Records Outline Simon’s Role at Collapsed S

From the start of his campaign for governor of California, Republican nominee Bill Simon Jr. has played down his role in the 1993 collapse of Western Federal Savings and Loan, a debacle that cost taxpayers $122 million.

By his account, he had nothing to do with the 1988 purchase of the Marina del Rey thrift by his family and other investors. By his account, he served on its board of directors for about a year to monitor the investment, but was not engaged in “anything to do with the operation of the thrift.”

Court documents and other records, however, show that Simon was more deeply involved in the downward spiral of Western Federal than his public statements suggest.

He signed the application for government approval of the S&L; purchase. He served for nearly two years on its 11-member board. For the next two years, until the government seized the thrift, Simon was one of five board members at a holding company that owned just one business: Western Federal.

During Simon’s tenure as a Western Federal director, records show, government regulators rebuked the board for lax supervision of management. Month after month, S&L; monitors alerted Simon and the other board members to rampant mismanagement on their watch. Lending practices were “liberal and imprudent,” they told the board. Reserves to cover bad loans were too small. Western Federal used “inappropriate and misleading” accounting methods that overstated profits, they said.

Business World of Simon

The full scope of Simon’s role at Western Federal is laid out in documents reviewed by The Times. Among the records are Simon family correspondence, confidential reports by thrift regulators and internal Western Federal memos.

They illustrate how Simon, who hopes to govern a state with a record $23.6-billion budget gap, carried out his responsibilities at an institution in severe financial distress.

They also provide a rare glimpse into the private business world of Simon. A central tenet of his campaign is that he was “a successful businessman,” but the vast bulk of his other work at his family’s privately held investment firm is shielded from public view.

Simon was not solely responsible for driving Western Federal into the ground, as his Democratic opponent, Gov. Gray Davis, has suggested. Over the course of its decline, the documents show, Simon was one of many players who tried--and failed--to restore the S&L; to financial health.

“Making Billy the poster boy for the failure of Western Fed is absolutely ridiculous,” said J. Peter Simon, the candidate’s brother and fellow board member. “It’s like blaming the sinking of the Titanic on someone working in the kitchen.”

The governor has used the thrift’s demise to argue that his challenger is unqualified to run California. On Monday, Davis launched a television ad that blames the taxpayer “bailout” of Western Federal on mismanagement by Simon.

In an interview last week, the Republican nominee acknowledged for the first time that he was on the Western Federal board for nearly two years. He denied that he and other board members were “remiss in their duties and responsibilities,” as regulators put it in one 1989 report.

“You had this big thrift crisis nationwide,” he said. Regulators “wanted to make sure that they could never be told that they were not tough enough. So what they did was they erred on the side of being overly tough.”

The Simons have lashed back at the government, arguing in a lawsuit against the United States that regulators improperly seized Western Federal. They blame the losses--both their own and the taxpayers’--on the government’s breach of an agreement struck when the Simon group bought the S&L.;

Judge Emily C. Hewitt of the U.S. Court of Federal Claims in Washington has found that the government did indeed break its word. But the case is still set to go to trial in September to determine whether that was Western Federal’s undoing.

By filing suit, the Simons invited the government to respond with its own story of how Western Federal died. The Justice Department, in court papers, says the Simons and their partners made a bad investment, then made it worse by retaining executives who mismanaged the thrift and put it on the path to insolvency. Among those at fault, it says, were members of the board.

Signed 1988 Application

The first trace of Bill Simon Jr. in the affairs of Western Federal is his signature on the August 1988 application for government approval of the purchase. He was one of three people who signed for the buyers.

Just six months earlier, he and his brother had gone into business with their father, William E. Simon, the powerful and notoriously hot-tempered former U.S. Treasury secretary. Simon Jr., then 37, had left his job as an assistant U.S. attorney in Manhattan to join William E. Simon & Sons, the family’s new investment firm in New Jersey.

Bill Simon Jr. signed the application to buy the S&L; in his role as president of Alham Inc., a family-owned company named after Alexander Hamilton, the nation’s first Treasury secretary.

“I reviewed the application, I’m sure,” Simon said in the interview.

Simon was listed as the person to whom the government should send communications with the family. His father put him in charge of watching the investment. Nevertheless, Simon said he played no part in the decision to buy Western Federal.

“This was definitely an investment decision that I did not make,” he said.

The Simons and their partners bought Western Federal for $220 million on Sept. 23, 1988. The Simon family invested $40 million in the deal, including $11 million from Alham.

“It was dad’s deal,” said Peter Simon. “Dad wanted to do this.”

Their father’s ambition was to build a Pacific Rim finance conglomerate with up to $20 billion in assets, including the $4 billion at Western Federal. Among the Simon group’s acquisitions were Honolulu Federal Savings and Loan and a commercial bank, First Interstate of Hawaii. Bill Simon Jr. served on the board of directors of both financial institutions.

At Western Federal, danger signs emerged even before the Simon group bought the thrift.

Terry M. Crow, the Simon group’s chief investment officer, recalled in an interview that he opposed the acquisition. Western Federal profits, he warned, relied too heavily on one-time gains from selling bundles of mortgages on Wall Street. In Crow’s view, the thrift also took too much risk by agreeing to take back mortgages that later went bad.

“I just don’t think that’s an appropriate way to run your business,” he said.

Government’s Incentive

Within the government, the voice of caution was Sidney C. Mar, then a supervisory agent at the Federal Home Loan Bank Board in San Francisco. He raised the same concerns as Crow--and several others. Western Federal, he told a fellow regulator in April 1988, would bear an “extremely high” debt burden and have insufficient reserves to protect against losses.

But the government had its own incentive to approve the purchase: As part of the deal, the Simon group would also acquire Bell Savings and Loan, a sick San Mateo thrift seized by regulators in 1985. The Simon group would merge Bell, which the government needed to unload, with Western Federal. In return, the government would cover Bell’s losses.

So despite Mar’s concerns, the government approved the application signed by Simon.

In hindsight, the Simon group could not have picked a worse time to buy Western Federal.

Within a year of the purchase, the California real estate market would start its steepest decline since the Great Depression. It was a poisonous climate for lenders, more so for those engaged in the kind of high-risk lending that had prompted Crow and Mar to raise red flags.

At the same time, Western Federal faced another more sudden--and devastating--blow: the August 1989 enactment of a federal law imposing strict new standards on S&Ls.;

Overnight, Western Federal would be required to set aside millions of dollars in reserves. It did not have the money.

In fact, it did not even meet the lower requirements in place before the new law took effect. Regulators had agreed at the time of the 1988 purchase that they would not enforce those rules. It was one of the benefits the Simon group got for taking Bell off the government’s hands.

Now, less than a year later, regulators broke the agreement and enforced the new rules.

As a result, Simon said, Western Federal was forced to toss its business plan “out the window.”

“It was really a nightmare,” he said.

Western Federal was immediately $14 million short of the capital it needed.

“Unless we wanted to just hand over the keys, we had to find a way to work with the new rules,” said C. Earl Corkett, then a Western Federal board member.

The immediate problem: The S&L; was crippled in its effort to meet the “extremely high” debt obligations that Sidney Mar had cautioned against. Just over the horizon was a $4-million payment that Western Federal needed to give its holding company so that it could pay a lender.

But regulators blocked the payment. The reason: It would worsen the shortage of capital at Western Federal. By the end of August 1989, just two months after Simon joined the S&L; board, Western Federal would notify lenders that prospects for paying debt any time soon were “doubtful.”

Within weeks of Simon’s appointment to the board, regulators began hammering the S&L; for more than just its shortage of money. In scathing examination reports, they described an institution awash in poor business practices. At the time, the government was putting thrifts nationwide under tight scrutiny after hundreds of them had failed.

At Western Federal, the problems started at the top with the board of directors, whose members were “lax in fulfilling their fiduciary responsibilities,” the Office of Thrift Supervision reported in August 1989. To regulators, the key step the board needed to take was to replace Chief Executive Hugh Evans Jr. and his top managers.

Western Federal had lent millions of dollars to unqualified borrowers without verifying their income, thrift monitors told Simon and his fellow board members. Managers of the S&L; had “committed a major violation” of a regulator’s order to stop making certain kinds of construction loans. The quality of the commercial real estate portfolio was poor. Reserves to cover bad loans were running dry. Aggressive accounting techniques were distorting the thrift’s balance sheet and hiding potential dangers.

In sum, Western Federal was unduly exposing itself to harm in a bad economy that would hurt even the healthiest thrifts. The panoply of troubles raised “concerns about management decision-making,” regulators told the board.

Simon himself reviewed some of the bad loans at Western Federal headquarters in Marina del Rey, according to Patrick J. McNamara, then the S&L;’s executive vice president for branches.

“I just remember him sitting in an office not far from mine calling for loan files and being upset every time he found out it was worse than he thought it would be,” McNamara said.

In April 1990, the Federal Deposit Insurance Corp. sent the board another report citing “severe problems,” and once again, the board itself was a target of criticism.

In a cover letter to Simon and the other members, John R. Sexton, then FDIC regional director in San Francisco, wrote: “You are particularly urged to review the section of the report dealing with supervision by the board, which has not been fully satisfactory.”

Regulators’ Findings

By law, board members of an S&L; must set policies that protect both stockholders and the taxpayers who insure its deposits.

The FDIC reminded the Western Federal board that it had a legal duty to “effectively supervise the affairs of the thrift.” On the cover of every examination report, regulators urged Simon and the other board members to review the findings thoroughly.

In the interview last week, Simon denied responsibility for supervision of Western Federal managers. “I wouldn’t use the word supervise, personally,” he said. “I would use the word evaluate. To me, evaluation implies something less frequent, more periodic, more in the normal course of business.”

Simon defined his role on the board as simply monitoring his family’s investment. He said it was not the board’s job to set Western Federal’s strategic direction.

“You have to be very clear what the duty of a board member is,” he said. “It’s not necessarily to initiate, craft, establish--those kinds of things--strategic direction. It really falls generally more in the line of a collaborative process where you ultimately will be part of discussions.”

During his 22 months on the Western Federal board, Simon left little impression on some fellow members. One of them, James L. Loper, could not recall Simon’s presence at all--although they served together the entire 22 months.

Corkett remembered Simon as “a very good listener.”

“Bill allowed the rest of the board of directors to carry the ball,” he said.

“He was just learning the business,” said former board member Richard S. Crowley.

But Preston Martin, a board member close to the Simons, described the candidate as “very assertive.” “It wasn’t just because he had money in it; it was because he’d done his homework,” he said.

Simon said he had only vague recollections of the concerns raised in the monitors’ reports. Asked how he responded to them, he said, “I don’t know if I was even on the board of the thrift at that point.”

He was. Simon served on the board from June 1989 until April 1991, then on the holding company board from May 1991 to June 1993, when the S&L; collapsed, according to a campaign spokesman.

Simon said he recalled government letters “saying there could be some problem loans or whatever it was.”

“I remember occasionally thinking, ‘Boy, I’ll tell you, the OTS is just--they’re tough,’ ” Simon said.

Peter Simon attributed the harsh reports to legal strategy. Knowing it would face lawsuits for breaking its word on how much capital Western Federal and other thrifts had to keep in reserve, the government exaggerated the problems at the S&Ls;, he said.

Bill Simon Jr. cast the problems as almost routine.

“I recall a concern that we just needed to be a little tighter in terms of the way the institution was being run,” he said.

The reports challenging CEO Evans piled up for nearly three years before Western Federal replaced him. Evans said the government was “the bad guy” for breaking its word, and the real estate slump made matters worse. He declined to comment further.

“I was sad to see him go,” Simon said. “He was a good man.”

In June 1992, Western Federal hired James A. Bethel as the new chief executive.

In a court deposition, Simon recalled, “At that point, I was on the holding company board, and you know it was really a matter for the thrift, in terms of what they wanted to do. But we would talk. No question about it.”

OTS supervisory agent Darrel W. Dochow later praised Bethel in a meeting with the Western Federal board. He told the board it was unfortunate that they had not replaced Evans “a year or two earlier,” because now it was too late to stop the thrift’s collapse.

Sale of S&L; Is Urged

With the thrift’s survival in jeopardy, Simon laid out his family’s options in an October 1992 memo to Bethel. At the top of Simon’s list: Sell Western Federal. But Simon recognized that no buyer would accept the risks of its bad loans.

“It is unlikely that we could sell the entire company for an amount in excess of zero,” Simon wrote.

With that in mind, Simon was aghast in early 1993 when regulators told him who should provide the capital that Western Federal needed to stay alive: his own family.

“They asked us for 150 million bucks,” Simon recalled last week in the interview.

The Simons responded: “Look, if you think money needs to be put up, why don’t you put it up?”

Sure enough, Western Federal asked the government for a $150-million bailout in March 1993. Seizure by the government would “destroy the institution” and cost taxpayers up to $1 billion, the S&L; warned in a report.

Even with a government rescue, the outlook was abysmal: Western Federal projected $180 million in new loan losses over the next three years. Its thrift rating had sunk to the lowest possible grade, 5, reserved for thrifts “with an extremely high immediate or near-term probability of failure.”

On June 4, 1993, the Office of Thrift Supervision put Western Federal into receivership and seized control of its 27 branches. The government ultimately broke it apart and sold off the pieces.

In the end, the takeover of Western Federal cost taxpayers $122 million, said FDIC spokesman David Barr. Depositors lost no money, he said.

For the Simons, the $40 million they put into Western Federal was wiped out. To this day, it is their biggest single investment loss.

Simon conceded that Western Federal was “not a success,” but in the context of the governor’s race, he cast it nonetheless in a favorable light.

“In terms of running the state,” he said, “I think the lesson you’d have to take away is that Bill Simon is a very diligent person. Thorough and diligent. Takes his responsibilities seriously.”