WASHINGTON -- Lawyers seeking to drum up business are actively wooing the executives of mutual savings and loans, offering to make them rich if they change their charters to take advantage of looser regulations in certain states on initial public stock offerings.
"The lawyers do a lot of soliciting of thrifts around the country to get their business," said Eric Luse, a partner at Luse Lehman Pomerenk & Schick, a District of Columbia-based law firm that works on such deals.
Jonathan L. Fiechter, acting Director of the Office of Thrift Supervision, said, "In the last year and a half or so, there has been a group of individuals that have begun to market the advantages to management of converting from mutual to stock under the individual states rather than under OTS rules."
Spelling Out the Differences
An Illinois lawyer, Daniel C. McKay 2d of Vedder, Price, Kaufman & Kammholz's Chicago office, sent a letter to potential customers in February that contrasted Illinois' then-proposed looser laws with OTS rules. The regulations became final in June.
"The Illinois commissioner of savings and residential finance is in the final stages of publishing the conversion to stock regulations for Illinois savings banks. The final draft is in the process of review by a committee of which I am[a] member, and I thought you may be interested in some of [the] differences emerging between the savings bank regulations and the Office of Thrift Supervision" regulations, Mr. McKay, wrote.
"A savings bank converting to stock form will now know before the offering that at least 50% of the stock will remain in friendly hands (20% for ESOP [employee stock ownership] and management plans, 20% priority in the subscription offering for directors and officers, and 10% set aside for the stock option plan)," Mr. McKay pointed out in the letter.
"With the number of Illinois institutions that have converted to an Illinois savings bank to date, I would expect that many will take advantage of these new regulations when issued."
Calls to Reporter
A reporter was surprised to get four unsolicited calls over the course of two days from Washington lawyers and lobbyists who had heard American Banker was writing about such conversions.
All were active in the stock conversion business -- some structuring deals under federal rules, some under state rules -- and wanted to ensure that their profits would not be ended by bad press.
State-chartered savings banks have traditionally been found in New England, but the 1989 thrift bailout law allowed them for the first time in other states. Illinois began allowing state savings bank charters in 1990.
Under the state's new stock conversion rules for savings banks, mutual thrift executives and other employees would be able to double their ownership share if they convert to a state-chartered savings bank before they go public.
Big Opening for Insiders
Insiders could claim nearly half the company after conversion and could control the entire institution within a few years if they carefully structure the deal. The OTS limits stock repurchases to 10% annually.
For instance, Illinois savings banks would be allowed to buy back 60% of outstanding stock within three years of going public. This means that the thrift executives that held on to their stock could own the institutions outright after a few years by using the thrift's new capital to buy back its own stock.
The Illinois plan would both raise the amount of stock given to a management recognition plan to 5%, from OTS' limit of 3% to 4%, and give the plans priority over depositors for buying new stock.
Also notable: the Illinois proposal would allow directors, officers, and other employees to buy up to 20% of the offering before depositors are allowed to buy any stock, if the deal is oversubscribed.
Paula Hiza, general counsel and deputy commissions of the Illinois Office of the Commissioner for Savings and Residential Finance, said the new rules are needed "to provide a vehicle to capitalize institutions via stock."
Illinois tried to give thrift directors and officers more of a stake in these deals because they are required to hold the stock they get for three years, she said.
"Our concerns are very bottom-line -- we want to see the institutions survive, and one of the incentives to survival is to make sure the people involved have a significant stake and a significant risk," Ms. Hiza said.
When asked why the proposed Illinois rules varied from the OTS rules, Mr. McKay, the lawyer and member of the state review committee, said Illinois wanted to ensure that, "if there are going to be changes, we are going to skew this to the people that built the institutions up -- that is, the managers and the local depositors."