NINE

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Big Business

HOME'S SUCCESS SPARKED a land rush of would-be entrepreneurs to Southern California's savings and loan business. At times, Commissioner Shaw and his staff were overwhelmed. Shaw complained that his Los Angeles office received an average of five phone calls a day from people who wanted to start new associations. He told Federal Home Loan Bank Board officials in Washington that he believed “promoters are moving into the field who are more interested in organization than they are in operation of an association.” Speculators were filing applications with the intention of selling the licenses as soon as they obtained them.1 Shaw suggested that the state and federal governments should jointly declare a moratorium on all new branches and charters. Inadvertently, he provided Ahmanson with an opportunity to solidify his first-mover advantages.

With $279 million in assets, Home dwarfed nearly every other thrift in the region. The company's nearest rival, Joe Crail's Coast Federal, had $202 million. Only three other thrifts had more than $100 million—Howard Edgerton's California Federal, Charles Wellman's Glendale Federal, and Adolph Slechta's Great Western.² Even more important, Home covered the broadest and richest geography. The company had nine branches in Long Beach, Highland Park, Huntington Park, Studio City, Arcadia, Glendale, Burbank, Lakewood, and Beverly Hills, in addition to its main office downtown at 800 South Spring Street. Other thrifts had only three or four offices at most.³ Most of Home's branches had been acquired rather than started from scratch at a time when nobody wanted to buy a savings and loan. With Ahmanson's success, savings and loans were now valuable; any potential rival would have to pay a premium for an existing institution or be enormously successful in winning new licenses.

The FHLBB was reluctant to accept Shaw's proposal for a moratorium. Chairman Walter W. McAllister noted that the state had tried the same strategy sixteen months earlier. Since that ban had been lifted, the state had approved twenty new associations and eighteen branches. In the same period, the FHLBB had approved only one new federal association and seven branches. Given this track record, McAllister suggested, maybe the state ought to declare a unilateral moratorium.4

McAllister's criticisms were echoed by savings and loan executives operating with federal charters. Charles Wellman suggested that Shaw bore complete responsibility for the situation. If he was either unwilling or politically unable to stop approving new facilities, the FHLBB should draft standards for him that would preclude “overpopulating the industry.” At a minimum, Wellman said, state and federal regulators should agree on “the simple principle of comity.” Whenever multiple applications were pending for the same territory but in different regulatory jurisdictions, the state and the FHLBB ought to give preference to whichever application had been submitted first, regardless of whether it was from a state or federal association.⁵ In Congress, Senator Estes Kefauver, who sat on the Judiciary Committee, expressed concern that a moratorium would raise antitrust issues.⁶

Shaw defended himself against this criticism. He pointed out that before approving an application his office required evidence that at least twenty-five thousand people in a community were not being served. Given Southern California's continued growth, additional savings and loan facilities were justified. He also noted that in the eighteen months elapsed since the lifting of the first ban, the state had processed seventy applications for Los Angeles and Orange Counties, forty of which had been denied. Seven of the approved facilities were not for new facilities but for the conversion of federally chartered institutions to state-chartered institutions (a further sign of the gold rush by individuals and executives who wanted an equity stake in the business).⁷

Ultimately, the FHLBB agreed to a one-year moratorium in the spirit of regulatory harmony.⁸ With the announcement in June 1955, state and federal regulators also articulated a plan to survey the market in Los Angeles and Orange Counties in 1956 to determine the need for additional facilities and to develop new procedures and standards for future approvals.⁹ A year later, however, the moratorium was extended for another six months.

With new competition prevented from entering the field, Home's growth in 1956 was spectacular. Its assets increased 41 percent, compared to a 25 percent increase for all savings and loans in California.¹⁰ Savings deposits, the liquid cash that gave Home the ability to invest, rose 66 percent, from $217 million to more than $360 million. Meanwhile, other savings and loans in California grew their deposits by only 30.5 percent.11 Acquisitions contributed to Home's growth, but most of these new deposits came from Ahmanson's continued marketing efforts to savers.

Never comfortable with the moratorium, the FHLBB finally made it clear to Shaw that the ban on new licenses in Los Angeles and Orange Counties should be lifted. Shaw reluctantly agreed. As he explained to the new FHLBB chairman, Albert Robertson, the situation in Southern California was unlike any other in the country. Already, there were ninety-six state and federal associations operating in these two counties, with an additional forty-eight branch locations. These thrifts had assets of $586 per person, compared to an average of $353 per person in savings and loans in the rest of the state. “The concentration of savings and loan facilities in the Los Angeles area is greater than in any other similar area in the United States,” Shaw insisted, yet demand to enter the market continued to grow.¹²

This demand imposed a regulatory burden on Shaw's office and the state. During the previous eighteen months, the state had received requests from 215 individuals and groups that wanted to be advised when the ban was lifted. Shaw expected that as soon as the moratorium was lifted he would receive as many as a hundred applications for branches. “Unless some very rigid standards are adopted,” he wrote, “it seems to me that the condition in the Los Angeles metropolitan area regarding approval of new facilities could become chaotic.”¹³ Ahmanson agreed. He expected incumbents to apply for new branches and “carpetbaggers” to seek charters.

While California and federal regulators debated new standards for license and branch approvals, some incumbents in the industry lobbied to restrict competition. They wanted new applicants to prove that a minimum of forty thousand people (rather than twenty-five thousand) were not being served by existing thrifts. Shaw and the FHLBB rejected this higher standard.

Indeed, within a week of the ending of the moratorium in January 1957, the commissioner's office received thirty applications for branches or charters, including four from Home Savings.¹⁴ The pace of applications continued. From March through July, the commissioner's office held an extraordinary number of hearings but approved only a handful of new charters in the Southland.¹⁵ It okayed nearly two dozen branches, including six for Home Savings.¹⁶ The following year, Shaw also gave the green light to new facilities for Home in Santa Ana and Encino.¹⁷

Home continued to grow by acquisition and with the permission of the state. In April, having concluded negotiations with his longtime friend Mervyn Hope, who wanted to retire, Howard bought Hollywood Savings and Loan, including branches in the desert towns of Victorville and Barstow, east of Los Angeles. In June, the state also authorized a new branch in Compton.18 But the pace of growth was slowing. In 1957, for the first time, Home Savings failed to keep pace with the field as a whole. The company's assets rose only 20 percent, compared to 21.5 percent for all state-chartered thrifts.¹⁹

As with all gold rushes, the arrival of so many new pilgrims seemed to coincide with the end of easy pickings and prompted some entrepreneurs to look for new ways to extract the gold. For thrifts, this meant adopting a new organizational structure.

HOLDING COMPANIES AND AN EFFORT TO MOVE NORTH

Holding companies offered two strategic advantages in the regulatory climate of the mid-1950s. First, they allowed investors to acquire existing savings and loans in different geographic areas without having to win permission from state or federal regulators for a new branch or charter. They also offered a structure conducive to the stock market, which gave these new companies greater access to capital and an easier way to realize gains from their investments. Critics suggested they simply provided speculators and stock promoters with a way to profit from the growing attention paid to the savings and loan industry.

The holding company movement in the thrift industry began in Southern California, the richest market in the country. In July 1955, a group of California investors working with Lehman Brothers organized the Great Western Corporation. With ten million dollars in private equity capital, the company acquired the assets of Great Western Savings and Loan and twenty-two escrow companies. The investors then filed a registration statement with the Securities and Exchange Commission for an initial public offering (IPO) of a half million shares of stock.²⁰

Great Western's IPO sparked consternation in the industry. Smaller institutions feared that with massive infusions of capital from the stock market, speculative companies would begin aggressive efforts to open branches or acquire thrifts in an effort to increase their stock price. Members of the California and U.S. leagues suggested this would have a destabilizing effect on an industry that depended on depositors’ trust to be successful. They called for legislation to ban the creation of savings and loan holding companies. Unfortunately for Ahmanson, the uproar came just as he was launching a major challenge to the traditional structure of the industry.

Localism was at the heart of the traditional savings and loan idea. In 1955, Ahmanson tried to acquire Home Mutual Savings and Loan of San Francisco and open offices in Oakland and Alameda. If approved by Milt Shaw and his staff, the deal would have marked the first time that state regulators allowed a savings and loan to operate in both Northern and Southern California.21

Ahmanson's proposal ignited a firestorm among competitors. Many felt that holding companies, including H. F. Ahmanson & Co., had already circumvented the regulators’ efforts to confine savings and loan entrepreneurs to local communities. For example, Mark Taper's Los Angeles-based holding company, First Charter Financial Corp, had purchased Pioneer Savings in San Jose in 1955. The following year, H. F. Ahmanson & Co. paid $2.2 million for a 93 percent stake in Guaranty Savings and Loan of San Jose.²² In each of these instances, because the holding company made the purchase and the acquired thrift was not legally integrated with either Taper's American Savings or Ahmanson's Home Savings in the Southland, regulators had no basis for denying the deal.²³ But competitors vowed to thwart any effort by Taper, Ahmanson, or anyone else to develop a statewide brand.

Dozens of rivals appeared at a hearing on December 28 to consider Home's San Francisco acquisition. Altogether, thirty-nine state-chartered savings and loan associations, representing 40 percent of the state's total, filed objections. With Home paying 3.5 percent on deposits in Los Angeles and most Bay Area companies paying only 3.0 percent, the protestors feared a rate war that they would lose. Elwood Hansen, the president of Bay View Federal Savings and Loan, told the commissioner that Bay Area companies maintained liquidity that was more than double the rate of Los Angeles associations. By implication, it was fine for Angelenos to take greater risks, but Bay Area depositors were more prudent and the state should protect them. Howard Stevens, who had served as president of the California Savings and Loan League, argued that if Home set up shop in San Francisco it would violate the FSLIC's rule that companies could not lend more than fifty miles away from their offices. Commissioner Shaw said he would consider these points.²⁴

Politically, Ahmanson's expansion and the controversy over holding companies converged. In Washington, Henry Bubb, Ahmanson's friend from Kansas and the eloquent champion of small government, now led the U.S. league's efforts to seek protection from Congress. As chairman of the U.S. Savings and Loan League's legislative committee, he was preparing to announce that the league would ask Congress to outlaw holding companies in the savings and loan industry. By the nature of their service, Bubb told the press, “savings and loan associations are and should be locally owned, locally operated and locally managed institutions.”25

Although H. F. Ahmanson & Company was not technically a holding company and Howard had no intention of taking the company public, he was clearly bent on geographic expansion that flew in the face of Bubb's sentiment. With the U.S. Savings and Loan League up in arms over the issue, neither California commissioner Milt Shaw nor FHLBB chairman Walter W. McAllister wanted to give Ahmanson what he wanted. They pressured him to withdraw his petition. Rather than jeopardize his relationships with these regulators, on January 25, 1956, the same day that Bubb offered the league's statement in Washington, Home withdrew its request and dropped its effort to move into Northern California.²⁶

In Sacramento and Washington, the regulators were pleased and grateful. McAllister praised Shaw for the way he had handled the situation. He also took note that Ahmanson had “so graciously indicated an ‘out’ for the San Francisco situation.” That out may have been regulatory approval for a deal closer to home—the acquisition of Pasadena Savings and Loan Association.²⁷ Regardless, Ahmanson's retreat reflected his continuing commitment to the basic concept of cooperation between regulated and regulator that permeated the managed economy.

Ahmanson's deal had little effect on the growing debate over localism in the banking and thrift industries. In 1958, bankers were able to persuade Congress to pass the Bank Holding Company Act, which limited the ability of holding companies to engage in interstate banking and extended many of the “compartmentalized” principles of Glass-Steagall to the holding company environment.²⁸ Meanwhile, in the thrift industry, the U.S. Savings and Loan League got a similar bill introduced in Congress. Considered a temporary measure until lawmakers could resolve issues facing the industry, the Spence Act was passed and signed by the president in 1959. It barred existing holding companies from acquiring additional savings institutions, and new holding companies were allowed to control only one savings and loan.²⁹

Unfortunately for the industry's lobbyists, the law did not apply retroactively. Existing holding companies like H. F. Ahmanson & Co., Great Western, and First Charter were not forced to divest. As a result, early movers like Howard Ahmanson, Stuart Davis, and Mark Taper gained added protection from potential rivals and were free to continue to build personal financial empires with institutions that many people across the country still insisted should be communitarian or cooperative in nature.

The effort to block the development of holding companies in financial services evidenced all of the aspects of regulatory and political competition that were the hallmarks of the managed economy in the late 1950s and early 1960s. While consumers were largely ignored and played little role in the political debate, the trade associations battled on behalf of the many smaller, weaker thrifts that littered the competitive landscape while the larger companies, like Home Savings, employed their own lobbyists or made their case directly to elected officials. When legislative action finally came, it was too late to hinder the biggest players. Although Howard Ahmanson was forced to abandon his plans for statewide expansion, his graciousness in accommodating the government's interests resulted in other business opportunities.