The Crisis at Old Court Savings and Loan Association is a classic in blunders, and the biggest blunder of them all was perpetrated by Maryland's elected officials and regulators.
Old Court's problems had become a time bomb and Maryland officials not only ignored early warnings of a possible disaster but failed ultimately in a half-hearted attempt to disarm an explosive situation. By waiting until yesterday to take control of the troubled S&L, state officials proved, among other things, that they had not learned the lessons of Ohio's S&L crisis in March.
The immediate story, of course, is the crisis at Old Court. In the wake of published accounts of problems at the S&L, savers seeking to withdraw their money have kept a vigil outside its offices for five days. Attorney General Stephen Sachs has promised to conduct a criminal investigation of past practices at Old Court. And in the state's sternest move to date, a lengthy list of alleged improprieties at the S&L was developed in support of a conservatorship petition which was granted by a circuit court judge early yesterday.
Old Court was an accident waiting to happen. All the signs were there but state officials were asleep at the wheel.
The signs were there last August when a special legislative task force considered ways to give regulators additional powers to oversee state-chartered S&Ls. The chairman of that task force, Sen. Howard A. Denis (R-Montgomery County), noted then that Maryland had managed to avoid serious problems in the S&L industry, but he also cautioned against living in "a fool's paradise."
The signs were there last February when the Maryland Senate failed to adopt tougher measures that would have strengthened the S&L regulatory machinery.
The signs were there again in April with indications of a growing lack of confidence in the state's private insurance fund for S&Ls, the Maryland Savings Share Insurance Corp. (MSSIC), and that private funds had really become anachronisms.
The president of one of Maryland's state-chartered S&Ls observed last month that a "small cadre of Baltimore-based, large MSSIC institutions . . . have the potential for creating serious problems for MSSIC unless they are closely regulated." Similar concerns been raised by the heads of small state-chartered S&Ls who feared the MSSIC fund couldn't weather a big hit from the collapse of a large high-flier.
The signs of trouble were there for all to read long before those red flags were raised, however. The high-fliers and heavy-rollers among Maryland-chartered S&Ls had been telling the world that they were taking big risks. They ran advertisements in national publications touting incredibly high rates on savings. Deposits and assets at some state-chartered S&Ls reached astronomical proportions within a matter of only two or three years. It was an open secret in Maryland that some S&Ls were wheeling and dealing in risky real-estate joint ventures.
"My great concern all during last year was real estate," Denis recalled yesterday. "Real estate developers have been using S&Ls as their private banks and the chickens have come home to roost."
In the midst of the task force's work last year Denis observed, with justifiable concern, that "higher yields mean higher risks." And in what should have been the prelude to a get-tough policy by the state, Denis added prophetically, "Whenever you have that much money moving in a hurry, it's necessary to take a look to see why."
But when Denis pushed for tougher regulations governing state-chartered S&Ls, legislators in the general assembly withered in the face of stiff pressure from the industry.
Neither the legislature nor the Maryland Division of Savings and Loan nor MSSIC bothered to step in and call a halt to the high-risk games. And at the height of the Ohio S&L crisis, the public was given repeated assurances that no problems existed at state-chartered institutions in Maryland. Old Court's problems were piling up before then -- before disaster struck Ohio, in fact. Indeed, since March 15, Old Court lost so many deposits it had to borrow $50 million from the Federal Reserve, according to the attorney general.
The response by MSSIC and state regulators was the managerial equivalent of a Band-Aid. Prudence should have dictated a takeover by the state long before yesterday's belated seizure. Moreover, the state should have headed off panic in the streets around Old Court offices by announcing immediately after its takeover that the situation was under control and that no depositor would lose money.
The Old Court mess will be cleaned up eventually. What remains is for Maryland to pass emergency legislation mandating more stringent regulations of state-chartered S&Ls and to limit coverage by MSSIC to small, community-oriented S&Ls who stick to the basic business of making home mortgages.