Mutuals Should Play |Price Is Right'

A headline in this newspaper, "Low Prices Make Time Ripe for Stock Conversion," [Aug. 22, page 4] should have startled every student of corporate finance and business policy.

Companies of all types should make it their policy to sell stock when prices are high, gaining as much cash as possible from the dilution caused by issuing new shares.

Yet here were two Washington lawyers, John F. Breyer and Christopher J. Zinski, telling the readers of this newspaper that now is the time for mutual - or depositor-owned - thrifts to go public: because prices may never be this low again!

Accentuating the Positive

The basic reasons for a mutual thrift to go public were well stated. Stock conversion is a way for thrifts to raise capital.

Conversion can reward staff members and officers with a new form of compensation to motivate stronger performance. If the institution is acquired, depositors who have become shareholders stand the chance to gain a profit otherwise unavailable to them if the company remains a mutual.

What was not stated, however, are the negatives. If the stock price moves lower, depositors who used their insured savings to buy shares can lose some or all of these funds. This has happened all too frequently in the recent past.

Finding Use for New Capital

Another negative has come home to haunt many converted thrifts, when they had to put their new capital to work. Their motive for making loans was simply to place the money in earning assets.

They should have put the horse before the cart - making loans because demand was there, from borrowers whose propositions made economic and financial sense.

For these negative reasons, the boards of trustees of many thrifts have decided to remain mutual rather than convert. As they have seen bank stock prices plummet to their current levels, many have been grateful for the wisdom of their decision to do nothing.

Wisdom of Standing Pat

There are some supportable, valid points to be made on either side of the conversion question. But there is real reason to oppose the low share price as a motive for conversion.

One argument is irrefutable, if a thrift sells stock when prices are at record lows, relative to book values, and the market for these shares recovers: The buyers will have a tidy capital gain.

But isn't this a raw deal for the savings bank or savings association that is converting?

Same Bargainer on Both Sides

Unfortunately, there is no one dedicated to supporting the thrift and its capital reserve cushion, in opposition to those who want to distribute ownership to new investors.

Any other deal has people on both sides. The company wants the most cash it can get for the new shares it sells; new investors want to pay the least. The deal closes when a mutually acceptable bargain is struck.

When a mutual sells stock, though, it turns over a surplus reserve to new investors - which of course includes the sellers. In some cases, this surplus reserve has been built up over a century or more.

The proposal to sell the surplus now is a continuation of the "me generation" spirit that permeated the 1980s and has left us a legacy of problems today.

Updating the Public Trust

Where do today's managers and trustees get the right to benefit from a surplus built up by withholding profits from depositors ever since the organization was started?

Some feel that the surplus is really a public trust, to be used for public good. This is specially applicable to the case of mutual savings banks. They were started as charities, to give the working man a place to save in an era when commercial banks turned their backs on him.

At least, it should be recognized that the surplus belongs to the bank itself, and should be used to make the bank as strong as possible.

This position goes directly against the policy of selling stock to the public, now that market value is so low relative to book. The trustees should wait until they get a better deal for the organization they have been sworn to protect and serve.

The surplus built up over the life of the organization should not be merely available for plunder at the lower cost, by those who happen to be running or depositing in the mutual organization in the year 1991.

Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management.

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