A Baltimore City judge last night ordered a second Maryland savings and loan placed under state conservatorship and Gov. Harry Hughes announced that a team of 350 federal banking examiners will be brought into the state beginning today.
The bank examiners are being brought in to help other state-chartered and privately insured savings and loans qualify for federal insurance and direct loans from the Federal Reserve.
Merritt Commercial Savings and Loan Association of Baltimore voluntarily asked to be placed under control of the Maryland Savings-Share Insurance Corp. along with Old Court Savings and Loan, which was ordered into conservatorship early yesterday morning.
The action will mean Merritt customers can withdraw only $1,000 from each account each month, discouraging savers from continuing to drain money from Merritt.
Hughes said Robert P. Black, president of the Federal Reserve Bank of Richmond, will send in 350 bank examiners to begin auditing the records of MSSIC-insured savings associations today.
The examiners will determine not only whether the associations can qualify for coverage by the Federal Savings and Loan Insurance Corp., but also whether they have assets that can be used as collateral for loans from the Federal Reserve. The Fed is authorized by law only to give loans that are fully backed by collateral.
The unprecedented invasion of bank examiners was meant to prevent the widening Maryland savings and loan crisis from escalating into a repetition of the incident that forced Ohio in March to declare the first bank holiday since the Great Depression.
Hughes sought to assure Maryland savers that their money is safe. "I would like to say something else to the citizens of Maryland," Hughes said at a late-night press conference. "I can understand how they are concerned and worried. That's understandable.
"But I would like to point out that just because we've identified two S&Ls in trouble does not indicate there are other savings and loans that have that same kind of trouble," he said.
"I still feel confident that the vast majority of state-chartered S&Ls are well managed and safe and sound," he said. "So what I am asking of the people of Maryland is to be calm. Fear is the worst thing that can happen."
The run that began draining deposits away from Old Court Savings and Loan of Baltimore last Thursday spread to Merritt over the weekend after it was reported the state was concerned about some business practices at Merritt.
Old Court was ordered into conservatorship early Monday morning, and Merritt's board of directors asked for the same protection yesterday. The documents creating the conservatorship for Merritt were signed at 11:50 p.m. last night by Baltimore City Circuit Court Judge Joseph H. H. Kaplan.
The implications of the Maryland S&L situation became clearer during the day when Federal Reserve Board Chairman Paul A. Volcker pledged his support and at least one money trader in New York blamed Maryland for the fall of the dollar in international currency trading.
Since April 1, Maryland associations have borrowed about $100 million from the Fed to replace funds withdrawn by nervous depositors. "We're going to be as supportive as we can," Volcker said. "We are lending to those S&Ls and we will continue to."
Arriving in Annapolis yesterday morning after a flight from Egypt, Hughes held nearly continuous meetings throughout the day with his top aides, Attorney General Stephen H. Sachs, MSSIC officials, S&L executives and representatives of the Federal Reserve Board.
"We're looking for whatever long-range solution may turn out to be necessary," said Hughes. "I am confident we will find one."
"Normally it takes a considerable period of time" to get federal insurance, the governor said. "Our goal is to get the cooperation of the Federal Reserve and Federal Home Loan Bank Board to expedite these matters."
First Maryland Savings and Loan of Silver Spring announced yesterday it is seeking FSLIC insurance, joining an exodus from MSSIC that includes many of the biggest and best-financed state-chartered institutions. Chevy Chase/Government Services Savings and Loan, John Hanson Savings & Loan, Second National Building and Loan, Comunity Savings and Loan, Friendship Savings and Loan and Baltimore County Savings and Loan all have applied for FSLIC coverage or announced plans to do so.
Hughes has been urged to call a special session of the Maryland General Assembly to pass legislation requiring all but the smallest MSSIC-insured S&Ls to get federal insurance, but said he hopes to avoid doing so.
Hughes said he hopes the state can find a healthy S&L to take over Old Court, but there was little progress on that front yesterday. John Hanson has been identified as one possible buyer. Also involved in the talks is Perpetual American Bank of Alexandria -- a federally insured former savings association that turned itself into a bank two years ago.
Asked whether he is satisfied with the state regulation of the S&L industry, Hughes said: "There's been an effort here to do what we can do to protect depositors in the state. This effort has been going on now for several weeks. Part of that is to avoid a panic, to avoid a run. So it's a very delicate balance to make sure you are doing everything you can to protect depositors, but at the same time not cause undue alarm."
Hughes' aides suggested the Federal Reserve is coaching them on how to handle the crisis, hoping to keep it from turning into a replay of the Ohio bank holiday of last March. After the failure of one large savings and loan wiped out the private insurance fund, Ohio was forced to close all its S&Ls, allowing them to reopen only after seeking federal coverage.
Several Maryland state officials and thrift industry sources have expressed doubt that MSSIC will survive, except as an insuror of the state's more than 60 tiny S&Ls.
MSSIC so far has lost no money, but it has been forced to put up some of its own assets to guarantee loans to Old Court by the Federal Reserve.
Hughes said last night that he "can't see, at this point, MSSIC going out of business entirely. We have savings and loans that will be eligible for federal insurance," he said. "We have others that for the most part are smaller . . . that are very, very sound that will not be eligible." Hughes said MSSIC needs to be retained to provide insurance for those.
Disclosure of MSSIC pressure on Merritt's management produced lines outside two Merritt branches over the weekend, and yesterday all seven of its offices suffered heavy runs.
The state not only has pushed Merritt to dispose of Merritt Tower, the $38 million office tower it is building with depositors' money, but also has blocked Merritt's plans to expand into Delaware.
Early yesterday, Merritt Senior Vice President Dennis Finnegan said the firm had "received an acceptable offer for the purchase of Merritt Tower," which is still under construction in downtown Baltimore.
The Merritt official said his institution had been experiencing heavier-than-usual withdrawals before lines became visible on Saturday. Many Merritt savers have money market accounts, from which funds can be withdrawn simply by writing a check.
Both Merritt and Old Court had grown rapidly in the past three years, attracting funds from all over the country by offering some of the highest interest rates available anywhere. Rather than using the money for home mortgages as conventional savings and loans do, Merritt and Old Court had invested heavily in real estate development projects.
Direct investment in properties offers the potential of higher profits but presents higher risks. When depositors ask for their money, mortgages can be sold quickly, but real estate investments are not so easily turned into cash. Finnegan said Merritt's deposits "plateaued" after the Ohio crisis, forcing the association "to rethink our strategy." He declined to say how much cash has been withdrawn by Merritt customers.
Unlike federally insured S&Ls, which are required to publicly report their financial condition in great detail four times a year, MSSIC-insured institutions can keep secret most of their finances.
At Merritt's Pikesville branch, police estimated a line of 150 to 200 people early yesterday, but that line was reduced to about 50 later in the afternoon.
At the Timonium branch, 65 depositors waited outside, with smaller lines at the other branches. Lines also formed yesterday morning outside Merrit's branches on Light Street and Charles Street.
Finnegan said in a press release that "Merritt continues to be a strong and viable institution, as evidenced by a record profit for the six months ending March 31, 1985 in excess of $4 million."
Finnegan described the announcement of the impending sale of the building at the same time as the Old Court crisis and long withdrawal lines at Merritt as a "coincidence."
This has been "a difficult situation for our customers," he added. "We are concerned about the reaction of the public.