Ohio state legislators yesterday agreed to set up a $50 million state-backed deposit insurance fund in the wake of a run last week on Home State Savings Bank in Cincinnati that raised concern about the adequacy of the $140 million private fund that insures Ohio savings and loans.
The 33 offices of Home State were closed last Saturday by state officials following disclosure that Home State had invested $640 million in government securities with a Ft. Lauderdale broker under a repurchase agreement. The broker, ESM Government Securities Inc., collapsed last week after an audit revealed it had a $300 million deficit. Home State's loss is expected to be considerably less than the repurchase -- or "repo" -- agreement with ESM. A repo is an agreement in which a securities dealer sells securities and agrees at the same time to buy them back at a higher cost, which compensates the investor for what amounts to a loan.
As soon as Home State was mentioned as a victim of ESM, customers rushed to withdraw funds. Officials would not reveal the size of the outflow, but some press reports have put it between $20 million and $60 million. Customer funds have been frozen, although the Ohio savings and loan superintendent announced yesterday that cashier checks issued last week by Home State would be honored.
The closed savings bank has been placed in a conservatorship while efforts continue to try to find a buyer.
Home State is insured by Ohio Deposit Guarantee Fund, a private fund that insures other state-chartered savings and loans in Ohio. Although the fund has $140 million and Home State has about $20 million in net worth -- a sum thought sufficient to cover deposits -- Ohio legislators decided to set up a separate fund to soothe the fears of depositors in other state-chartered thrift institutions.
Meanwhile, the Wall Street Journal revealed yesterday that ESM's receiver had obtained a court order last Friday freezing the firm's assets after it was discovered that the company's officers had improperly transferred millions of dollars from ESM to themselves. ESM was placed in receivership a week ago after the Securities and Exchange Commission filed suit against it, charging it with fraud in connection with the disappearance of $300 million in customer funds.