WASHINGTON -- Washington bank regulators are rewriting the rules governing mutual thrifts selling stock for the first time.
One influential regulator, Derrick D. Cephas, New York State superintendent of banks, laid out his views on the conversion issue in a Feb. 24 letter to thrift CEOs explaining the approach he expects to take in pending regulations, and in a Feb. 25 statement before the Senate Banking Committee here. Excerpts follow:
As regulators, we are faced with large financial institutions with large capital bases which are owned by no one. Many constituencies lay claim to owning or having an interest in the net worth of mutuals, but the fact is that none of those claims have any basis in law.
Converting from mutual to stock form is a legitimate business objective and has over the years allowed the thrift industry to raise billions of dollars of additional capital. I believe that we all should be supportive of that objective....
We do not believe that any legitimate public policy interest would be served if our policies and procedures discouraged or inhibited conversions. ... It is important that conversions to stock form remain available and viable as a way to bring new capital into the thrift industry.
Balancing Act
Mutual thrifts desiring to convert should be able to do so under a set of rules which balances in an equitable manner the various competing interests present in the conversion context.
Except in the case of a supervisory conversion, the decision whether or not to convert rests solely with the trustees of a mutual institution. Similarly, the trustees are also empowered to decide the manner in which a thrift will convert.
Thus far, it has been in the second instance -- the manner of conversion -- that additional regulatory guidance and oversight appears to be needed.
Prior to 1987, many converting thrift institutions were undercapitalized and a conversion to stock form provided the principal means by which thrifts could gain access to the public markets and enhance their capital positions.
Capital-Raising Strategy
Indeed, in many cases the primary purpose of the conversion was to bring the converting institution into compliance with applicable capital requirements.
Today, the scenario is sometimes quite different. Mutual thrift institutions with capital far in excess of regulatory requirements often convert to stock form. Conversions have been structured which contain terms providing management and trustees with significant personal financial benefits.
Institutions have sometimes converted on the basis of appraisals which may not have reflected "full value" of the institution. Some institutions, soon after conversion, repurchase material amounts of their newly issued stock.
There are several serious and novel policy issues to be addressed. There is first the question as to who actually owns a mutual institution.
As appealing as it might be to conclude that depositors own mutual thrifts, that answer is simply at odds with the law.... Although it may well be that depositors have a greater "moral" claim to ownership than any other constituency, the plain fact is that depositors do not "own" mutual thrift institutions as the term "ownership" is understood under New York law.
It is equally clear under the law that the managers of these institutions -- namely, the officers and the trustees -- also do not own them.
These mutual institutions are legally owned by no one, but we believe that the public has a clear interest in them. Because of this unique status, the responsibility falls to us -- bank regulators -- to protect the public interest in the conversion process.
