By Ray Stern
By Ray Stern
By New Times
By Amy Silverman
By Stephen Lemons
By Stephen Lemons
By Monica Alonzo
By Chris Parker
Fife Symington wants taxpayers to bail out Keith Turley and MeraBank.
This bit of fiscal largesse with federal funds comes as the leading GOP contender for governor is trying hard to position himself as the champion of the little guy.
In a speech last week in Glendale, Symington said he doesn't want Arizona Public Service ratepayers to have to pay more to keep MeraBank afloat. That pronouncement came safely after the Arizona Corporation Commission reached an accord with the utility to block the wholesale transfer of funds to Pinnacle West Capital, parent company of both APS and MeraBank.
Symington also doesn't think that the stockholders of Pinnacle West should be responsible for bailing out the ailing thrift. He contends many of the shareholders "are senior citizens who invest in utility stocks because these investments tend to be safe and dependable."
What Symington didn't say in his speech is that eliminating those two options leaves only one other if MeraBank doesn't recover on its own: That Pinnacle West simply walks away from its money-losing thrift--leaving it as another insolvent thrift which has to be bailed out by taxpayers because its deposits are federally insured. That's exactly what Pinnacle West executives have been hinting at for weeks. While such a plan would let both APS ratepayers and company shareholders--the owners--off the hook, it drops the problem square into the lap of taxpayers.
Confronted with this clearly outrageous--and non-populist--stance, Symington doesn't deny that protecting ratepayers and shareholders would leave taxpayers holding the bag. But he has an explanation for why that should be the case: The S&L mess can be blamed on Congress for passing the 1986 Tax Reform Act.
The purpose behind the act was to eliminate a number of tax loopholes and produce more revenue for the government. "But, inherent in that law were some things that made life very difficult for financial institutions and how they handle real estate," Symington tells New Times. Symington explains it this way: In the good old days before tax reform it was easier for a bank to sell off repossessed property. Why? "The institution could turn around and put it back out to a group of private investors who could do a tax syndication and basically take it off their hands." In other words, the buyers would acquire the property not because of what it was worth but because they needed a tax loss. That meant these investors paid less in federal income taxes--and everyone else without that loophole paid more.
But the tax laws were good for the banks, Symington says, which could recover "maybe 80-90 cents on the dollar. Now they're lucky if they get 40-50 cents on the dollar because the market isn't out there in the private sector to take the property off their hands."
"I think the tax reform act of 1986 was very bad public policy," Symington says. He acknowledges, though, that he can't place all the blame for the S&L crisis on the Democratic-controlled Congress which passed the bill, or even on Republican President Ronald Reagan, who signed it. "In addition you have a market which is significantly overbuilt across the country," Symington says, as well as "relatively high interest rates."
Symington's stance puts him in bed with Pinnacle West executives who want to dump MeraBank and force the taxpayers to pick up the pieces.
When the company acquired the thrift three years ago, it signed an agreement with federal regulators to infuse enough money whenever necessary to keep MeraBank healthy. Earlier this year, the Federal Home Loan Bank Board demanded Pinnacle West add $192 million to the thrift's assets; Pinnacle West refused and the matter is now in negotiations.
The S&L bailout bill approved last month by Congress has even stiffer capital requirements. By MeraBank's own admission, it would take about $600 million to comply with the new law. Wall Street analysts say the actual cost may be higher.
Barry Abramson, a securities analyst for Prudential-Bache, says the $600 million figure was reported at the end of June. MeraBank expects to lose more money in the next two quarters, Abramson says, which he believes will require another $100 million infusion.
And if Pinnacle West seeks federal approval to either spin off MeraBank as a separate corporation or sell it to someone else, the feds may require even more money from Pinnacle West to ensure the thrift survival, he says.
"I'm sure they would want to create a cushion in case there are any future losses," Abramson says. "They might want a cushion that would carry them through a whole year or two. And then you're talking about another $200 million or $300 million on top of the $700 million. You could get an enormous figure like a billion dollars without necessarily going to an extreme position."
Coming up with all that cash is the only way Pinnacle West could possibly find a buyer for its ailing thrift. Abramson says the recent ban on transferring capital from APS to MeraBank means Pinnacle West can come up with the needed money only by borrowing. "They simply raise unsecured debt--junk bonds," he says. But that presumes investors actually would be willing to buy such paper, Abramson adds. And that is unlikely unless Pinnacle West is willing to pay extremely high interest rates.
That leaves, as the pocketbook of last resort, the taxpayers.
In its latest financial statement, Pinnacle West declares it has the legal ability to unilaterally abrogate its agreement with the feds to keep MeraBank healthy. That means dumping it, at which point it becomes just another insolvent thrift taken over by the government. Abramson says he isn't sure the company's legal advisers are on firm ground. "I'm sure if they could have done that before, they would have," he says of divestiture. "And that [still] would not resolve the situation. It would put it into the courtroom."
Symington's stance is certainly welcomed by the owners of Pinnacle West--its shareholders. Joseph Castillo, chairman of the Pinnacle West Shareholders Association, is willing to concede that Pinnacle West will have to spend some money to make MeraBank healthier, with an eye toward selling it off. But he's not willing to hit up the company for anything like the $600 million--or more--it will take. "Anything over $150 million to $200 million is unreasonable," he says.
And if no one will take it for that price? Castillo goes along with the idea of Pinnacle West simply washing its hands of the thrift, which means a taxpayer bailout. Castillo, like Symington, has his own federal bogeymen to blame.
"There's been a problem with the regulators historically in this area to let things get as bad as they have been," Castillo says, citing the delays in federal takeover of Charles Keating's Lincoln Thrift as an example. "It's not entirely their fault," he adds. "Don't get me wrong."
Aside from ridding itself of the black hole, abandoning MeraBank--and letting the taxpayers pick up the tab--would have other advantages for Pinnacle West shareholders.
Pinnacle West stock is currently selling for about $12.50 a share. Analysts say that is based on the assumption that the company will have to put in more than $600 million to keep the thrift afloat. But Abramson says the "book value" of Pinnacle West stock without MeraBank is in "the low twenties."
Thus, Abramson figures, dumping MeraBank might be worth $10 a share to shareholders.
One of the big beneficiaries of such a move would be Pinnacle West president and CEO Keith Turley, who owns 18,607 shares according to a company statement issued in May. A $10-per-share hike would mean an instant profit of more than $180,000.
Raising the price of Pinnacle West stock also would help Turley do something with his now-worthless option of buying up to 67,671 shares--at $25.69 a share.
Henry Sargent Jr., the company's chief financial officer, also stands to benefit, with 10,389 shares and options on another 29,691 at $25.63 a share.
Other board members also would benefit. John Norton III, former deputy secretary of agriculture, holds 11,500 shares. And Circle K chairman Karl Eller, another director, has 1,154 shares.
All these men stand to make a lot more money by getting rid of MeraBank than any of the little old ladies that Symington professes to be protecting.