Sunday, March 28, 2010

Cautionary Tale: FirstFed’s Fault Lines

By RICHARD CLOUGH - 3/29/2010

Los Angeles Business Journal Staff

On one side of a long conference table in a room deep inside the headquarters of the Federal Deposit Insurance Corp. sat the management team of FirstFed Financial Corp. On the other side, about a dozen regulators.

It was a Wednesday afternoon in early December, and the FirstFed executives, jet-lagged from cross-country flights, had descended on Washington, D.C., to plead for the survival of one of California’s oldest financial institutions.

The holding company for First Federal Bank of California, a savings and loan with branches across Los Angeles, was up against the wall. Saddled with toxic adjustable rate mortgages, the thrift had endured more than a half-billion dollars in losses since the collapse of the housing market.

FirstFed’s failure seemed inevitable, but executives requested the emergency meeting with the FDIC and Office of Thrift Supervision to beg for a stay.

Babette Heimbuch, the thrift’s brash chief executive, argued that by many measures, the situation was improving. Chief Operating Officer James Giraldin detailed expected losses under the worst-case scenario. Others attested to the likelihood of new investment.

The FirstFed contingent left that afternoon confident. They had nailed the presentation.

“My read of the meeting was it couldn’t have gone better,” said one person in attendance.

Two weeks and two days later, regulators closed FirstFed, the sixth largest depository institution in Los Angeles.

To most, FirstFed was by then a familiar story: Mortgage lender dives headlong into adjustable rate loans, losses pile up, regulators shutter the institution. IndyMac Bank, Downey Savings & Loan and BankUnited, to name a few, had already suffered a similar fate.

On closer examination, however, FirstFed’s failure was hardly typical. Unlike many failed institutions, its bottom line and long-term outlook actually seemed to be improving.

Quarterly losses had narrowed all year. It still had significant capital and strong liquidity. Problem assets had been declining for months. Better still, the thrift was on the verge, insiders insisted, of a dramatic recapitalization.

“Our numbers were trending positively,” maintains Nicholas Biase, a New York-based investor and former director of FirstFed.

The details of banks’ interactions with regulators are almost never made public and the execution of bank closures is intentionally secretive; not surprisingly, many of those with knowledge of FirstFed’s final days asked to remain anonymous.

But through dozens of interviews with former FirstFed executives and directors, government regulators and banking industry leaders, as well as examination of hundreds of pages of internal e-mails and other documents, the Business Journal has reconstructed the months, weeks, days and hours leading up to the thrift’s closure.

It’s a story that typifies the challenges that many struggling banks and thrifts faced over the last several years as they tried to recover from self-inflicted wounds during the real estate boom – only to find overwhelmed regulators less than sympathetic.

It’s also a nuanced picture of a deeply troubled institution that perhaps could have been saved, if not for a convergence of unfortunate events – not the least of which was FirstFed’s shelving of a planned stock offering when its auditor suddenly quit. It also didn’t help when Heimbuch was forced out by regulators, who some believe had enough of her outspokenness.

And just when it seemed like a turnaround was possible, regulators went back on a pledge to give FirstFed more time to save itself. FirstFed, it turns out, survived multiple takeover attempts before it was closed Dec. 18 and its $6.1 billion in assets sold to Pasadena’s OneWest Bank, a rapidly growing thrift created from IndyMac’s failed assets and backed by financial heavyweights such as George Soros.

Regulators insist FirstFed was simply unfit to continue operating, but the timing of and circumstances surrounding the failure left some wondering if a weaker thrift was sacrificed to build up a growing one.

“I don’t think anybody exactly knows what the rationale behind (the closure) was,” Biase said.

FDIC officials, who declined to make available any examiners who worked directly with FirstFed, bristled at any allegations of favoritism.

“We take the bid that would cause the lowest hit to the deposit insurance fund,” said FDIC spokeswoman Lajuan Williams-Young.

For more see article at Los Angeles Business Journal.