Maryland Gov. Harry Hughes had strong evidence of a potential crisis in the state's $9 billion system of privately insured savings and loan associations nearly three weeks ago, several days before he left on his trip to the Middle East.
At that time, Hughes summoned to his State House office several men, including the state's attorney general, a senior officer of the Federal Reserve Bank of Richmond and a renowned corporate lawyer from Baltimore to discuss some astonishingly bad news about a Baltimore savings and loan association called Old Court. There was evidence of millions of dollars of unsecured insider loans and overdrawn accounts.
That April 29 meeting, sparked by Hughes' receipt the night before of a copy of a March 22 warning letter from regulators accusing Old Court of a series of shoddy business practices, was held so that state and federal officials could begin to map a strategy to protect Maryland's savings and loan associations from any damage that could be caused by Old Court's mismanagement.
Several officials mark the beginning of the state's attempt to control the crisis that has since rocked Maryland's savings and loan industry from that meeting, for it was then that oversight of all Maryland thrifts shifted quietly but inexorably from state regulators to federal officials, an elite group of corporate lawyers from Baltimore and the most powerful politicians here in the capital.
In effect, the Federal Reserve quickly became caretaker for a thrift industry that state regulators and the Maryland Savings-Share Insurance Corp., which was established in 1962 in the wake of a statewide savings and loan scandal, had been unable or unwilling to manage on their own.
In Washington, the head of the federal agency that insures bank deposits called the Maryland crisis "anticipated and probably inevitable" after Ohio. Citing the same concerns later raised here, Federal Deposit Insurance Corp. Chairman William M. Isaac told reporters that the problems faced in Maryland stemmed from a lack of proper state supervision and inadequate private insurance funding.
"The outlines were forecast from the beginning," said Attorney General Stephen H. Sachs, who has mounted a criminal investigation of Old Court and its flamboyant president, Jeffrey A. Levitt. Sachs, who detailed the recent chronology of the crisis in an interview yesterday, added: "The Federal Reserve heavily influenced if not dominated the proceedings."
The activities of federal and state officials during the last three weeks constitute a textbook case of crisis management, one in which often-competing agencies have set aside bureaucratic differences in an attempt to revitalize an all-but-paralyzed thrift industry.
The drama, played out as depositors have withdrawn hundreds of millions of dollars from thrifts across the state, has also led to several missteps, including some in which key negotiators were left uninformed of crucial developments in the crisis.
It has also raised other questions: about the wisdom of Hughes' week-long trip to Israel, which he began several days after being informed of severe problems within Old Court, and about the assertions made by his administration, MSSIC officials and state regulators that Old Court and the rest of the thrift system were fundamentally sound.
Well before the first meeting in Hughes' office, state and federal examiners and officials at MSSIC had strong evidence of mismanagement at Old Court, those officials said this week.
But it was not until the April 29 meeting in the governor's office that the gravity of the looming crisis -- the potential for a run on Old Court and other troubled thrifts -- crystalized for Hughes and other top state officials, according to participants. The centerpiece of the discussion was the March 22 letter from MSSIC President Charles C. Hogg II to Levitt in which Hogg charged that Old Court had violated a host of MSSIC regulations by issuing millions of dollars worth of improper or unsecured loans, paying more than $2.5 million in "excessive" management fees to Levitt and associates and failing to keep accurate records of its many financial transactions.
At one point in the meeting, Welford F. Farmer, senior vice president of the Federal Reserve Bank of Richmond, sat "shaking his head" in dismay over the disarray at Old Court, acccording to Sachs.
"His people had seen some loans and he was shaking his head like 'Things are bad in there'," Sachs said.
The meeting ended with few conclusive decisions, other than a general agreement that the recently increased number of federal examiners in Maryland would continue to audit selected thrifts and state officials would monitor daily withdrawals from those institutions.
Three days later on May 2, as Hughes was meeting with reporters to discuss his upcoming trade mission and goodwill trip to Israel, Maryland economic development Secretary Thomas Maddux met with Michael Branfield and William Taylor, two ranking Federal Reserve Board officials, Sachs and others to review the situation.
"The federal people were very concerned," Sachs recalled. "Borrowing by Old Court from the Federal Reserve was increasing. It was more and more disquieting to them."
Branfield, general counsel to the Federal Reserve Board, and Taylor, the board's director of supervision and regulation, had not yet been informed of Hogg's March 22 letter and were "jarred" when they learned of it, according to Sachs.
(Key Federal Reserve Board officials declined through a spokesman to comment yesterday about the events of the last three weeks.)
There were two major meetings about the crisis at Old Court on May 2. Some officials, including Sachs, argued that Old Court should be immediately placed into conservatorship. Others argued that MSSIC should promptly assume control of the ailing thrift.
In the end, the officials decided that they would take no sweeping actions to shore up Old Court without additional information about the savings and loan association or fresh developments there.
Sachs said yesterday that he advised Hughes on that day to cancel his trip to Israel. The attorney general added that the governor's decision to proceed with the trip was "a judgment call."
Hughes "believes he went on the trip because of the alternative -- what the effect would be of his not going," Sachs said. Some Hughes administration officials raised the possibility that by canceling the trip Hughes could have triggered enough concern to create a run even earlier.
Hughes could not be reached for comment yesterday but his handling of the savings and loan crisis since his abrupt return from Israel earlier this week has earned him high praise from Sachs, key legislators and state government officials who are involved in the day-to-day management of the crisis.
However, during the governor's absence, his staff director and other officials familiar with Old Court's failing financial health repeatedly asserted that it and other thrifts were sound.
On May 9, a day in which Old Court lost $15 million because of a run of withdrawls, Hughes staff director Ejner J. Johnson told a reporter that Old Court was suffering only minor "day-to-day operations" problems limited to "accounts payable" and "institutional advertising."
But Old Court's problems were far more severe. The events of that day, which some here have dubbed "Black Thursday," set the stage for Hughes to declare a state of emergency five days later.