WASHINGTON - Glenfed Inc. is negotiating a deal to raise $350 million to $400 million in capital and avert government action against Glendale Federal Bank, according to Stephen J. Trafton, chairman and chief executive officer of both entities.

Mr. Trafton said regulators have told him they will extend a June 30 deadline for acting against the capital-short thrift if he can arrange a deal. He is racing to complete negotiations by mid-June.

The Office of Thrift Supervision is requiring Glendale Federal Bank to increase its core capital ratio to 5% by June 30, from 2.76%, and its risk-based capital level to 10%, from 5.73%.

"Given the progress made to date. and continued progress," Mr. Trafton said, "the OTS will accommodate the institution and move the June 30 date, a long as progress continues to be made."

The transaction would have several components, which would occur simultaneously, Mr. Trafton said. Glenfed plans to restructure the thrift's preferred stock created through a March 10 exchange for bank debt totaling $137 million, restructure its $60 million holding company debt, and go to the market for equity capital.

Rights Offering Foreseen

Washington and Wall Street sources said part of the equity infusion would involve a rights offering.

The OTS refused to comment on the case. But a spokesman said that, generally speaking, the agency is "trying to work with institutions on recapitalization strategies, and if they are making what we believe to be reasonable progress, we have been extending deadlines."

Glendale is involved, meanwhile, in a lengthy lawsuit against the government on supervisory goodwill it was forced to write off quickly because of a 1989 law.

Although Glendale is suing for $1.4 billion in damages, it has said it would settle the suit by giving the government $700 common in preferred stock in an offer the government has so far rejected.

Goodwill Suit Secondary

Although the suit has received widespread attention, Mr. Trafton insists that its outcome is now of secondary importance to the company.

"As high a profile as the goodwill case is, it does not represent the highest priority of management," Mr. Trafton said. Instead, Glendale officials are "spending 20 hours a day here working on this private recapitalization."

However, Mr. Trafton said he was encouraged by the recent resolution of another goodwill dispute, in which a thrift agreed to drop its lawsuit as part of a recapitalization plan.

In early May, Secor Bank - Alabama's largest thrift - bought back $53 million of its preferred stock held by the Federal Deposit Insurance Corp. and, as part of the deal, dropped a goodwill-related lawsuit against the government. In a separate transaction, Secor was sold May 18 to First Alabama Bancshares.

New Government Approach

"We were extremely happy to see the announcement by Secor that [dropping the suit was an] express condition" of a recapitalization deal with the government, Mr. Trafton said. "It is a very clear demonstration that the government is beginning to see the value of utilizing these goodwill cases" in the recapitalization viable institutions.

Glenfed has "made substantive progress," he said, in negotiations with the new preferred-stock holders. "We have made some ongoing progress" with holders of Glenfed's convertible notes, he added.

As for the rest of the effort, Mr. Trafton said the company is working very diligently to identify sources of additional equity capital for a major capital infusion to the institution.

"We would anticipate that if we continue to make the progress that we are making that we will be successful in our recapitalization," he said. He predicted the company would make "some continued modest improvement in every quarter going forward."

OTS Depositions Ordered

He has faced stiff obstacles in trying to turn the thrift around, Mr. Trafton acknowledged. "The California real estate economy," he said, "and the environment in which we are working has made the job doubly tough."

In the most recent development in the goodwill suit, a federal Claims Court judge ordered two OTS officials to answer questions about Glendale.

While no date has been set, a Glendale spokesman said the depositions by Jeff Curry, financial analyst on the OTS staff. and Henry Owsley, a financial analyst retained by the agency at Glendale's expense would likely be taken in mid-June.

"The depositions will move the case forward substantively," Mr. Trafton said.

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