Previous bank crisis claimed four Richmond-based thrifts

In July, the Federal Deposit Insurance Corp. seized the failed IndyMac Bank, one of the nation's largest banking institutions to fall to questionable lending practices.

In September, JPMorgan Chase & Co. Inc. paid $1.9 billion for Washington Mutual Inc., another failed U.S. banking giant seized and sold under FDIC scrutiny.

After a year that saw the collapse of 25 banks and thrifts and the near-collapse of more than 100 others, the final tallies of bank causalities and taxpayer costs are looming uncertainties. The crisis is not without precedent, however.

The last spate of failures in the U.S. banking industry began two decades ago, took six years to resolve, and resulted in the closings, sales or mergers of 747 savings and loan associations. The cost to taxpayers was $124 billion.

Its effects were seen and felt in Richmond.

On Oct. 19, 1989, federal regulators marched into the Richmond offices of Seasons Savings Bank.

When the thrift -- a savings depository institution that specialized in making mortgage loans -- reopened for business the next day, it had a new name: Seasons Federal Savings Bank. It also was under new management: the Resolution Trust Corp.

The savings institution was the first Richmond-area thrift taken over by the government agency created by a law enacted Aug. 9, 1989. The Resolution Trust Corp. was part of a legislative package that overhauled the nation's thrift regulatory system.

At the dawn of the 1980s, savings institutions throughout the country were finding themselves in a revenue pinch. Rising interest rates fueled by inflation, increasing competition for depositors' dollars, and long-term residential mortgage loans made at the lower interest rates of the 1970s were the culprits. Legislation in the early 1980s lifted caps on interest rates that thrifts could pay depositors and allowed thrifts to expand mortgage portfolios to include commercial construction loans. This backfired, resulting in reduced profit for most savings institutions and massive losses for some.

The Resolution Trust Corp. was created to reorganize, merge or liquidate failing thrifts as quickly and cost-effectively as possible, while providing uninterrupted service to their customers. It seized four Richmond-based thrifts: Seasons Savings Bank, Security Federal Savings and Loan Association, and two of the area's largest -- Heritage Savings Bank and Investors Savings Bank.

Heritage Savings Bank, which opened in Richmond as Heritage Savings and Loan Association in 1967, became the third area thrift seized by the agency, on Oct. 19, 1990. Long a success story, Heritage had fallen victim to depleted capital.

"It's just been an outstanding institution in the community," a spokesman for the Virginia League of Savings Institutions said at the time. "They've been struggling to try and build capital and just weren't able to do it."

The government agency managed Heritage for eight months before selling the thrift's $527 million in deposits in July 1991 to Crestar Financial Corp. for $2.35 million. Crestar, which later merged with SunTrust Banks Inc., closed Heritage's 13 branches, and the agency disposed of Heritage's real estate holdings in separate transactions.

The story was similar at Investors Savings Bank, founded in Richmond as Investors Savings and Loan Association in 1974. It was the state's second-largest thrift when the agency took control on Dec. 13, 1991.

A hush fell over the office that day as more than 40 Resolution Trust Corp. officials marched into Investors' Midlothian Turnpike headquarters. Agency guards stood at doors and in halls as Investors' top three officers grabbed personal belongings before being escorted outside. The thrift's president, Warner L. Blunt III, later termed the approach "the sledge-hammer mentality."

In July 1992, regulators announced that Central Fidelity Banks Inc., which later was acquired by Wachovia Corp., had paid almost $25 million for Investors' approximately $1 billion in deposits and the thrift's entire 47-branch network. Most Investors employees lost their jobs.

Investors was the last Richmond-based thrift seized by the Resolution Trust Corp., which was folded into the FDIC in 1995.

With today's subprime mortgage crisis causing major bank failures, some have suggested that an agency similar to the Resolution Trust Corp. may be needed to take control of failing banks and thrifts.

But Virginia Commonwealth University finance professor Kenneth Daniels believes that type of solution may be unnecessary.

"In the earlier crisis, the RTC was needed because the crisis emanated from the savings and loans," Daniels said. "It's unlikely we'll need another RTC, but it's likely we'll see more mergers and acquisitions where the healthy acquire the weak."

Daniels said he believes the dramatic rise in residential mortgage delinquencies is inseparable from economic factors that made subprime financing an acute problem.

"The timing of the oil crisis is significant," he said. "Many who struggled to pay their mortgages were pushed over the edge."

Financial-planning consultant Alex Paoletto of Investment Associates in Richmond said he believes another RTC is inappropriate because of the current problem's reach beyond federal regulation.

"We are now a global economy, so it's not just a domestic issue," Paoletto said. "Rather than taking control of failing institutions, the Treasury has decided on a cash infusion to allow banks to use that to help them solve the problem."