OTS Controversy Puts Kansas Bank in Spotlight
OVERLAND PARK, Kan. (AP) _ Employees cheered when Ernie Fleischer walked in the front door of Franklin Savings Association, after winning it back from federal regulators in a bitter court battle.
Just six hours later, an appeals court forced him out again. Regulators moved back in.
And even Thursday’s events won’t be the end of the roller coaster ride for the once-tiny Franklin, which boomed in the 1980s on a complex investment strategy that the government now contends it mishandled.
″I’m optimistic we’ll win,″ Fleischer, the thrift’s chairman and the man credited with its growth, said Friday. ″It will just take time.″
Franklin was seized Feb. 16 of this year by regulators with the Office of Thrift Supervision. Attorneys contended the thrift used improper accounting tricks to avoid $119 million in losses from the futures market.
They ordered the bank to take the losses immediately, which placed it below required capital requirements and triggered the takeover. The Resolution Trust Corp. took control.
Fleischer and other officers filed suit, saying regulators had changed their accounting rules in midstream. After a four-week trial, U.S. District Judge Dale E. Saffels ruled Wednesday that regulators had acted in an arbitrary and capricious manner.
Fleischer and fellow managers regained control of Franklin on Thursday morning. But six hours later, the 10th U.S. Circuit Court of Appeals in Denver granted the government’s request for a temporary stay in the order until it can appeal.
Regulators re-seized Franklin, and Fleischer walked out of the suburban Kansas City branch office where he was visiting employees.
″He can’t go back for now,″ Franklin’s attorney, Roger Stanton, said Friday. ″They had a nice day yesterday and got to see some employees, but that’s that. It was good for the employees to see Ernie again.″
On Friday, Fleischer, 57, was busy answering calls in the home office he has used since Franklin was seized.
Analysts say Franklin, which was founded in 1889 in the small town of Ottawa, Kan., was different than other thrifts in its operations. About 10 years ago it began to move beyond the traditional S&L business of simple home loans and passbook savings accounts and sought out so-called brokered deposits, in which depositors from anywhere in the nation ask brokers to seek out the highest possible interest rates.
It then used that money to buy mortgage-backed bonds, and protected itself against resulting swings in interest rates by buying and selling futures contracts.
″Franklin operated in an entirely different way than just about any thrift I know,″ said Henry Peltz, an analyst with Keefe, Bruyette and Woods in New York. ″They were not a lending institution, they were an investing institution. And Ernie Fleischer taught Wall Street a good deal about hedging.″
Franklin’s $11.4 billion in assets made it the 21st largest savings and loan in the nation a year ago and the largest in Kansas. More than 90 percent of those assets were in mortgage-backed securities.
Fleischer, a Kansas City tax lawyer, had acquired Franklin in 1972 with other investors. Although Franklin kept its headquarters in Ottawa, he and his investment team worked out of an office building in this Kansas City suburb.
RTC officials were back in those offices Friday.
Fleischer said he had time to do just a cursory examination of the thrift’s books Thursday before the government’s re-seizure, but it appeared stable.
He said RTC agents have sold some assets and the thrift appeared to have lost between $400 and $500 million in deposits.
Franklin also lost about 50 of its 350 employees. But Fleischer said he’s optimistic the thrift would prosper if he regains control.
″Everyone I talked to yesterday was prepared to go back to work and build on what exists,″ Fleischer said. ″There remains a very highly skilled and highly qualified group of employees.″