WASHINGTON - Federal Deposit Insurance Corp. examiners vigilantly supervised failed Pacific Thrift and Loan but had a hard time valuing its assets, the agency's top supervisor said Tuesday.

California regulators closed the $118 million-asset subprime lender last Friday at an estimated cost of $50 million to the Bank Insurance Fund, a huge loss relative to the bank's asset size. Pacific was the sixth bank to fail this year.

In an interview, supervision director James L. Sexton said the FDIC had used virtually all the enforcement tools at its disposal to rein in the Woodland Hills, Calif., industrial loan bank, including cease-and-desist orders and a prompt corrective action order for low capital.

"We did intervene early," he said. "Otherwise, perhaps this bank is still operating, and the loss might be greater."

Mr. Sexton argued that the FDIC could not have avoided the $50 million cost of liquidating the bank. "There's nothing to prevent an asset from going bad."

But according to Mr. Sexton, FDIC examiners could not persuade Pacific to set a reasonable value on its interest-only residuals, the asset the bank retained when it securitized and sold subprime mortgages. He blamed most of the cleanup's price tag on this asset category, which provides some cash flow but has virtually no resale value.

"These residuals simply can't be sold, except to bottom-feeders that might pay just a pittance for them," he said.

Agency examiners first became alarmed about the bank's valuation method during an April 1998 examination. They believed the assets were being overvalued.

To rectify the situation, the examiners classified the residuals and issued a cease-and-desist order. Finalized in December, the order required Pacific to obtain an independent assessment of its valuation method. But an accounting firm ultimately frustrated the FDIC by accepting the bank's assumptions about interest rates, default rates, and prepayments.

"That really wasn't what we were looking for," Mr. Sexton said.

Ultimately, the FDIC went ahead and substituted its own valuation method for the bank's, classified the residuals as "doubtful" or "lost," and imposed higher capital requirements.

The bank was unable to raise sufficient capital to hit the new targets, however, and its bid to sell the residuals fell through. In September, California gave the bank 90 days to raise its net worth or be closed. On Oct. 16, the FDIC notified the bank it was "critically undercapitalized" and had 90 days to shape up under federal law, if the state did not close it first.

An hour before California shut down the bank Friday, Pacific's holding company - Pacific America Money Center Inc. - declared bankruptcy. That will make it even harder for FDIC liquidators to claim and sell the bank's residuals.

Mr. Sexton admitted that the FDIC should have kept in closer touch with the unnamed accounting firm Pacific hired, rather than waiting months to learn its disappointing conclusion. But he said doing so would only have moved up the bank's closure by about a month and would not have reduced the cost of liquidating it.

Joel R. Schultz, chairman of Pacific and its holding company, did not return phone calls seeking comment.

Valuation of residual assets was a key factor in the spectacular failure of First National Bank of Keystone, W.Va. That $1.1 billion-asset bank is expected to cost the FDIC up to $850 million to resolve.

An interagency group of bank and thrift regulators wants to change the rules for valuing residuals. Members already agree that financial institutions should be limited in the amount of residuals they may count as capital.

Mr. Sexton said residuals based on subprime loans should not be counted as capital unless the institution can show there is a market for them. "This kind of a failure would be eliminated altogether because the residual would not even be an asset in calculating the equity of the bank," he said. "What we're trying to do to keep this problem from bubbling up again."

In the absence of such a rule change, Mr. Sexton said, the FDIC did what it could with Pacific, which had $48 million of residuals when it was shut down.

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