Some intriguing questions remain in the wake of Household Finance Corp.'s acquisition of Baltimore's Fidelity Federal Savings and Loan Association last week.
The most intriguing is why is HFC willing to gamble on a financially wrecked enterprise that competitors in the Baltimore-Washington corridor considered too much of a risk, notwithstanding the offer of millions of dollars in federal assistance? To put it another way, what does HFC know that other financial institutions don't know, or, vice versa?
Fidelity's rescue is the culmination of a mutual-aid pact between HFC and the Federal Home Loan Bank Board and its insurance arm, the Federal Savings and Loan Insurance Corp. By agreeing to acquire the troubled Fidelity through a subsidiary -- California-based Household Bank, F.S.B. -- HFC relieved federal regulators of a burden with which they had been stuck for nearly two years. In exchange, Household Bank will receive a hefty bag of cash to complete the deal.
A bank board spokesman described the deal as "the least-cost scenario to the FSLIC," but regulators and HFC officials refuse to translate that bureaucratic explanation into dollars and cents. Either it "would've been more costly" to employ another alternative in getting Fidelity out of hock, or "we couldn't find anybody in Maryland that was interested," a spokesman for the bank board allowed. "I just don't think a breakdown is appropriate."
Regardless of the scenario, you can bet your savings account that the hemorrhaging that began at Fidelity two years ago required an expensive tourniquet. Regulators will acknowledge only that the FSLIC agreed to pay nearly $60 million to wrap up a package that gave Household Bank control of Fidelity and Heritage Savings F.A. of Bloomingdale, Ill. HFC, meanwhile, will contribute almost $22 million in cash to its savings bank subsidiary to bolster the acquisitions.
Whether or not the FSLIC could have cleaned up the mess at Fidelity any sooner or for less cash (the bank board took control of the troubled S&L in January 1983) is still open to question. A bank board official insisted that "every effort was made" to find a partner for Fidelity in the state after regulators took it over. Industry officials in Maryland maintain, however, that one and perhaps two Maryland S&Ls had expressed interest in taking over Fidelity if the FSLIC would agree to provide adequate financial assistance.
"We just don't want to get into that subject," a bank board spokesman replied when pressed about negotiations that eventually led to a resolution of problems at Fidelity.
Normally, the bank board tries first to merge a troubled thrift with the same type of institution in the same state. Failing that, the agency then seeks an interstate merger between like institutions, a merger between different types of institutions (an S&L and a commercial bank, for example) in the same state, or an interstate merger between different types of institutions, in that order. The FSLIC obviously considered an agreement with Household Bank the least expensive alternative.
Would it have been worth it for a Washington S&L to strike a deal for Fidelity and thus gain entry into the Baltimore market as well as the entire state of Maryland? Surely, after years of fighting to cross state lines, local S&Ls wouldn't pass up an opportunity to gain control of a Maryland institution with the help of the FSLIC.
Surprise, surprise. "We knew Fidelity was available, but we weren't interested in Baltimore," admitted the chairman of a large Washington thrift. "We're interested in the Washington market. We know little about the Baltimore market and, besides, Baltimore already has two big S&Ls and a big savings bank."
That speaks volumes about a well-publicized desire to branch across state lines.
In the meantime, HFC had some better answers, even though officials refuse to discuss the specifics of the Fidelity transaction. Maryland was chosen as a test market on the East Coast for HFC's consumer bank concept, explained senior vice president John W. Ostrem. And said Ostrem, "We elected to take advantage of this opportunity even at the cost involved."
Ostrem conceded that "there is a great deal of work to be done" to make the new savings bank branch competitive. But now that the investment has been made, he added, HFC's "initial plan and effort will be devoted to a turnaround situation."
Admittedly "surprised" that the bank board chose Household Bank as a merger partner for Fidelity, one savings industry official in Baltimore believes that "it's going to intensify competition." And well he might. Household Bank's introduction this week of a new no-fee credit card and other services designed specifically to attract new customers proves his point. But with $150 million in receivables in Maryland, HFC already is a formidable competitor among consumer-oriented financial services companies in the state.
Competition in the consumer-banking arena will determine whether regional competitors were right in passing up the FSLIC's millions and how well HFC knew the odds before taking the risk, if it was that.