Chastened savings industry emerges from recession
Until 1981, profits were a way of life at Golden West Financial Corporation, a savings and loan holding company based in Oakland, Calif. Conservatively run by the husband-wife team of Herbert and Marion Sandler, who serve as chairman and president, respectively, Golden West ran up a record of over 14 years (57 quarters) of uninterrupted earnings growth.Skip to next paragraph
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But then the problems that hit the entire US savings and loan industry - rising interest rates, portfolios laden with low-interest mortgages, and legal confinement to a moribund housing industry - caught up with Golden West. The company, which has offices in three states, lost money for the next several quarters, until the fourth quarter of 1982.
Now prospects for another long run of profits ''look very good,'' Mrs. Sandler said at a conference on S&Ls here.
Indeed, prospects for a complete recovery for most of the S&L industry are quite good. But - like industries that produce automobiles, steel, and appliances - this one is changing rapidly. When recovery does come, it will be smaller and quite different from the way it entered the recession.
It will also be a much-chastened industry, one that has had to learn some bitter lessons about pricing services, about long-term loans, and about trying to predict the future of interest rates.
As Herbert Sandler told the conference: ''I'm not going to try and predict the direction of interest rates. What I do know is that they will continue to go up and down. And we have to exist in that environment.''
The most important lesson S&Ls are learning is that they must reduce the fixed-interest share of their portfolios and correct what has been a mismatch in maturities: books full of low-yielding long-term loans and higher-cost short-term deposits. One way S&Ls are correcting this is to make as many variable-rate loans as they can.
''Some [S&Ls] are changing 2 percent of their total loans per month to variable-rate form,'' notes Jonathan C. Gray, financial analyst with Sanford C. Bernstein & Co., a brokerage firm. Within two years he expects such loans to make up as much as 70 percent of total loans in the industry.
Given this change, along with a sustained period of lower interest rates and increased powers, Mr. Gray says, ''the financial Dunkirk of the past three years is unlikely ever to be repeated.''
The S&Ls must also learn to deal carefully with the expanded powers given them in recent years. Among other things, S&Ls can now pay whatever interest they like on certain deposits; they are gradually being allowed into the commercial lending business; and they can write more adjustable-mortgage loans.
The introduction of insured ''money market'' accounts that permit S&Ls to pay competitive interest rates was responsible for deposit inflows of $43.4 billion in their first five months of existence. This compares with outflows of $43.7 billion in the previous 21 months, according to the US League of Savings Institutions.
Despite the potential for quick infusions of cash, most S&Ls will probably be careful about using their new powers, says Sandra Johnigan, co-chairman of the national thrift group at Arthur Young & Co., the accounting firm. ''They've learned their lessons from the past few years,'' she says.
There is, however, another group of S&Ls, she adds, that ''are so happy to see interest rates falling, they are not behaving much better than they did before.'' These institutions will not be in any real trouble, she says, as long as short-term interest rates (such as those paid on deposits) stay below long-term rates (such as those charged on mortgages). But if short-term rates shoot up again, there could be more S&L failures and mergers.