criticized for excess costs.
Q.: Why couldn't the Bass brothers sell American Savings?
HARSHFIELD: It's not that there were no buyers. It's just that the asking price was too high. The second was that they had a very complex tax position. They could not make a sale work.
Q.: What about Gerald Ford and Ronald Perelman at First Nationwide? Could they be the buyers everyone is waiting for?
HARSHFIELD: They won't buy anything of substance. Their first priority is to retire debt as fast as possible. Why would they want to buy, paying a high price, when they can strip their company down and look for somebody to buy them? In the meantime, they may do some smaller acquisitions.
Q.: And what about California Federal? Are you a buyer or a seller?
HARSHFIELD: It depends on what the marketplace wants. It's whatever makes sense.
There could be opportunities for us to do a merger of equals. The reason to do that would be to get reedy for the next stage. Then somebody might come and buy us. On the other side, we may acquire.
If the way you get the best value for the institution is to sell it and there is a real buyer on the other side, then you sell it. If the opportunity is a merger of equals and you can make the value of your stock behave the way you want it, then you do that. There isn't any way to prejudge which way it is going to come out.
Q.: Who are the natural buyers of big California thrifts?
HARSHFIELD: A natural buyer would be an institution that has a strategic view and wants to buy market share, a viable branch structure, and core deposits. Alternatively, you could define a natural buyer as someone who wants to get a strategic toehold in California, i.e., an external buyer.
Banks are going to have to move increasingly to the consumer side of the business because they are getting squeezed out on the commercial side.
Q.: Isn't the value of a thrift branch network declining?
HARSHFIELD: I agree that branch systems have decreasing value. But it's a question of pacing. If I were here 100 years from now, I would be very surprised to see a system the way we have it today.
But a system of virtually no branches is not going to happen in the next five years, not in the next 10 years. It may not happen in the next 25 years. So the erosion is very slow.
Q.: What kind of prices do you expect major California thrifts to fetch when consolidation starts?
HARSHFIELD: We will watch what goes on in the rest of the country. If you look at premiums at banks, they run about 1.8, 1.9 times book value as an average. If you look at the S&L business, they tend to trade down about 40 basis points. But you have examples where sellers get two times book.
It gets down to individual circumstances -- what kinds of products you have, your customer base, your branch network, how efficient you are.
If you want to buy this place today, you take tangible book, call it $575 million; multiply it times two. Somebody has got to write a check or issue stock or some combination for $1 billion-plus.