On the surface, the news last week that New York's billionaire Tisch family has bought more stock in Continental Bank Corp. of Chicago and that Columbia Savings & Loan Association of Beverly Hills, Calif., is trying to sell its junk bond portfolio are strictly Dullsville.
But look a little deeper, and you find unfortunate decisions by federal regulators that have cost the U.S. public a Stealth bomber. Or something like half a billion dollars, if you would like a number.
In the great scheme of things, what's a crummy half-billion dollars when you're talking about a half-trillion dollar S&L mess? But it's a half-billion dollars that didn't have to be lost. And the way it was lost -- on just two deals -- tells a lot about what's going wrong in the government's effort to dig its way out of the S&L and bank messes.
The Continental story is pretty simple. The Federal Deposit Insurance Corp. owns 14.1 million shares of Continental, the remnant of the 63 million shares it got for bailing out the bank in 1984. This summer, the Tisches, who control CBS and the Loews tobacco-insurance conglomerate, put together an investor group to buy the FDIC's Continental shares. The Tisches were to take just under 3 million shares. The price for the stock was determined by a formula based on Continental's stock price over a number of days.
The formula worked out to $15.15 a share -- but the FDIC walked away. The apparent reason is that Continental's stock rose above the $15.15 price, and the FDIC didn't want to seem to be giving the Tisches a bargain.
Lucky for the Tisches, unlucky for the FDIC. Instead of doing one-stop shopping at the FDIC, the Tisches bought Continental shares in the stock market. By my math, the Tisches' first 3 million shares -- they're up to 4.2 million -- cost $2 million less than they were willing to pay the FDIC for them. The FDIC still has its Continental stock -- except the price is now $10.12 1/2, not $15.15. Thus, the FDIC's 14.1 million Continental shares are worth $71 million less than the Tisch group offered.
If you assume, as I do, that the FDIC will ultimately put its hand into taxpayers' pockets to clean up the carnage in the banking business, the $71 million that the FDIC left on the table will end up being taxpayer money.
FDIC Chairman L. William Seidman said he couldn't discuss the deal, because he didn't participate in the negotiations as he knows the Tisches. No one else at the agency would talk.
The Columbia Savings deal, though, makes the FDIC crew look like geniuses.
Columbia, of course, has more junk bonds than any S&L in the country, and its balance sheet was vaporized when the junk market collapsed. Because you can't sell $3 billion of junk bonds in the bond market without driving their price down to zero, Columbia decided to sell the portfolio to a single buyer.
Seeking the highest possible price, Columbia offered easy financing. A buyer could put up only a 10 percent down payment and borrow the rest from Columbia on a non-recourse basis -- which means that if the bonds went south, Columbia could end up with them.
You can argue that this isn't really a sale because Columbia will get the bonds back if the they go down sharply in price. But you would think that the regulators, who had to approve the deal, would decide early in the game whether this structure was acceptable. The bidding went on for weeks, with every junkmeister in North America poring over the Columbia portfolio.
But instead of taking the winning $3 billion bid before the buyers came to their senses -- or turning it down right away -- the regulators thought. Meanwhile, Saddam Hussein invaded Kuwait and the junk market plummeted.
In late August, a statement in the name of T. Timothy Ryan, the head man at the Office of Thrift Supervision, said that the deal was unacceptable because of the non-recourse note.
So the bonds are back on the market now. I think they're worth $500 million less than they were in July, when the first deal was struck. Someone involved says the decline is only $300 million. Whatever it is, it's a lot. And a total waste.
I would give you Ryan's side of this if I could get him or any of his subordinates to talk to me.
The Continental and Columbia fiascoes were both caused by regulators not being willing to take risk. If you do nothing, you don't attract criticism. If you do something, a publicity-hungry politician or scandal-mongering reporter can rake you over the coals.
Part of the solution is for those of us in the news business to differentiate between deals in which investors make money, such as the purchase of New York's Bowery Savings Bank by a Tisch-led group in 1985, and outrageous deals, such as Ronald Perelman's purchase of dead Texas S&Ls in 1988. The difference? The Tisch group paid a fair price in an auction open to all buyers and got lucky when bank prices soared. Perelman bought his S&Ls in an auction in which M. Danny Wall, formerly the head S&L regulator, set up absurd rules that kept out most bidders. You can't blame Perelman, who bid fair and square. You can and should blame Wall, who set up cockamamie rules so he could maintain the fiction that the S&L bailout wouldn't require taxpayer money.
If we are ever going to finish cleaning up the S&L and bank messes, regulators are going to have to sell billions of dollars of stocks, bonds and real estate to investors who hope to make money on them. If we keep treating every transaction in which an investor profits as a rip-off of the government, nothing will ever get done.
The solution, probably, is for the government to do what wealthy investors do to get good performance in their stock and bond portfolios. You hire a hedge fund manager, give him a small salary and 20 percent of the profits, and let him make the decisions. If he makes money, good. If not, you fire him. It would cause endless screaming and posturing when some manager made a 10-digit bonus working the government's portfolio -- but we would be saving four times what the manager makes. And at least someone, somewhere, would finally be making decisions instead of covering backsides.
Allan Sloan is a columnist for Newsday in New York.