Jerome S. Cardin, one of three owners of the Old Court Savings & Loan Association and a once-influential member of Baltimore's financial and political communities, probably had never faced a more attentive audience than the one gathered last May 11 in the board room of that city's most prestigious law firm.
Virtually the entire leadership of Maryland's $9 billion savings and loan industry was seated around the table at Venable Baetjer Howard & Civiletti in downtown Baltimore that Saturday night. Their goal was to stop a panic run on deposits that in three days had nearly drained Old Court dry and was threatening to spread to other thrift institutions.
His coat off, his glasses dangling from a cord around his neck, the 59-year-old Cardin asked his competitors to contribute $500 million to the Maryland savings and loan industry's private insurance fund to restore public confidence and quell the run. His proposal, described later as "ludicrous" by one thrift executive, was met with a stony silence.
"Well," said Charles C. Hogg II, the insurance fund's president, "does anyone have any other ideas?"
Hogg's question provided a fitting epitaph for a futile effort to stave off the worst financial calamity in Maryland history.
From mid-March, when a privately insured savings and loan system collapsed in Ohio, until May 13, when the state of Maryland seized control of Old Court, the highest levels of state government and the savings and loan industry were consumed by a frantic effort to keep Old Court afloat and preserve the private insurance system that protected deposits at 102 thrifts in Maryland. The attempt, begun far too late to salvage an industry undermined by years of regulatory neglect and the speculative practices of some savings and loan owners, ended in utter failure.
Much of the drama unfolded largely outside public scrutiny, as government officials and thrift executives met secretly in out-of-the-way hotels and state offices. Pieced together from extensive interviews with key players in that script, the diary of the last days of Old Court depicts a damage-control operation that was doomed from the start.
The first attempts were made by the Maryland Savings-Share Insurance Corp., the private corporation financed by the savings and loans themselves and mandated by law to police their operations and pay off depositors should one fail. MSSIC began its first vigorous attempt to rein in Old Court three weeks before the collapse of the Ohio system.
At a board of directors meeting in late February, MSSIC formally voted to issue a cease and desist order to Old Court for repeated violations of the corporation's rules governing investments and net worth, an action that eventually led to a MSSIC takeover of the thrift in late April.
Old Court had systematically ignored MSSIC directives as early as the summer of 1984, according to MSSIC documents, when under the direction of Old Court President Jeffrey A. Levitt, the thrift began a period of explosive growth by offering depositors some of the highest interest rates in the nation.
Depositors flocked to take advantage of interest rates as much as 2 percent higher than many of its Maryland competitors. Between June 1984 and February 1985 depositors' total savings in Old Court nearly doubled from $350 million to $681 million. In February 1985 alone, Old Court attracted savings deposits of $111 million. During one five-month period of July through November 1984, the total face value of Old Court's jumbo certificates of deposit -- accounts of $100,000 or more that are often "brokered" to find the highest rates -- soared from $70 million to $140 million.
To pay the high interest on those deposits, Old Court invested heavily in speculative commercial ventures -- often as far away as Florida -- that offered the promise of high returns. But it was a losing battle, according to thrift experts.
"The deals [Levitt] was generating were not enough to pay his interest," said one lawyer knowledgeable about the thrift industry. The lawyer compared Old Court transactions to "a Ponzi scheme. It depended on the next sucker putting his money in to pay the interest on the other deposits."
In addition, a $200 million civil suit filed in July by the state of Maryland against Old Court's owners and directors alleges that many of Old Court's commercial loans went to partnerships controlled by Levitt and other Old Court principals and that the thrift's owners diverted millions of dollars in unearned fees as they "treated depositors' funds as their own private slush fund."
In addition to the civil suit, Old Court's owners are the subjects of a criminal investigation by state and federal authorities.
Attorneys for Levitt and Cardin said their clients declined to be interviewed for this series of articles. Warning Offered From Ohio
Old Court's risky practices might have escaped the notice of senior state officials even longer had it not been for the preview of disaster that Ohio provided when its own private insurance system collapsed and underscored the vulnerability of the nation's five privately insured thrift systems.
On March 15, 1985, after a run on deposits at the Home State Savings Bank of Cincinnati, Ohio Gov. Richard Celeste declared a bank holiday at the state's 71 thrifts. In a telephone call to Hughes, Celeste warned that Ohio's crisis could spread to Maryland. Ejner J. Johnson, Hughes' chief of staff, began monitoring withdrawals from Maryland thrifts in cooperation with MSSIC, but both men remained ignorant of the Old Court excesses that MSSIC and the state's regulatory agency, the Division of Savings and Loan Associations, knew about.
At the same time, Attorney General Stephen H. Sachs began to raise questions about the soundness of Maryland thrifts with his assistant assigned to the state Department of Licensing and Regulation. That agency oversaw the savings and loan division, the state arm of government mandated to police thrifts along with MSSIC.
Robert deV. Frierson, one of those assistants, passed the inquiry on to William S. LeCompte Jr., the savings and loan division's deputy director.
"I felt immediately some kind of resistance," Frierson said, recalling his call to LeCompte. "The conversation became very acrimonious . . . . I heard phrases like 'I know your boss is running for governor, this is a very sensitive thing, we don't want to cause a run.' I didn't think he was hiding anything, but there was this resistance."
In his five-page handwritten response on March 21, LeCompte stressed the importance of maintaining public confidence and urged Frierson "not to injure it" when discussing the memo with others.
" . . . the only true problem being faced by the state-chartered MSSIC system is the possibility of loss of confidence and 'Runs' on the associations," LeCompte concluded. "Panic isn't a balance sheet item, but it is a possible liability at this time . . . . "
If LeCompte was defensive, many executives of the state's largest savings and loans were positively edgy. On the night before LeCompte wrote his memo, five days after Celeste declared Ohio's bank holiday, representatives of most of Maryland's largest, stockholder-owned savings and loans gathered in secret at the Holiday Inn at Baltimore-Washington International Airport.
So great was the fear of publicity that the meeting of the Organization of Maryland Stock Savings & Loan Associations (OMSSLA) was not listed on the motel's indoor marquee that night.
The discussion centered on measures the executives could take to brace for a crisis if it came. As they talked, they brought in two televisions to watch how the Ohio crisis was being played on the national news.
"The general feeling was it was very likely we could have some repercussions because we had the same kind of insurance program," said Jerry Whitlock, president of John Hanson Savings and Loan and chairman of OMSSLA.
OMSSLA's executive director, who had just returned from consultations with Federal Reserve officials in Richmond, briefed the thrift officers and owners on how to open up a line of credit at the Federal Reserve if they ran short of money and had to borrow funds to meet depositors' needs.
One executive suggested they ask Hughes to make a public statement of confidence; another that all the associations try to get federal deposit insurance immediately. Both suggestions were rejected.
"It was a chaotic meeting," remembered Alan Hyatt, president of Severn Savings Association, a relatively small Anne Arundel County thrift. "Everyone was looking for assurances and anyone who offered solace was looked on with favor."
One who offered comfort was Levitt, Old Court's president. Standing in the back of the room throughout the meeting, Levitt assured his colleagues that Old Court was actually gaining deposits after the Ohio problem became public and he offered help to any thrifts with cash-flow problems.
In fact, during the last two weeks in March, Old Court's withdrawals exceeded deposits by $30 million, according to minutes from the April 4 meeting of the state Board of Savings and Loan Association Commissioners, the parent body of the savings and loan division. The thrift had applied for $17 million in credit from the Federal Reserve when the Ohio crisis first hit, the board was told, and by March 28, Old Court had only $606,000 in cash -- a minuscule amount compared to its total liabilities to depositors of $668 million.
The so-called "silent runs" had begun.
By early April, two friends had gone to Attorney General Sachs with general concerns about Old Court and another Baltimore thrift, Merritt Commercial Savings & Loan. Sachs called Frierson on April 10 to ask whether the assistant attorney general had confidence in savings and loan division officials. Frierson's response, in effect, was no.
In a memo to Sachs the next day, April 11, Frierson and his immediate superior, Assistant Attorney General Francis X. Pugh, recommended that the governor himself try to find out "if any Maryland institutions are in trouble" because state regulators were responding to their own inquiries with "offhand comments." Sachs relayed those concerns to Hughes, urging the governor to seek federal help -- "sharp-pencil guys," to examine suspect thrifts.
That same day, April 11, the Board of Savings and Loan Commissioners met in executive session to discuss MSSIC's proposal under which the insurer would take control of Old Court's management, an agreement that the thrift accepted 12 days later.
According to the minutes of the meeting, Chairman W. Thomas Gisriel told his colleagues the MSSIC operating agreement "is orderly and will keep down publicity . . . . If this situation was made public at this time it could ruin MSSIC and . . . the industry."
Later that day, the board met with Levitt, Cardin and several Old Court officers to express its "grave concern" over the thrift's operations. Old Court, said Gisriel, had been "grossly mismanaged."
On April 13, still ignorant of what MSSIC and his own regulators knew about Old Court, Hughes left for a week's vacation in Florida, his usual practice after the legislature adjourns its regular 90-day session. A Call From the Federal Reserve
That night, Hughes received a telephone call from the head of the Federal Reserve Bank of Richmond. The message was not reassuring: Several Maryland thrifts were borrowing large amounts of cash to meet unusually heavy withdrawals.
Johnson, Hughes' chief of staff, and Hogg, MSSIC's president, met with Federal Reserve officials on April 16 and learned that Old Court, Merritt and several other thrifts had already borrowed more than $55 million from the Fed and that state-chartered thrifts had lost $375 million in deposits since February.
Three days later, as the first federal examiners began looking at Old Court's books, Johnson wrote a memo for the governor based on a private meeting with Fed officials who had told him Hogg was being too optimistic.
"There are many warning signs out there that cause me great concern," Johnson wrote. "The crisis could develop and if it does, it could come upon us quickly."
Johnson then went off on a week's vacation of his own. Before he left, he asked the Department of Licensing and Regulation to draft legislation, and Pugh began framing bills to require the larger associations to get federal insurance. He also roughed out the procedures for placing troubled thrifts under state conservatorship.
On April 29, in their first major war council in the governor's office, Hughes and his senior aides met with Attorney General Sachs and his assistants, MSSIC and savings and loan division officials, and Welford F. Farmer, the senior vice president of the Federal Reserve Bank of Richmond.
MSSIC President Hogg, and John D. Faulkner Jr., a consultant hired by the insurer, briefed the group on the management agreement that would remove Levitt from control of Old Court. They maintained that this would quietly resolve the thrift's problems.
Farmer, whose federal auditors had been inside Old Court for a week by this time and had already discovered some evidence of insider dealing, was visibly distressed by MSSIC's upbeat prognosis, according to participants in the meeting.
Two days later, on the afternoon of May 1, Pugh, the counsel to the Department of Licensing and Regulation, showed Hughes a collection of documents that left the governor aghast, according to Johnson, his chief aide.
One paper, a March 22 letter from MSSIC to Levitt, Old Court's president, detailed millions of dollars in insider loans and fees received by the thrift's owners. Another was a copy of a $1.2 million Old Court check issued to two of the owners after they had relinquished control of the association to MSSIC under an operating agreement signed on April 23.
It was a critical moment of truth for Hughes and his senior aides, who more than six months before had routinely handled a prophetic memo from a trusted aide warning of "an extraordinary amount of self-dealing" at Maryland thrifts. After accepting his bureaucrats' assurances that the industry was sound, the governor now had clear indications that some Old Court executives had enriched themselves through questionable loans and fees from the thrift, and put the state's second largest privately insured thrift in extreme peril.
Though Hughes discussed that memo with The Washington Post two months ago, he declined, through his press secretary, to be interviewed for this series of articles.
Pugh had come across the damaging information about Old Court almost accidentally. That morning, he and Frierson had been summoned to a meeting with savings and loan division head Charles H. Brown Jr. Brown thought they ought to see something one of his examiners had discovered on top of a copying machine at Old Court's headquarters: the $1.2 million check to Levitt and his partner Cardin.
As they were leaving, Brown -- in what Pugh and Frierson recalled was an offhand way -- mentioned the March 22 letter. The letter was attached to the April 23 agreement under which Levitt and his partners had capitulated to MSSIC's demand that they give up operational control of the thrift because of repeated violations of the insurer's rules.
The letter -- which had been in the possession of state regulators for almost a month -- listed 15 separate violations of MSSIC rules by Old Court and detailed the receipt by Levitt and his associates of millions of dollars in insider loans, excessive fees and NOW account overdrafts.
"I was shocked," recalled Pugh. "You read the March 22 letter, it certainly is not a mild instrument. And here's this check -- an unsecured loan. Bad enough that they wrote it, but they wrote it when they're not even supposed to be in control anymore! The totality of it was pretty flagrant."
Recalling Hughes' reaction to the March 22 letter and the check, Pugh said: "He was very, very concerned."
The next day, at a second war council held in a small auditorium at the Department of Economic and Community Development three blocks from the State House, embarrassed state officials revealed the March 22 letter to Farmer and his colleagues from the Federal Reserve.
Farmer "read it and puffed his pipe and shook his head in dismay," remembered Sachs. "And the dismay was not so much at the awful conditions that were disclosed and which shocked him, but that . . . his men had been in there working with [the savings and loan division] and nobody had shown it to him. We were asking these guys to come help Maryland put out its fire and we have one of our local firemen with a choke-hold on the hose."
At the same May 2 meeting, MSSIC officials also revealed the existence of a second letter, this one to Merritt Commercial Savings & Loan, raising questions about that thrift's investments in a Baltimore skyscraper and Eastern Shore properties.
"The federal guys were shocked," said Benjamin Bialek, Hughes' chief legislative aide.
Sachs argued that the state should place both Old Court and Merritt into conservatorship and that Hughes should postpone a trip to Israel that was to begin two days later. He was overruled on both counts on the grounds that the actions might spark a widespread run on deposits.
The Board of Savings and Loan Commissioners, the only body with authority to impose a conservatorship, was opposed to taking control of Old Court and Merritt. Hughes' aides, mindful they had no plan to manage the thrifts in the event of a conservatorship and fearful such an action would trigger a run that would bring down the entire system, reluctantly concurred.
"We simply knew we didn't have the resources to deal with a run," said Bialek. "So it seemed the best we could do would be to try to effect the management transition at Old Court and hope that that alone would not precipiate a serious run. Of course it did."
The lines began a week later, on Thursday, May 9, after the management change at Old Court was reported in Baltimore newspapers. Lines lengthened on Friday, a day when Old Court lost in excess of $30 million.
That afternoon, Sachs, Johnson and federal officials met in secret at a Holiday Inn outside Annapolis to search for ways to contain the run to Old Court. In a desperate attempt to portray Old Court as an isolated case, Johnson and Sachs agreed that the attorney general should announce that Hughes had authorized him to conduct a criminal investigation of the thrift.
Some industry officials now believe Sachs' announcement only exacerbated the public's loss of confidence, and made finding a buyer for Old Court virtually impossible. Johnson said, however that it "was the last opportunity we had to contain the damage to Old Court."
At almost the same time that Sachs was revealing the investigation to the newspapers, a Baltimore television station reported on MSSIC's letter to Merritt. The run spread to that thrift on Saturday morning. By the time its branches closed at midday, it had lost $3 million in deposits.
A panic run -- every banker's nightmare -- was under way.
Hughes' top aides had told savings and loan executives and industry lobbyists that unless some other financial institution bought Old Court, the state was going to put Old Court into conservatorship."
So on that Saturday night, May 11, their last-ditch salvage effort began in the board room of Venable Baetjer Howard & Civiletti, which served as legal counsel to MSSIC. The group of about two dozen included the top leadership of MSSIC and the savings and loan division, as well as executives from several of the largest thrifts, including Old Court.
Cardin, presenting himself as "neither a director nor an officer of Old Court," proposed his $500 million bailout, which he suggested could be repaid by an orderly sale of the thrift's properties. Cardin recommended three trustees to supervise the liquidation: himself, his attorney and a third person chosen by the industry.
"People were ready to rip Jerry Cardin's thorax out," said one industry source who was there.
The meeting broke up after Frank Evans, a consultant retained by MSSIC who was a former director of insurance at the Federal Savings & Loan Insurance Corp. (FSLIC), reported on his estimate that Old Court's loan portfolio contained a possible loss of $206 million.
The meetings at Venable resumed on Sunday -- Mother's Day -- as a handful of associations returned one by one to offer proposals to MSSIC for acquiring Old Court. One of the potential suitors was Community Savings & Loan, a Montgomery County thrift that was forced into conservatorship itself in September after the collapse of its real estate subsidiary.
The offers, all sketchy, had one feature in common: MSSIC would have to guarantee against any losses incurred in a takeover of Old Court, whose depositor liabilities were known but whose investment assets were a large question mark. MSSIC refused because, based on Evans' estimate, its officers feared the entire $175 million insurance fund would be devoured by the potential loss at Old Court. Hughes' Aides Stay in Background
Hughes' top aides stayed largely in the background throughout the weekend meetings as the industry floundered for a solution to its massive problem. "That was the Hughes administration at one of its weakest points," said one participant in the meetings who was dismayed that the state had no proposals to make.
With Old Court virtually out of cash and unable to open Monday morning, the Board of Savings and Loan Commissioners had already agreed to vote for a conservatorship if a solution was not found Sunday.
At 8 p.m. Sunday, MSSIC clung to a final thread of hope, that Perpetual American Bank of Alexandria, a large federally insured thrift in the Washington area, would take over Old Court's management with an option to acquire the institution.
But at about 10:30 p.m., Perpetual American withdrew because FSLIC objected to its acquisition of a state-chartered thrift.
Sachs and his lawyers, joined by Hughes administration aides, MSSIC officials and their lawyers, and Old Court's attorney, drove to the north Baltimore home of Circuit Court Judge Martin B. Greenfeld. The judge, sitting at the head of his dining room table, listened to oral arguments as his sheepdog Gus barked at the late-night intruders.
Greenfeld retired to his study to read the conservatorship papers. He emerged shortly before 1 a.m. May 13, and signed the order placing Old Court under the state's control. Within 36 hours, the state placed Merritt under conservatorship, Hughes limited withdrawals at every thrift to $1,000 a month, and the legislature was called into session to dismantle the MSSIC insurance system.
"It was like watching a wall of water come at you," said Evans of Old Court's final days. "You can throw up your hands, but that's about it . . . . "