The State of Maryland seized control of Old Court Savings and Loan Association early this morning after it proved impossible to arrange a private rescue for the beleaguered Baltimore financial institution.
The unprecedented state intervention will attempt to halt the run on Old Court by limiting withdrawals to $1,000 per account per month when Old Court opens for business today. The limit on withdrawals will remain in effect for 30 days.
At the request of the state Board of Savings and Loan Association Commissioners, the Maryland Savings-Share Insurance Corp. was appointed conservator to oversee the affairs of Old Court, the second-largest privately insured savings association in the state.
The petition for conservatorship said Old Court was in "unsafe and unsound" financial condition as the result of a run on deposits that began last Thursday after new management was installed under pressure from MSSIC and the state Division of Savings and Loan Associations.
Maryland Attorney General Stephen Sachs went to the North Baltimore home of Maryland Circuit Court Judge Martin B. Greenfeld late last night to obtain the court order seizing control of Old Court.
At a hearing in the judge's dining room, Old Court attorneys pleaded to avoid the conservatorship, but Greenfeld signed the order at about 1 a.m.
Sachs, who disclosed Friday that he had begun a criminal investigation of conflicts of interest at Old Court, said the association is awash "in a sea of illegalities."
Despite laws restricting insider loans, Old Court had overdrafts on NOW accounts of officers and directors amounting to $5,724,421, Sachs said. "These overdrafts constitute unsecured interest-free loans," he said.
In addition, as of Jan 31, the conservatorship petition said, Old Court had other unsecured loans to officers and directors, their family members and businesses amounting to $5,787,879.
The state also alleged impropriety in the number of management and consulting fees that went to Old Court directors and officers. For example, the petition said that "in calendar year 1984, defendant Old Court and its subsidiaries paid $1961,750 in such fees to Jeffrey A. Levitt individually, $630,000 to Levitt Pearlstein Management Co. and $230,000 to Pearlstein, Levitt Investments."
Since March 15, the attorney general said, Old Court lost so many deposits it has had to borrow about $50 million from the Federal Reserve. Only the Fed's lending has kept Old Court going for the last two months, but the central bank is no longer willing to provide more funds, and Old Court has no credit lines with private lending institutions, he said.
Old Court had $94 million in certificates of deposit falling due in 30 days, another $42 million in deposits due in 60 days and $70 million in construction loan committments that will be called for during the summer construction season, according to Sachs.
MSSIC officials spent the weekend in futile negotiations to avoid the state takeover, which they feared could destroy confidence in Maryland's private insurance program for savings and loan deposits.
When MSSIC was unable to arrange for a healthy association to take over ailing Old Court, state officials stepped in.
While the rescue effort dragged on, Old Court depositors were lining up in the rain outside many branches hoping to withdraw their money when the doors open this morning.
Confidence in Old Court sagged with Thursday's announcement that, under pressure from regulators, Levitt was being replaced as chief executive by John D. Faulkner Jr., a MSSIC board member and veteran savings executive. Depositors' faith bent with disclosure that Sachs was beginning a criminal investigation of conflicts of interest at Old Court and broke when depositors were turned away without their money Friday night and Saturday.
Sachs said that in terms of establishing public confidence, the conservatorship is essential "to help stop the bleeding."
Whether the effort will succeed will be determined today.
House Speaker Benjamin L. Cardin (D-Baltimore) said, "You don't know what's going to happen with a conservatorship. It might be just what is needed or cause another round of withdrawals."
"I'm very disappointed," said Cardin. "I was hopeful they would have come up with some kind of solution to restore public confidence. What is really sad is there is no indication of any solvency problems with any Maryland associations. What needs to be done is restore the public's confidence."
Sen. Howard Denis (R-Montgomery), who chaired a legislative S&L study panel, yesterday urged Hughes to call a special session of the general assembly to require federal insurance for all but the smallest state-chartered associations. He suggested private insurance might still be appropriate for the more than 60 MSSIC members that are neighborhood associations with less than $10 million in assets. "They may end up insuring some mom-and-pop operations, but this is the end of MSSIC," said one state official involved in the hectic weekend rescue.
Cardin called talk of a special session "premature. There is no indication legislative action is needed." And Senate President Melvin A. Steinberg (D-Baltimore County) said he was skeptical about what an emergency session would accomplish. Cardin and Steinberg are to meet with Hughes today.
Said Steinberg, "The only thing I can think of at this stage is the possibility of mandatory federal insurance, and that has a lot of ramifications. You also have the question of what type of a message it would send out. It could create a tremendous run."
The fragility of public confidence was shown Saturday when many depositors withdrew funds from Merritt Commercial Savings and Loan Association after reports it is under pressure to sell the new office tower it is building. Senior Vice President Dennis Finnegan said "an unfortunate misunderstanding" caused the withdrawals. There were no lines at Merritt branches yesterday, but Old Court depositors lined up early in the day, prepared to wait through sun and rain in hopes of withdrawing their savings.
At Old Court's Randallstown branch, where the run began last Thursday, four police cruisers arrived during the afternoon to maintain order. There were confrontations between customers who lined up yesterday and those who had been there Saturday and returned trying to reclaim the places they held when the thrift closed without allowing them in.
While the lines drew the attention, Old Court also suffered what bankers called "a silent run." Many customers simply closed their accounts by writing checks for the entire balance and depositing them in other institutions.
Old Court found its new deposits dwindling after Ohio's savings and loan insurance fund failed in mid-March, shaking savers' confidence in all private thrift-insurance plans.
Offering some of the highest interest rates in the nation -- as much as 3 percentage points above local federally insured institutions -- Old Court had grown rapidly since new owners took over three years ago.
At that time, Levitt, a Baltimore real estate attorney, and Allen Pearlstein, a Pennsylvania shoe manufacturer, each purchased 41 percent of Old Court. The remaining 18 percent is owned by Jerome Cardin, whose family members sold their interests to Levitt and Pearlstein. Jerome Cardin is a cousin of Senate leader Benjamin Cardin.
Faulkner, a MSSIC board member and veteran S&L executive, will remain in charge of the day-to-day operations of Old Court under the MSSIC conservatorship.
John Hanson Savings & Loan, the Beltsville association said to be the most likely merger partner for Old Court, has assets of $649.8 million. Now the third-largest MSSIC member after Old Court and Chevy Chase Savings & Loan, which also was involved in the talks, John Hanson already has applied for Federal Savings and Loan Insurance Corp. insurance.
John Hanson President Jerry D. Whitlock said his firm is interested in acquiring Old Court if MSSIC provides an immediate cash infusion and protection against future losses.