A Red Face for the Red Baron

Financial Corporation of America stumbles

Charles Knapp, chairman of California's huge Financial Corporation of America (assets: $32.7 billion), was sporting a new tan from a sailing vacation in the Caribbean last week, but what he had to say at a hastily called Los Angeles press conference contrasted sharply with his relaxed appearance. Under pressure from the Securities and Exchange Commission, Knapp explained, F.C.A. was adjusting its earnings report to show a second-quarter loss of $107.5 million instead of the $31.1 million profit announced earlier. The dispute with the SEC was a technical argument concerning the manner in which the company reported sales of Government mortgage securities.

But that was only part of the bad news that has been jolting F.C.A. The company, which is the parent of American Savings & Loan Association, the largest U.S. thrift institution, may be facing liquidity problems. Last month institutional investors, worried by the company's lower earnings and regulatory problems, withdrew $1.4 billion in deposits, forcing F.C.A. to borrow emergency funds from the Federal Home Loan Bank in San Francisco. Coming just three weeks after the $4.5 billion federal bailout of Chicago's Continental Illinois Bank, the troubles at F.C.A. were particularly unsettling to financial circles. After Knapp's press conference last week, the Dow Jones industrial average dipped more than 15 points. F.C.A., the most heavily traded stock of the day, was the biggest loser, falling 21A points to 5. A year ago it was 37.

F.C.A. has sailed into rough waters almost as suddenly as it rose to prominence. Starting with a small California thrift with assets of $390 million, Knapp, 49, built up the financial institution to its present size in less than ten years. Last year the Los Angeles-based corporation gobbled up California's First Charter Financial, doubling its assets in one stroke. At the end of 1983 F.C.A. proudly boasted a 600% increase in earnings, to $172.5 million, or $5.13 per share.

A pilot who likes to restore vintage aircraft in his spare time, Knapp enjoyed being known as the Red Baron of the S & L industry. His biggest mistake was to gamble heavily that interest rates would fall. While other S & Ls hedged their bets by offering homeowners variable-rate mortgages, Knapp aggressively marketed fixed-rate mortgages at about 12.5% in the expectation of making big profits when interest rates fell. Instead, they rose slightly in the second quarter, putting the squeeze on F.C.A. To make matters worse, Knapp had permitted large institutional investments, many of which have deposits that exceed the $100,000 limit on accounts insured by the Federal Savings & Loan Insurance Corporation, to make up some 49% of the company's total deposit base. As Knapp's mortgage strategy soured, institutional investors began to flee, fearful about the safety of their uninsured deposits. The size of their investments made these departures costly.

The situation at F.C.A. could become critical during the next month, as $15 billion in the company's certificates of deposit comes due. If all that money is not reinvested, the company may find itself in serious trouble. Said a senior Treasury Department official last week: "We're watching it very, very closely. We're deeply concerned." F.C.A. is not alone among S & Ls in a bind. Since the beginning of the year, Government regulators have forced nine failing S & Ls to merge with larger institutions.