In the summer of 1993, Unionfed Financial Corp. chief executive David S. Engelman held "a beauty contest" as investment banks lined up for the chance to help the Los Angeles thrift rebuild its capital.

Less than two years later, the capital has been drained away by losses and Unionfed is an ugly duckling.

All told, bank stock investors have lost more than $80 million in the last two years on three major community bank recapitalizations in California, including the $45 million of new Unionfed stock issued in September 1993. Several struggling financial institutions in California have raised new capital in the last two years only to see it disappear.

And investors are souring.

"The investment community has lost a lot of its appetite for these turnaround situations," said Campbell Chaney, a stock analyst at Rodman & Renshaw Inc. in San Francisco.

These cases, more than anything else, point up the pitfalls that still exist in an economy that was once considered so strong and diversified it could support the 70-odd de novo banks that were started there in the 1980s.

Last week, facing a regulator-ordered sale or closure, $843 million- asset Unionfed said it would sell for a steep discount the bulk of its branches, deposits and assets to Glendale Federal Bank and hope for the best as a tiny thrift with one branch.

Unionfed management could not be reached for comment.

If it can pull the Glenfed deal off, Unionfed will at least be in better shape than Los Angeles' Guardian Bancorp and San Francisco's Continental Savings of America, both of which failed this year after raising new capital. In Guardian's case, the bank was closed by state regulators a mere 10 months after raising $19.7 million in a rights offering.

Fidelity Federal Bank, a $3.7 billion thrift in Los Angeles, raised $108 million last August from some of the savviest bank stock investors in the country. But continued problems with its multi-family portfolio have caused the stock to sink from a $5.25 offering price to near $3.

All of these failures are attributable to a reliance on real estate lending, especially multi-family, construction and development loans.

Large-scale recapitalizations of California's community banks and thrifts have been few and far between. The state had more than 20 bank failures in the last two years, and precious few have been saved by recaps.

"For every recapitalization that succeeded, there's one that failed miserably," said one investment banker. "We're shooting 50-50."

The ramifications of such failures are not being lost on potential investors in California community banks, despite the resurgent economy and new-found liquidity in real estate.

Several analysts said institutional investors - the main source of capital now for troubled community banks in the state - are pickier than ever. And if a dozen or so deeply troubled institutions in the state can't raise capital by this summer their woes could mount.

One institution that needs capital is Hawthorne Financial Corp., Hawthorne, Calif. The $725 million thrift has been struggling with an unwieldy portfolio of housing developments in its real estate owned and 12% of its assets are not performing. It has hemorrhaged money in the last 18 months. Its risk-based capital ratio, once one of the strongest among thrifts in southern California, fell below 8% in the first quarter.

The Office of Thrift Supervision has given until June 30 to raise its capital levels, but management has already told the regulator it won't make the deadline.

The thrift is filing a capital plan with the OTS that calls for raising new capital or, more likely, selling to one of the many megathrift buyers of retail franchises in California such as Glenfed.

"Hawthorne is suffering from the same problems Unionfed had," Mr. Chaney said. "These development loans are just toxic."

For the institutions that already raised capital, the fallout is sometimes more than just a failed bank. Investors are irate and, in some cases, litigious.

T. Rowe Price, the giant Baltimore-based mutual fund company, is suing Oppenheimer & Co. over its role as investment banker to Guardian in the $500 million bank's rights offering last spring. T. Rowe Price, which had a 3.6% stake in Guardian, accused Oppenheimer of incompetence and Guardian management with duplicity.

And there's rumblings of a lawsuit over Fidelity's recapitalization. J.P. Morgan was the banker, and several Wall Street investors are said to be mad enough at the thrift's performance to consider suing the investment house.

For his part, Rodman's Mr. Chaney doesn't think these recapitalizations were "irresponsible" - just overly optimistic.

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