Every once in a while a government agency comes out with a decision that seems so appropriate that you want to shout it out to the hills.
That was my feeling as I read in the American Banker ("OTS Reads Riot Act Over Low IPO Appraisals," May 26, page 3) that the Office of Thrift Supervision has put appraisers on notice that they will be penalized if stock prices rise too high on thrifts they have appraised immediately after initial public offerings.
Summoning leading appraisers to the OTS office, officials "read the riot act" to them and told them that if the stocks of their appraisees exhibited too strong a performance, these appraisers would not be allowed to submit future applications.
Furthermore, the OTS indicated that if it felt appraisal values were too low, instead of negotiating with the appraisers in the future it would turn the entire deal down, thereby adding heavily to the conversion cost, and of course, discouraging converting thrifts from using that appraiser again.
The response of appraisers is, of course, "How can I predict what will happen to the price of the thrift's stock after it hits the market?"
But, to be realistic, we know
Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management. that every thrift seeking to go public - and every appraiser - has a bias in favor of a low valuation.
In virtually every other type of deal there are people on both sides of the table. The buyer wants prices low and the seller wants them high. But in a thrift conversion, there is nobody on the other side of the table.
The converting thrift is going to market to sell an organization whose capital has been built up in many cases for 150 years or more. The depositors who sacrificed income to build most of this capital are long since dead.
And, whether they state this openly or not, we know that the insiders and outsiders who will subscribe to the stock when the present management decides to give up this mutual form will benefit more if the price of conversion is low than if management makes the buyers put a greater amount of money into the thrift to win the shares.
A Familiar Problem
So there is an incentive to provide a low bid, make management happy and, of course, build the reputation of the appraiser, so his firm gets future conversion appraisals.
It is the same problem as we have with any investment transaction where a so called "fairness opinion" is needed.
Think of the scenario:
I come to an appraiser and say, "Sam, I want to sell my company to the public. I need an appraisal that says that $5 million is fair.
"If you say $5 million is fair, your fee will be $150,000. If you say it is too high and not fair, your fee will be $1,000.
"Now, please be objective." It is like the old story of the company trying to pick a CPA firm by asking one question:
"What's two and two?" and ends up picking the CPA whose response is "What number did you have in mind?"
Should we care if conversion prices are set too low?
The Federal Deposit Insurance Corp. has partially answered this with its recent objection to two thrift conversions - of Statewide Savings Bank, Jersey City, and Home Savings Bank of Albemarle, in North Carolina.
It said the acquiring companies are benefiting more than the depositors of the thrifts being acquired. And the FDIC called the proposals a "breach of fiduciary duty by directors."
Robert Hartheimer, director of resolutions for the FDIC, put is simply: "What is very clear to our board is that the acquirers are not the parties who should be receiving a portion of the value that belongs to depositors and other groups with an interest in the mutual thrift."
Is the Public Served?
By "other groups," of course one can assume he meant the community, which should also gain some of the benefits if the surplus built up in that community over a century or more is being distributed.
There is the final issue of whether the public is served when a thrift goes public and raises more capital in the process. Isn't that extra capital a benefit to the thrift's community, justifying attractive terms to get the IPO fully subscribed?
Not quite so.
When the thrift has no immediate need for this fresh capital, it sometimes burns a hole in its pocket and leads to loans that are uneconomic, simply to put the capital to work and keep the IPO from diluting the thrift's return on assets and capital.
In this regard, a recent thesis submitted to the Stonier Graduate School of Banking by Gregory T. Caswell, of the Coastal Bank of Portland, Maine, concludes that many conversions that were motivated by personal gain for the management group ended by not only putting the thrift at risk as it tried to earn a return on the newly subscribed funds but also contributed heavily to the boom and bust of the economies of Maine and New England.
In retrospect, then, we must conclude that the conversion of thrifts in such magnitude in the 1980s was a basic cause of the problems that both the thrifts and their communities often suffered in the banking crises of the end of that decade.
And with the "enthusiastic" appraisals and fairness opinions of consulting firms playing so great a part in causing this debacle, it is good to see the OTS reading the appraisers the riot act, thereby putting much of the blame for the situation just where it belongs.