Gov. Harry Hughes' effort to manage the state's savings and loan crisis was severely shaken today, as negotiations collapsed over the planned sale of a crippled Silver Spring thrift, Chase Manhattan Corp. threatened to halt its purchase of three other associations and about 200 angry depositors marched on the capital.
While the depositors hurled vitriolic and highly personal attacks at Hughes for continued withdrawal bans at four savings associations, state officials announced that Citibank Maryland had abruptly terminated its negotiations to purchase First Maryland Savings and Loan.
An industry source said Citibank's protracted talks with First Maryland owner Julian M. Seidel were finally broken off late Wednesday because of the discovery by Citibank auditors of "a lot of bad loans, a lot of bad deals" in the thrift's portfolio.
First Maryland, a thrift with $397 million in assets and 40,000 depositors, has suffered severe drains on deposits and assets since the thrift industry crisis began in May.
Hughes promised depositors of all privately insured thrifts that the state would guarantee their accounts up to $100,000, and the Hughes administration was relying on the sale of First Maryland to Citibank to reduce financial liability from that thrift.
"This is devastating, both for First Maryland and for the state," said another source who had monitored the progress of the negotiations.
The breakdown in negotiations also represents a major setback for Citibank, a subsidiary of the giant New York bank Citicorp, which had hoped to convert First Maryland branches into full-service banks and gain a handsome competitive footing with Chase Manhattan.
Chase, with Hughes' blessing, is planning to buy Merritt Commercial Savings and Loan and two smaller thrifts in Bethesda and Annapolis by Oct. 31 for conversion to branch banks. The purchase of those three thrifts, however, faces mounting opposition in the General Assembly, whose members must pass legislation before the sales become final.
"To say this deal is going to fly is very optimistic," said Sen. Thomas P. O'Reilly (D-Prince George's), vice chairman of the Finance Committee, which will consider the banking legislation.
The concerns of O'Reilly and many of his colleagues over several aspects of the proposed Merritt purchase have appeared to grow rather than diminish since the assembly got its first look at the deal Monday night. One of those concerns is a proposed agreement between Chase and Merritt owner Gerald Klein that some legislators say treats Klein too generously. Legislators also are worried about a $25 million payment to Chase from a thrift industry insurance fund controlled by the state.
Senators are beginning to question Chase's analysis that the state will be relieved of an $80 million potential loss at Merritt in exchange for the $25 million.
House Speaker Benjamin L. Cardin (D-Baltimore), while predicting ultimate legislative approval of the Chase deal, said the assembly would not vote on the issue until it can look at the actual agreements between the state and Chase and between Chase and Klein, and a number of other documents including an independent financial analysis of the proposal.
"We have to be convinced the state is saving a lot of money and that Klein is walking away without any money," said Cardin, adding that at least two of the four commercial properties Klein will receive in the transaction are now "suspect." Chase has insisted those properties have little potential worth, but Cardin said that assertion is now under question.
"The governor has a lot of work on his hands," Cardin said.
As a sign of Chase's eagerness to expand its now limited operations in Maryland, the bank sent a senior executive here today to appeal for approval of the Merritt sale.
"The situation is deteriorating," said Chase vice chairman Robert R. Douglass, referring to the five-month-old crisis. "Our proposal . . . is a necessary part of the solution."
In an interview later today, Douglass issued what amounted to an ultimatum to the legislature, saying, "The clock is running here."
Chase's purchase agreements with Friendship and Chesapeake expire at the end of this month, and because Chase executives say they need 10 days to get federal approvals of the purchase they are pushing for the legislature to meet on Thursday.
"If you go beyond next week [without a vote], you start incurring a high risk that you won't be able to pull it off," Douglass added. "It's time to cut bait or fish on this."
A similarly urgent, albeit different, message was delivered to the legislature and Hughes today by more than 200 depositors who staged a peaceful but raucous demonstration in the shadow of the State House to underscore their fury at being unable to withdraw funds from First Maryland and Merritt, as well as Community and Old Court savings and loans.
Many of the depositors, in a departure from recent rallies staged in Prince George's and Howard counties, carried signs specifically blaming Hughes for withdrawal bans at the four thrifts. Deposits at Community, Old Court and Merritt were frozen by court order; Hughes banned withdrawals at First Maryland at the thrift's request.
"Hughes lied to us, he can lie to you," said one poster. "I listened to Hughes, now I'm singing the blues," read another. One bumper sticker, affixed to a station wagon in the depositors' caravan, proclaimed: "Harry Hughes stole my money."
Bob Rees, a 42-year-old Anne Arundel County man who has $11,000 tied up in First Maryland, sobbed on the steps of a state office building, criticizing the Hughes administration "for behaving like a dictatorship, denying me the money I've worked for all my life."
"I feel I will get my money in the end," said Rees, who said he had to fire one employe from his cabinet shop because of the crisis. But, he added, "this thing has dragged on too long."
Rees said he "had faith in the system" at the beginning of the crisis in May, and left his money in First Maryland, and "Look where it's got me." The ban on withdrawals at First Maryland took effect in late August.
Hughes met for more than 90 minutes this morning with four depositors' representatives to explain steps he is taking to free up frozen funds for those Maryland residents suffering extreme harships because of the thrift crisis. The legislature has demanded to see that plan before voting on the Chase deal.
The depositors, who are demanding immediate access to their accounts and earned interest, said Hughes offered nothing to placate them. "It's still our feeling that he should be more out front on the issue and do more," said John McHale, a Columbia resident whose elderly mother has $100,000 in Community.
Hughes later issued a statement through his press office saying he shared the hope of depositors for the return of their money but that he was unable to predict when that would happen.
An administration spokesman tried to put the best face possible on today's events, saying that "consummation of the Chase deal will far outweigh the damage done to the First Maryland negotiations. The governor is trying to reconstruct the negotiations. We are still in there punching."
Yet collapse of the First Maryland talks was just the latest in a series of unexpected setbacks that has dogged the Hughes administration throughout the summer.
First Maryland vice president Mary Drak said today that the thrift does not anticipate new negotiations with Citicorp and would instead attempt to obtain federal insurance that would allow it to resume business on its own. But First Maryland, which has lost $40 million in assets between April and September, must improve its financial position to the point where assets outweigh liabilities by $30 million in order to get federal insurance, a task that many state officials believe is virtually impossible.
Legislation enacted last May requires all thrifts with more than $40 million in assets to get federal insurance by the end of this year or face liquidation.
Asked today if the administration is considering placing First Maryland under conservatorship, state economic development secretary Thomas H. Maddux said, "We are examining all the alternatives." The 60-day ban on withdrawals at First Maryland expires in two weeks.
The Chase-Merritt agreement has drawn opposition from executives of some of the state's other largest savings and loans. Representatives of several of the associations are unhappy that Chase will get a $4.1 million contribution that the three thrifts it is buying had made to an industry fund now controlled by the state. The other associations are demanding they get their contributions at the same time.