WASHINGTON -- Before taking Milwaukee's Guaranty Bank public, its executives changed the institution into a state-chartered savings bank, allowing them to buy moreshares of the hot stock than the depositors who owned the institution.

If Guaranty had kept its federal charter, the executives would have been allowed to buy roughly 30% of the stock. But Wisconsin laws set no such limits, and the company's management doubled its share to 65% of the stock sold in the oversubscribed initial offering.

As in most initial public offerings. the 790,000 shares sold in March have fared well. The executives and other initial buyers bought shares for $10 apiece. A few shares changed hands last month at $12, and offers have since been made for $13 -- with no sellers.

New State Laws

The deal was possible under new state law in Wisconsin that covers the conversion of state-chartered mutual savings banks -- which are owned by their depositors -- into publicly traded companies.

Wisconsin law and similar rules that six other states have recently put on their books or are now considering allow management to take much larger stakes in mutual-to-stock conversions than the 25% to 35% allowed for federally chartered thrifts.

Initial public offerings of stock, particularly in conservatively appraised businesses, are famous on Wall Street as one of the fastest ways for investors to make money. Thrift insiders are claiming more and more of the shares in these initial public offerings, avoiding federal limits on their purchases by converting their savings and loans into state-chartered savings banks.

Advocates of the new state laws say that stock conversions add to the net worth of the thrift industry and improve its financial stability because the money paid for shares is added to an institution's capital.

They favor the more liberal stock purchase rights under state laws because they permit mutual thrifts to reward executives' service with profits.

And they say the state rules let thrifts save money on supervisory and filing fees because states charge less than federal regulator's do for overseeing federally chartered institutions.

But consumer groups are crying foul over the practice, because mutual thrifts are owned by their depositors and because capital could be raised by selling shares to depositors instead of executives. The institutions' directors and officers are charged with the legal responsibility to look after the depositor/owners' best interest.

Unfairness Seen

"Managements of mutual institutions are walking away with very handsome deals for themselves at the expense of the mom-and-pop depositor base of the mutuals," said Chris Lewis, director of banking and housing policy at the Consumer Federation of America.

Robert J. Warren, a senior vice president at Ferguson & Co., a Dallas-based consulting firm, said, "The trend on those stocks is that once issued, they go up 25% to 30%."

Office of Thrift Supervision regulations govern all federally chartered thrifts as well as state-chartered savings and loans that convert to stock form, but they do not govern state-chartered savings banks. The federal rules set limits on the amount of stock that thrift executives can buy, and allow account holders to buy stock before the insiders.

"We have found that at the state level, the regulations differ fairly dramatically," said Jonathan L. Fiechter, acting director of the Office of Thrift Supervision. "It is our effort to make certain that everyone is treated fairly."

FDIC to Scrutinize Laws

As a result, Mr. Fiechter said the OTS has asked the Federal Deposit Insurance Corp. -- which serves as a secondary regulator for state-chartered thrifts -- to look into the new state savings bank laws. North Carolina, Wisconsin, New Jersey, Ohio, Pennsylvania, Illinois, and Indiana either have the new laws on their books or are considering them.

"Regulatory arbitrage does not make sense in this area," Mr. Fiechter said. "So what we have done is approach the FDIC . . . and suggest that the two agencies work together to come up with a common approach to dealing with these conversions," he said.

An FDIC spokesman would not comment on the trend, except to say, "The staff is developing some proposed guidance for the [FDIC) board to consider."

Eric Luse, a partner at Luse Lehman Pomerenk & Schick, a Washington, D.C.-based law firm that has quarterbacked many such deals -- including Guaranty Bank's -- said, "These deals all increase capital, and I don't think insider participation is a safety and soundness issue at

|A Question of Equity'

Besides, he said, "right now, everybody is pointing to management purchases because there is a strong market. Where were all these complainers three years ago?"

The OTS' Mr. Fiechter said that although states seem to be competing with the federal government for who can offer more attractive stock conversion regulations, the situation is not a repeat of the 1980s, when state and federal regulators competed to offer more generous deals to the savings and loans they regulated. "There are no safety and soundness concerns raised here," Mr. Fiechter said. "It is more a question of equity."

Mr. Luse explained that stock conversions using a state savings bank charters have much in their favor. "There is regulatory flexibility, which means that you have more flexibility in structuring the transaction and setting insider purchase limits," he said.

Exams Cost Less

The company can also save money on regulators' examination and assessment fees, Mr. Luse said. "If you flip over to a savings bank [charter], the OTS is no longer your regulator, and therefore you don't pay the OTS assessments," he said. "For the companies that are $250 million or more [in assets], the differences can be fairly significant."

In addition, state-regulated thrifts have greater flexibility to decide what the company is worth when selling stock for the first time. "There is a perception that the appraisal at the federal level is going to be a tougher appraisal," Mr. Luse said.

If the company's value is set too high in an initial public offering, not all of the shares may be sold. But if the company is undervalued in the appraisal, it won't get the full benefit from the sale of its stock, and initial stockholders will realize quick gains as the stock price shoots up.

Privately, investment bankers and financial advisers familiar with the trend of mutual thrifts changing their charters to state savings banks before selling stock said the state rules attracted managements that were motivated primarily by profits.

They said the state deals were known for the more liberal appraisal rules and for allotting management the right to buy more stock.

But half a dozen of those advisers refused to talk publicly about the trend, because, they said, they did not want to hurt the lucrative business they had built around such deals.

In Guaranty's case, appraisers set the book value of the company before the conversion at $16.6 million. The thrift, which has $375 million in assets, had $19.8 million in capital before it sold stock, and now has $26.8 million in capital.

Executives of the company and its subsidiaries who bought stock include Guaranty's chief executive Gerald J. Levy, who was a chairman of the now disbanded United States League of Savings Institutions. Mr. Levy, who has worked at Guaranty for more than 30 years, defended the large management purchases allowed in the stock sale. "I just wanted to buy a piece of my company that I helped create," Mr. Levy said. "It's what America is about."

He said two other family members bought Guaranty stock in the deal: his son, Douglas S. Levy, who is the thrift's president, and his daughter, Jill Belconis, the president of one of the company's two mortgage subsidiaries.

But some don't see it quite that way. "This is the classic case of an S&L insider getting away with murder at the expense of consumers, and everybody in this town knows who Jerry Levy is." said the Consumer Federation's Mr. Lewis.

Mr. Levy was chairman of the U.S. League from November 1985 to November 1986.

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