The Office of Thrift Supervision last week won a billion-dollar gamble on one of the thrift industry's long shots, the struggling Glendale Federal Bank.
June 30 was the date regulators had set for Glendale, the nation's fifth-largest thrift, to raise capital or face the possibility of seizure. But when that summer day rolled around, the OTS took a different, more risky course - it extended the deadline for the money-losing, undercapitalized thrift to Aug. 31.
The high-stakes bet paid off on Aug. 19. That is when the Glendale, Calif.-based thrift coaxed Wall Street into investing $425 million in new capital, letting the bank meet its OTS-imposed goals and then some. (See related article: on page 5.)
Most elements of the deal are scheduled to close today.
The OTS decision to give Glendale more time was a handicapper's nightmare.
If the OTS had sent $17.9 billion-asset Glendale to the Resolution Trust Corp., it would have hurt the already bruised California economy and cost taxpayers about $3 billion.
A Peril for All Thrifts
The S&L industry feared even worse: If Glendale failed and Congress never voted to fund the RTC, the cost of that single failure would have bankrupted the industry's reborn federal deposit insurance fund, causing premiums to soar to the point where thrifts feared they wouldn't be able to compete with commercial banks.
But if Glendale were allowed to live and the OTS was later forced to shut it down, the delay might cost the government even more - because the thrift had lost money for the past six quarters.
Congress, which has passed laws to ensure the early closure of troubled banks and thrifts to avert such losses, would have skewered the agency.
Climate Has Improved
"We are very fortunate that the capital markets were in our favor," said John F. Downey, deputy director of regional operations at the OTS.
The situation wouldn't have been possible just a few years before. But now the business environment even for borderline thrifts is better, because wide interest rate spreads have improved the outlook for earnings.
Large numbers of thrifts, even troubled institutions, have been able to raise capital as a result.
"This is the largest by far of any private recapitalization effort," said Stephen J. Trafton, chairman and chief executive officer of Glendale and its parent company, Glenfed Inc.
It took Glendale months to win regulators over to the view that the thrift might be able to pull off a deal if given enough time, people familiar with the deal said.
Some observers are reluctant to give the OTS that much credit, saying that the agency couldn't work up the nerve to put Glendale down, and instead placed heavy bets that the long-shot deal would work.
Between late December 1992 and now, 64 problem thrifts with $53 billion in assets raised capital through a recapitalization, merger, acquisition or added to capital through retained earnings.
Of those, 31 thrifts with $42.4 billion in assets have been recapitalized through an infusion of capital, according to the OTS.
Reception Was in Doubt
Many analysts and consultants were convinced earlier this month that OTS had miscalculated the mood of investors and that the deal would never fly.
Glendale's reception on Wall Street was considered touch-and-go because of the deal's size and the thrift's location, square in the center of the rocky California economy.
The Glendale deal stumbled when Calfed reported bad second quarter earnings and fired its chairman, which drove its stock down.
Many investors associate Glendafe with Calfed because it too is a large California thrift that attempted a recapitalization.
Although some criticized the OTS for being too lenient on Glendale, the agency apparently wasn't unnerved.
"We didn't expect it to go down, and it didn't go down," Mr. Downey said,
Mr. Downey agreed that the industry's condition is much different than it was during the S&L crisis, but he remains sensitive to any suggestions that regulators were exercising forebearance by pushing back Glendale's original June 30 deadline for raising capital.
"I really take exception to the word 'forebearance,'" Mr. Downey said.
He said the word does not apply today's thrifts because of the differences between now and the time of the thrift crisis. Now, troubled thrifts are either making money or will soon, be making money.
And management teams at thrifts are generally better than just two years ago, when S&L reform legislation was signed into law, he said.
He said all troubled thrifts have gotten the same treatment from the agency. The OTS since spring has been encouraging thrifts to tap capital markets as soon as possible while Wall Street is so receptive to their stock.
The OTS will only work with institutions if it believes there is a "better than 50% chance of the institution achieving its target" capital levels, Mr. Downey said.
Mr. Trafton, naturally, agrees with the regulators' policy of giving troubled institutions the time necessary to turn around by themselves
When undercapitalized thrifts' conditions are improving, "every effort should be made to achieve a private recapitalization of those companies, and I think that we ought to go slow in our drive for burial with public money," Mr. Trafton said.