With emergency legislation enacted last week, and 12 of the state's former privately insured savings and loan associations receiving conditional approval for federal deposit insurance, Maryland's S&L crisis appears to be winding down. The anxiety level of some depositors remains high (the $1,000-a-month withdrawal limit that the governor imposed last week is still in effect), but the panic that fueled the crisis has all but dissipated.
Emergency legislation giving the state unprecedented power over most Maryland S&Ls eventually will eliminate the vestiges of an inefficient regulatory system and restore confidence among depositors. The governor and state legislators are still not out of the woods, however.
Lawmakers have acted to restore confidence in the S&L industry, and the attorney general is investigating operations at Old Court Savings and Loan Association, where problems spawned the statewide crisis. The credibility of the state and the effectiveness of its regulatory authority are still open to question, however, and the state's investigation needs to go beyond Old Court.
Credibility can be restored in state government only after an investigation shows why officials in the Savings and Loan Division and the Maryland Savings-Share Insurance Corp., the defunct private S&L insurance fund, withheld information from legislators about Old Court's problems. Not only was information withheld, lawmakers and the public were given misleading statements about the extent of problems in the industry. Moreover, Old Court was permitted to do business as usual for several months before MSSIC replaced the old management.
In the absence of an investigation into the regulatory machinery responsible for monitoring Old Court, the governor and the legislature run the risk of being accused of a coverup.
Maryland's S&L crisis began as a management and regulatory problem that spawned an upheaval within the industry. Cleaning up the damage after the S&L storm could create further upheaval, however, possibly dragging the state's banking industry into considerable turmoil.
Under emergency action taken last week, former MSSIC-insured S&Ls must obtain federal insurance, seek a merger partner or eventually close. It's virtually certain that all 102 of those S&Ls won't qualify for federal deposit insurance. Even if the capital-to-deposit ratios at some institutions meet federal standards, their management capability probably won't.
Maryland officials have quietly contacted S&Ls in the The governor and state legislators are still not out of the woods.Washington area, including a few in Northern Virginia, about acquiring some S&Ls. That effort apparently isn't meeting with much success, however, because the initial aim in Maryland appears to be unloading the problem-ridden Old Court, and Merritt Commercial Savings and Loan Association, which volunteered last week to be placed in conservatorship.
Some of the few profitable S&Ls in metropolitan Washington are interested in acquiring Maryland associations that have adequate net worth, but they refuse to consider Old Court and Merritt as possible acquisitions. While little is known about the condition of both of those S&Ls, informed sources who have seen Old Court's balance sheet say that its losses could be as much as $200 million and that its books are riddled with title and ownership problems. Moreover, said one executive, "If you took it over, you could wind up not having a branch network. The facilities may be there, but deposits may not be there."
In the meantime, several money-center banks have volunteered to "help with the problem" in Maryland by offering to buy S&Ls there and convert them to commercial banks. Maryland banks, on the other hand, aren't willing to pay as high a premium as out-of-state banks may be willing to pay just to get in the state.
Regional banks in Virginia, while not ruling out the possibility of acquiring a Maryland S&L, aren't likely to go shopping for one because reciprocal interstate banking laws passed by both states recently have cleared the way for Virginia banks to buy Maryland banks, which are far more attractive. "Is it really worth the effort for a large regional bank to go after an ailing S&L that has a limited base?" a Virginia bank official asked rhetorically.
That leaves the big money-center banks that lobbied successfully earlier in the year for the right to bank in Maryland. The so-called Citicorp bill gives out-of-state banks permission to enter Maryland next year, provided they agree to invest $25 million and provide 1,000 jobs in exchange for the right to operate a limited-service bank initially. By turning to money-center banks now for help with the S&L problem, Hughes and the legislature run the risk of reopening wounds in the state's banking industry, which opposed the Citicorp bill.
And that possibility has some legislators worried as well. Indeed, one delegate was overheard brooding last week about "all sorts of sharks around" when "blood is in the water." Yet another groused about money-center banks wanting to "come in here and skim the cream off the top."
Chickens are coming home to roost on this can of worms.