Baltimore Circuit Court Judge Joseph H.H. Kaplan, who will be asked next week to approve the controversial sale of Merritt Commercial Savings & Loan to Chase Manhattan Corp., criticized the terms of the transaction today as too generous to the thrift's owner and too costly for Maryland taxpayers.
However, Kaplan, who has overseen Merritt's affairs since the Baltimore thrift entered voluntary conservatorship in May, indicated he will approve the Chase transaction because it will free an estimated $500 million in deposits at Merritt and two other thrifts.
"I wish it could have been a better deal for the taxpayers," Kaplan said of the transaction supported by the administration of Gov. Harry Hughes and narrowly approved by the General Assembly early Tuesday.
The deal provides for a state payment of $25 million to Chase. There is a separate, private agreement between the New York banking giant and Merritt owner Gerald S. Klein that gives Klein several potentially profitable real estate properties. Legislators consider Klein -- a target in a criminal investigation of Merritt -- largely responsible for Merritt's troubles.
By expressing his discomfort over the terms of the two Chase agreements, Kaplan joined complaints that began two weeks ago when the broad outlines of the transaction were first presented to the legislature. Opposition to the $25 million payment to Chase and Klein's continued control over a large housing development in Anne Arundel County, an office building in the District and other properties nearly killed the deal in the state Senate.
In several public briefings, Chase officers assured legislators that Klein would be permitted to keep properties with an aggregate worth of $30 million, but said that he would be saddled with $51 million in loan commitments that ensured that the Merritt owner would remain deeply in debt.
However, under the terms of two agreements between Chase and Klein presented to the legislature over the weekend, the Merritt owner will actually emerge with fewer debts to Chase because the bank will restructure and forgive many of the loans.
The total amount he will be forgiven could not be determined, but among the arrangements is one that forgives $7.5 million in loans Klein previously guaranteed if he helps Chase untangle the thrift's complex portfolio.
Further, Kaplan and others who have scrutinized the affairs of Merritt since May believe that the properties Klein will retain have considerable potential for making money. Klein will retain control on at least two real estate ventures that, in a good economy, will generate cash.
"I know they are very valuable," Kaplan said of the commercial properties Klein will keep.
The Anne Arundel housing project known as Chesterfield, for example, one of the largest developments in the state that is supposed to be finished by 1989, is estimated by Kaplan and the agent for the state conservator of Merritt to have a minimum potential profit of $5 million.
Two weeks ago, the conservator's agent, Daniel S. Stone, advised the director of the Maryland Deposit Insurance Fund (MDIF) that the Chesterfield development "is just about Merritt's only proven winner." The 1,846-lot development, said Stone, "is unquestionably the most successful and profitable project in Merritt's portfolio," with most of the undeveloped lots already sold to developers.
Stone and Kaplan also predicted that the office building at 425 I St. NW that Klein will retain will turn a profit because of recent indications that the building's prime tenant, the federal General Services Administration, will renew its lease for 10 years.
"With the GSA lease, that property becomes a winner," said Kaplan.
Kaplan disputed Chase Manhattan's assertion that it needed $25 million from the state to partially offset an estimated $100 million in losses at Merritt. Kaplan contended that through careful management of Merritt's extensive real estate holdings, Chase will be able to reduce those losses to nearly zero.
"There's very little doubt in my mind that . . . they [Chase] will come out of this without any loss at all," the judge said.
In debating the Chase transaction, members of the General Assembly reserved their strongest criticism for those aspects of the deal involving Merritt. But there also were complaints that stockholders of Friendship and Chesapeake savings and loans -- the two healthier thrifts Chase is buying -- would unduly benefit from the state-assisted sale of Merritt.
Though Chase and the governor insisted that the $25 million would go only to Merritt, some legislators said the distinction was at best fuzzy because Chase was acquiring the three thrifts as a package.
Under private sale agreements with Chase, Friendship's two stockholders will share $800,000 cash and control of $19.4 million in fully secured but uninsured mortgages on four apartment complexes in Michigan, Illinois and the Southwest.
Chesapeake's 180 stockholders, whose stock was first offered at $9 per share in 1983, will receive $35 per share from Chase, for a total of $3.8 million.
An added element of these two transactions that made the Friendship and Chesapeake sales more palatable to the legislature was an agreement by the two thrifts to place $4.4 million into a government-controlled thrift insurance fund during a 10-year period.
Douglas C. Petty, an executive of Legg Mason -- a respected brokerage house in Baltimore that recently analyzed Merritt's condition for the legislature -- said the price Chase is paying to acquire Chesapeake and Friendship is "a little higher" than conventional market rates for healthy savings associations.
"But when you buy complete control of an institution -- and gain entry into a market of this kind -- you pay a premium," said Petty.
While taking issue with major elements of the Chase deal, Kaplan nonetheless said it satisfies his own goal to return deposits to Merritt customers as quickly as possible. "It's not the best deal, but the end result is reasonable," said Kaplan, who has no authority to alter any major component of the transaction.
Officials of the Hughes administration were putting the finishing touches on the arrangement with Chase today; MDIF, Merritt's conservator, is expected to ask the judge to approve the deal by Tuesday.
Thomas H. Maddux, Hughes' economic and community development secretary who was the state's chief negotiator with Chase, defended the transaction as the best bargain Maryland could negotiate under difficult circumstances. "You can always speculate on what might have been," said Maddux. Chase, Maddux added, stood by its original offer even as the financial condition of Merritt deteriorated during the summer-long negotiations.
"That was a substantial concession from them," said Maddux.