Clip 9: For $1 million, Sanchez settled years of scrutiny / FDIC deal in 1994 concerned a proposed lawsuit over failed S&L
By PETE SLOVER
AUSTIN -- Democratic candidate for governor Tony Sanchez - whose pitch to voters leans heavily on his business record - paid the government $1 million to settle complaints of risky and bad management at his failed Laredo savings and loan.
The 1994 settlement with Mr. Sanchez and 12 directors and officers concluded years of government scrutiny of his Tesoro Savings and Loan, which closed in November 1988, in a bailout estimated at $161 million.
"Tesoro's management structure is unstable, and the enforcement of adequate controls, policies and procedures is questionable," said a 1988 memorandum from a federal supervisory agent, which led to rejection of a rescue plan proposed by Mr. Sanchez, the thrift's board chairman and principal shareholder.
Based on thrift examinations, that agent deemed Tesoro's management and board "unacceptable," alleging risky lending practices, reckless growth, conflicts of interest, questionable expenditures, weak internal controls, and noncompliance with regulatory agreements.
In an interview last week, Mr. Sanchez discounted the criticism and defended his institution's management. He said practices at Tesoro were typical of Texas thrifts, which he said were hamstrung by the economy, boxed in by lending regulations, and flummoxed by unclear government directives.
And, he said, regulators knew about, approved and even encouraged many of the practices they later panned.
Mr. Sanchez, who is expected to win the Democratic nomination in March and then face GOP Gov. Rick Perry, said voters should measure his most noteworthy business flop against a career of banking, oil and gas, and other successes.
"I am a businessman who has made a number of investments in 30 years, most of which worked," he said. Using a metaphor from the oil and gas trade that has built his fortune to an estimated $600 million, he said: "We've drilled over 1,000 wells, all over the country. And we have had our share of dry holes."
The Dallas Morning News reviewed thousands of pages of federal, state, and internal thrift documents related to Tesoro, including previously confidential thrift examinations obtained under open-records laws.
Mr. Sanchez said he didn't profit personally from the operation of the thrift.
"I never took a dividend, I never took a salary. I think they paid me a couple of hundred bucks a meeting," he said. "And I lost several million dollars" in Tesoro stock that was rendered worthless by the thrift's failure.
Regulators criticized the S&L for acquiring two fishing condos used by Tesoro officials and for paying or pledging to pay for the use of a hunting lease and a plane owned by other Sanchez enterprises.
Principal stockholders
With 83 percent ownership, Mr. Sanchez and his father were the principal stockholders in the thrift, which they founded in 1972. Numerous government documents and interviews conducted by regulators after the thrift failed confirmed that Mr. Sanchez took a lead role in management and decision-making at Tesoro - "treasure," in Spanish.
Federal examinations showed Tesoro performing poorly in key categories over the three years before it folded. Compared with all similarly sized thrifts nationwide in mid-1987, Tesoro had less profit and more expenses. Thrift books showed 14 times the national average of loans with slow payments, nearly six times the number of repossessions, and five times the number of loans flagged as overvalued or otherwise flawed.
Mr. Sanchez said that those numbers unfairly incorporated thrifts in other regions not suffering the fiscal pains of energy and real estate crashes that contributed to loan defaults.
"The peer group was not narrow enough. I mean, we were suffering more in Texas," he said. "Other parts of the nation were enjoying a pretty good economy. I mean, comparatively speaking."
Three months before Tesoro folded, nearly half of the state's 271 thrifts were insolvent. Eventually, more than 80 percent of Texas S&Ls folded at a bailout cost of at least $48.1 billion from 1988 to 1995.
When Tesoro failed in November 1988, it was $129 million in the red, with assets listed at $250.5 million. Its loan portfolio bulged with speculative land deals and investments in troubled business ventures.
It took an estimated $161 million bailout to protect insured depositors and dispose of loans gone bad. That money came from various federal funds paid for with taxpayer money and fees on insured institutions.
The 1994 settlement Mr. Sanchez and 12 other Tesoro officials reached with the Federal Deposit Insurance Corp. concerned a civil lawsuit the agency considered filing against the men because of their management of the S&L.
Mr. Sanchez, who characterized the threatened litigation as "lingering cleanup" from the thrift's failure, said he didn't recall the details.
"Somebody was handling that. And, you know, when they came up with that settlement I said that's fine, let's just put the thing behind us," he said. He personally paid the $1 million and was not reimbursed by the other Tesoro officials.
The deal makes clear that the thrift officials did not admit wrongdoing. It said both sides were settling the matter after more than four years of wrangling "solely in order to avoid the uncertainty, burden, and expense of protracted litigation."
The agreement provides that regulators would not take steps to block Mr. Sanchez and the other men from serving on bank or thrift boards. For years, Mr. Sanchez has been the largest shareholder and a board member of International Bank of Commerce in Laredo.
In many cases, former directors of failed thrifts, especially those accused of serious or criminal acts, are barred from future service on such boards. Government lawyers who worked on the matter would not discuss whether that provision indicates the potential case against Mr. Sanchez and his colleagues was weak.
Proposed suit
The pact does not disclose what the FDIC had accused Tesoro officials of doing wrong, but the proposed civil suit against them was laid out in a 1989 memo obtained by The News, drafted by two outside law firms that investigated Tesoro for regulators after the thrift failed. It was common for the agency to hire outside firms for such work because it lacked the staff to do so.
None of the lawyers involved in drafting the memo would discuss it, but the document recommended that the government file a $10 million lawsuit against Mr. Sanchez and the other officers and directors. No suit was ever filed.
The memo reiterated examiners' earlier complaints, including reasons why regulators rejected Mr. Sanchez's proposal in 1988 to merge Tesoro with other minority-owned thrifts, beefed up with a dose of private investment and federal money.
Instead, the Federal Home Loan Bank Board closed the thrift and sold its assets to Americity Federal Savings Bank.
The memo said Tesoro executives "were motivated in part by a desire to create the appearance of solvency for at least a period of 4 years after Tesoro was hopelessly insolvent."
"Sanchez dominated the affairs of Tesoro," it said. "As majority stockholder, Sanchez had the most to lose if Tesoro failed and he was directly aware of the loans and other measures taken to falsely create the appearance of solvency."
Mr. Sanchez and his advisors dismissed the memo as the overheated rantings of law firms lobbying to win themselves further work, a frequent criticism of outside lawyers hired to investigate failed thrifts. Congress eventually held hearings inquiring into charges that overzealous lawyers unfairly targeted former thrift directors.
The FDIC would not release internal documents about the proposed Tesoro litigation. But Fred Fisch, a senior FDIC lawyer, said in an interview he was told that the matter was settled because it was "not too great" a case.
FDIC spokesman David Barr said that in the months immediately preceding the settlement, the Tesoro case and potential lawsuits against other Texas thrift officials were undercut by a series of appeals court rulings against the agency.
FDIC records show that agencies cleaning up the S&L failures opened liability investigations against thrift executives and others in thousands of cases. Most were closed without action, either because the cases were weak or the chance of recovering money was slim.
The majority of cases they pursued were settled before lawsuits were filed, with overall recoveries of more than $5 billion.
Political advisers for Mr. Sanchez, who is making his first run for office, have expressed concern that campaign rivals will excerpt some of the 1989 memo's language out-of-context.
In his defense, they have generated lengthy lists of prominent Texans who were sued and settled in their capacity as thrift officers and directors, including a number Gov. Perry's donors.
Government's bad advice
Bert Ely, a Washington-area banking consultant widely credited with being one of the first to predict the S&L debacle, said the thrifts that survived were those that cut costs, limited expansion, and "hunkered down."
He said Tesoro was among a crowd of thrifts that apparently followed government's bad advice: to "grow" themselves out of their problems through aggressive lending.
But he said that doesn't make the "go-go" attitude of the day any less problematic.
"As far as I'm concerned, that was risky growth. Maybe he was doing what his peers were doing, but they were all just driving off a cliff together, like lemmings," he said. "A lot of people did dumb things and learned from it. If he's made a success of himself since then, that's a huge mitigating factor."
Adopting that tack, Mr. Sanchez said that since his thrift went bust, he thinks long and hard before becoming a partner with anybody who has never failed at business.
"As a result of not only those [enterprises] that worked real well and were successful," he said, "but equally important, those that didn't work - I learned a lot."
Responses to federal complaints
Because of what federal regulators considered troubling management practices, Tesoro Savings and Loan operated under a series of supervisory agreements with the state and federal government from early 1985 until Tesoro folded in November 1988.
Supervisory agents were assigned to the thrift to ensure compliance with the agreements, which greatly limited discretion of officers and board members, and with banking laws.
Here are the regulators' most frequent complaints and responses by the Tesoro board's former chairman, Tony Sanchez, a Democratic running for governor.
Growth
From 1983 to 1985, Tesoro's assets grew from $45 million to nearly $300 million, more than a sixfold increase. At the same time, the number of employees jumped from 17 to 130. To accomplish this growth, the thrift did what many booming thrifts did: It moved its focus from residential mortgages to high-risk construction and development loans and investments.
Regulators criticized the thrift's investment in a winery, which went bankrupt and lost Tesoro $1.7 million. They also questioned nearly $5.3 million in loans for land deals and restaurants proposed by Austin lobbyist Nick Kralj, which eventually went into default. Mr. Kralj and Mr. Sanchez worked together as aides to Lt. Gov. Ben Barnes beginning in the late 1960s.
Mr. Sanchez's response: Tesoro was pinched by limits on interest rates it could charge borrowers. Faced with paying more for money than it could charge for loans, it heeded regulators' urging to "grow" the thrift to profitability. Methods included investing thrift money in development projects and businesses.
The goal was to keep the thrift alive until Congress could reform a flawed regulatory system that was squeezing the life from savings and loans.
The winery deal could eventually have made money. The Kralj loans involved no special treatment and the thrift filed repeated lawsuits to collect on those bad debts. Mr. Sanchez's advisers noted that Mr. Barnes and former Gov. John Connally applied and were rejected for a Tesoro loan on a land deal.
Accounting
Federal regulations require thrifts to meet certain "capitalization" requirements - to keep money in their coffers. Tesoro, like many other thrifts, accomplished this with a financial sleight of hand: Borrowers were advanced money to pay closing costs and even future loan payments. That money would go onto Tesoro's books, fulfilling the capital requirement for future loans.
The thrift was accused of essentially loaning itself money to meet its capital requirements.
Regulators also questioned a series of land transactions commonly known as "flips," in which properties were sold and resold between affiliated parties at higher-and-higher prices. Although at other S&Ls participants were accused of extracting cash from such deals, the complaint against Tesoro was that it used such deals to beef up the book value of its assets.
Mr. Sanchez's response: All loans were reviewed and approved by the government supervisory agents.
Potential conflicts
Regulators complained that two officers of Tesoro were paid more than $400,000 in commissions for loans and investments that they had helped get approved, which later lost more than $7 million.
Regulators expressed concern that the officers' judgment was clouded by their financial interest in the loans, making them more likely to approve risky ventures.
Internal thrift documents show that after regulators objected, Tesoro's attorney reviewed the transactions and found them to be legal. The thrift discontinued the payments.
Mr. Sanchez's response: No conflict existed, because the men could not approve the loans without several other layers of internal review. And the commissions were approved by the supervisory agent.
Business expenditures
Regulators in 1987 criticized the thrift's 1985 acquisition of two condominiums in the Gulf Coast fishing village of Port Mansfield. They questioned expenditures for marble floors and said that the thrift valued the condos at more than twice the appraised worth for the property.
An examiner wrote, "This investment does not reflect useful business purpose and appears to have been used primarily for the benefit of" thrift officials.
Similarly, the examiner questioned the payment of $140,000 to Mr. Sanchez's oil company for the use of hunting leases. And he took issue with payment of $265,000 for use of private aircraft owned by Mr. Sanchez's other business.
Mr. Sanchez's response: The expenses were legitimate costs of doing business and not excessive. The aircraft expenses were never actually paid, leaving his other companies with a loss for the use of the planes. The supervisory agent was aware of the expenditures.
