Not since the 1980s and 1990s has Orange County’s financial sector seen such dramatic change.
In fact, what the county’s seeing now is like a combination of the savings and loan crisis of the 1980s and consolidation wave of the 1990s.
This time around, most of the local impact has come from a handful of bank and thrift failures: Newport Beach-based Downey Financial Corp., Brea’s Fremont General Corp. and First Heri-tage Bank of Newport Beach, which had about $20 billion in combined assets.
(See complete list of failed local banks and thrifts, page 23.)
The trouble was more widespread during the savings and loan crisis.
By 1994 more than
30 locally based banks and thrifts with more than $17 billion in assets had failed. In today’s money, that would be about $25 billion.
Before Downey, which had about $12.7 billion in assets when it failed in November, the largest bank or thrift here to go under was Irvine’s Lincoln Sav-ings and Loan Associa-tion, headed by Charles Keating, namesake of the infamous Keating Five.
Lincoln ended up losing the savings of more than 21,000 mostly elderly account holders as it collapsed from troubles that plagued thrifts across the country.
Tax reforms that devalued property, deregulation that allowed thrifts to operate more loosely and risky bets on real estate lending were some of the key causes of the thrifts’ implosion two decades ago.
Today’s trouble has roots in similar recklessness, but there are differences.
The epicenter today is home loans, much of them generated in OC.
By now we all know the story: Loose lending practices led to a wave of bad loans made to borrowers with poor credit or who couldn’t afford the loans they were getting.
Fraud was rampant, both by unscrupulous mortgage brokers and less-than-truthful borrowers.
Complex financing in the form of loans sold to Wall Street as bonds, credit swaps, derivatives and hedges all exacerbated the problem, making the scope of today’s crisis still
untallied.
It’s hard to say exactly how the two crises stack up to each other, especially since the current one isn’t over.
Many see the financial industry’s drag on the rest of economy today as a far worse situation than before as credit market problems and debt weigh on businesses.
In OC, the savings and loan crisis overlapped with the early 1990s recession, which saw the collapse of the aerospace industry and the housing market.
The current banking crisis is costing the government about $350 billion for its Troubled Asset Relief Program.
On top of that, the government is estimated to have committed a couple of trillion dollars to help fix the economy, including bailouts and the stimulus program that President Obama signed into law last week.
In 1990, the government spent $250 billion, adjusted for inflation, on the Resolution Trust Corp. set up to take the assets of bad thrifts.
Better Capitalized
A key difference today is that banks and thrifts tend to be better capitalized, said Ed Carpenter, who heads up bank consultancy Carpenter & Co. in Irvine.
Carpenter’s company managed assets of most of the largest institutions west of the Mississippi River for the RTC in the 1990s.
“Regulators were quicker to warn banks in the 1990s,” Carpenter said. “But most banks today are healthier. There’s more room for them to survive.”
Banks in the 1980s and 1990s tended to have a 7% core capital ratio, which measures their ability to cushion losses, compared to 11% today, he said.
Regulators now like to see at least an 8% core capital ratio for thrifts, according to Carpenter.
A full recovery for banks and thrifts may not happen for two or three years, he said.
The good news is that most locally based banks in the county don’t deal heavily with home loans, according to Carpenter.
But a handful of OC lenders were some of the largest in the country for subprime loans.
Large bets on home loans ended up swallowing lenders when borrowers couldn’t afford them. That was the case with Downey and Fremont.
Fremont, once the country’s fourth largest issuer of subprime loans, filed for bankruptcy protection last year when borrowers began to stop payments on loans and it was forced to buy back pools of them sold to Wall Street as bonds.
Its branches and assets were bought by Mary-land’s CapitalSource Inc. last year.
In 2007, Irvine-based New Century Financial Corp. and Orange-based ACC Capital Holdings Corp., major subprime lenders that were not re-gulated as banks or thrifts, went out of business.
Downey, whose business centered on borrowers in between the worst and best credit risks, eventually felt the same burn.
When Downey’s adjustable-rate loans began to reset at unaffordable rates for borrowers toward the end of 2007, it too entered a death spiral that eventually put it out of business late last year.
Minneapolis-based U.S. Bancorp took over Downey’s business after the government seized the thrift.
Bad home loans also eventually took over Seattle-based Washington Mutual Inc., which had ranked as the third largest financial institution operating in the county with deposits of nearly $8 billion.
New York’s JPMorgan Chase & Co. bought WaMu’s business in a government-brokered deal last fall.
Just like two decades ago, WaMu and Downey are examples of thrifts being taken over by banks.
What’s happening today also parallels a wave of bank and thrift consolidation that played out in the 1990s.
Back then, Washington Mutual bought H.F. Ahmanson & Co.’s Home Savings of America, NationsBank Corp. bought Bank of America Corp. and took its name and Wells Fargo & Co. acquired First Interstate Bancorp.
Some local bankers oppose the dominance of big banks, which are getting bigger with recent acquisitions and government-orchestrated takeovers. Those include BofA’s acquisition
of Merrill Lynch & Co. and San Francisco-based Wells Fargo & Co.’s buy of Wachovia Corp.
BofA and Wells control of about half of the deposits among the largest 30 banks operating in the county. That gives them the ability to set market rates, according to some.
And with no locally based bank large enough to handle some of the major business loans, it leaves companies vulner-able to people making de-cisions far removed from the county, critics say.
For now, all banks are being cautious in the wake of the crisis. They’re lending less, requiring borrowers to put down more cash and taking a hard look at people’s ability to repay, Carpenter said.
As for subprime loans, they’re “going to the bottom of the ocean,” he said.
“We’ve recovered from the Depression, World War II and the 1990s,” Carpenter said. “We’ll recover from this.”
