How a Texas thrift brought itself down

One of the most notorious institutions to go under is Vernon Savings and Loan Association in Texas. It gained publicity because its major stockholder, Donald R. Dixon, is a major contributor to Democratic legislators. House Speaker Jim Wright (D) of Texas used his influence with the Federal Home Loan Bank Board to delay the thrift's closing, and Tony Coelho (D) of California, now House majority whip, had hosted parties on Vernon's corporate yacht, named High Spirits, last summer. The following is a chronology of a thrift that soared - it was at one time reported to be the most profitable in the country - right into insolvency. It is based on court documents and conversations with bankers and an attorney close to the case. Attempts to reach Mr. Dixon or his attorney were unsuccessful.

In January 1982, Dixon bought 90 percent of Vernon's stock, then a small ($120 million) thrift. In the next five years, it would grow more than 1,000 percent to $1.3 billion.

In June 1982, Dixon transferred the stock to Dondi Financial Corporation, which he controlled, and Vernon became a DFC subsidiary. A year later, Vernon was reorganized, and another $9 million was ostensibly added to the company's net worth. (The higher the net worth, the more loans you can make and deposits you can take in, which allows higher growth.) At that point, says Charles McDonald, a Federal Home Loan Bank Board attorney, ``it appears the lending spree began.''

Over the next three years, Vernon focused on risky ``acquisition, development and construction'' loans. ADC loans are for commercial real estate project still in the works. They bring high up-front fees, says thrift executive Walter McAllister, ``so the loan looks good for two or three years, but when the land is developed and doesn't sell, as happened to the Texas real estate market, then the loan goes bad.''

By 1987, FSLIC says that 80 to 85 percent of Vernon's loan portfolio consisted of ADC loans.

To raise money for the loans, the Bank Board alleges, Vernon alerted money brokers, who place large sums of their customers' money in high-yielding bank accounts, that it would pay high interest rates.

But Vernon looked profitable, though FSLIC claims it was heading toward a negative net worth of $350 million. Dixon, who was not an officer, and the top officers were well paid. Over four years, Dixon got $8.9 million in salary and bonuses.

In late 1984 and early '85, Vernon officials became concerned about losses that would be reflected in the year-end audit that summer. So a Vernon subsidiary sold off properties to friends at inflated prices ``by promising the buyers they'd never have to pay the loans back,'' McDonald says. That let Vernon make a false paper profit on the properties, and Vernon made initial payments to itself, channeling the money through different bank accounts to make it look like the ``buyers'' were paying their loans.

Regulators began closing in. The bank board pressured officers to resign starting in early 1986. In August, regulators began to examine Vernon's network of companies.

Eventually, the high rates Vernon was paying, combined with defaulted loans, did the thrift in. When the government closed its doors on March 20, transferring management to another thrift, 96 percent of the loans were delinquent.

On April 22, Dixon filed for Chapter 11 bankruptcy, and five days later, FSLIC sued Vernon and six associates for at least $350 million in damages. Last month, a judge froze the assets of Dixon and six colleagues.

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