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Congress, the state legislatures and their various regulatory agencies have failed to adequately deal with the problem and have left a mish-mash of weak and conflicting rules on the books that have provided a welcome mat for the sharp deal makers. Fair play has often gone out the window in this massive "Conversion Lotto" with all the odds and the winnings in favor of the insider.

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As the chief executive of one Federal savings institution has said: "We are in the middle of a feeding frenzy".

The Office of Thrift Supervision (OTS), under Acting Director Jonathan Fiechter, does deserve credit for leaping into the jaws of this feeding frenzy. The staff has tracked the developments state by state and has drafted regulations to try to control the worst abuses.

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A good try, but not enough. OTS needs help in the form of statutory across the board safeguards that will protect the depositors the real owners in these mutuals and the safety and soundness of the financial system and prevent unfair, unearned windfalls from lining the pockets of the insiders. Unfortunately, many of the states and apparently OTS's sister agency the Federal Deposit Insurance Corporation (FDIC) one trade public noted last year appear "unfazed" by the concerns.

FDIC

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Some regard the issue as a "turf war" between the OTS and the Iwith the converted state savings banks added to the jurisdiction of the FDIC and subtracted from the universe of institutions under the wing of the OTS. Turf wars being what they are in this town, there is undoubtedly a lot of truth in these assumptions.

But, we believe that the Congress should look past the bland assurances from the FDIC and not dismiss the OTS concerns out of hand. Turf wars aside, any casual glance at the financial landscape should be enough to alert this Committee and the Congress to the fact that the rules of the conversion road are sadly deficient and horribly inconsistent from state to state.

CONVERSION HISTORY

True, there have long been conversions from mutual ownership to stock ownership. But, from the post-World War period to the mid1970s the number of conversions were infinitesimal not even a blip on the regulatory radar scheme.

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in a rare moment conversion regulations

But conversions began to grow and in 1974 of regulatory and Congressional foresight were adopted with the emphasis placed on preventing "windfalls" in the conversion of a mutual thrift windfalls that might create "irresistible pressures" on other mutuals to convert and, more

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importantly, windfalls that led to abuses by insiders to the detriment of the mutual share holders.

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Again in 1976 and 1979 in response to concern about stock manipulation and insider abuse the regulations were broadened. Then in 1982 -- as the era of deregulation dawned "flexibility" was added to conversion regulations and holding company and merger conversions were authorized.

POST-FIRREA WINDFALLS

Today much of the concern centers around these merger conversions and it is this activity that has spawned the headlines about "feeding frenzies" and resulting abuses.

We identify four principle areas of abuse or potential for abuse are evident on the conversion battlefield:

1. Insiders

conversions;

obtaining control of

institutions through

2. Unfair and excessive "deals" offered "insiders" to induce officers and directors to push for conversions without regard to the best interests of depositors or the community;

3. Fraudulent low appraisals of institutions involved in the transactions, letting holding companies obtain mutuals at bargain basement prices; and,

4. Limitation of meaningful participation of account holders the real owners in the transactions.

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There is also concern that the "big deals" and the stories of lucrative pay-offs to officers and directors as well discounted stock arrangements for depositors will ultimately create that "irresistible urge" for other mutuals to leap into the game.

This Committee needs to look carefully at whether these artificially-induced urges are really good public policy or the right way to build a financial system where the publicly-backed insurance funds is involved. Hopefully, the experience of the 1980's has taught us that unrestrained greed at insured financial institutions can lead not only to an expensive bill to the taxpayers but to the creation of an unstable and unsustainable financial system.

While OTS and FDIC feud about the issues, there are voices on the outside that have expressed concerns. An newsletter, the Thrift Regulator, quoted a Washington lawyer and conversion expert recently as warning:

"There are some states where management can buy so much stock before the depositors get in that the equity and fairness in the conversion process goes away."

Whether regulators and Federal and State governments look on these issues as good, bad, or indifferent, no one can ignore the fact that something big has been going on in the conversion arena. Since FIRREA, scores of institutions have swopped Federal for State charters, almost 300 mutuals have converted to stock companies and the average amount of stock sold per conversion has increased from $10 million in 1989 to some $32 million in 1993.

Underneath these numbers are case-histories that more dramatically point to the problems being generated by these merger conversions.

Let us remember that the owners of record of these institutions are the depositors that is the definition of a mutual -- of cooperative ownership.

But to watch these schemes in action, you would never recognize that fact. Perhaps no one says it better than Home Savings depositor Evelyn Surratt who testified before the Committee last week:

"I don't think the officers and directors are doing right by us members. It looks to me like they're looking out for themselves instead of us. They should treat the people right who stuck by them all these years, but their not. The statute book says we're the owners. I've seen it. It's plain. Anybody can understand it. I'll read it to you, "Members are the owners of a mutual savings bank." But they've got all these high-powered experts trying to tell us the law doesn't mean what it says. That's just not right. A lot of folks in Albermarle might not have a whole lot of education, but we're smart enough to know right from wrong."

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Clearly, what the owners the depositors are getting in, many of these conversions is nothing more than the crumbs from the table. Sitting at the big feast on the inside are the directors and officers who are wooed to grease the skids for the quick slide into stock companies or holding company acquisition.

Provident Bancorp's President, Allen Davis, who has been scouring the Midwest in search of mutuals willing to play the merger-conversion game is very blunt about why the Cincinnati Ohiobased holding company likes the game.

"We can virtually get the institution for relatively nominal amounts."

And the numbers published in the American Banker last November indicate that Mr. Davis is, indeed, the master of understatement.

The American Banker estimated that Provident would be paying roughly $1.573 million to officers and depositors of Heritage Savings, an Ohio mutual with an appraised value of nearly $5.7 million a more than three-fold windfall. From Ohio, to North Carolina, to Wisconsin to Florida these self-enrichment schemes abound.

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In the polite worlds of banking, finance and the stock market, the lucrative deals offered insiders are described as necessary "inducements" and proper payments to those that have "managed the institutions so well". Among the less polite and less sophisticated these look like just plain old bribes used to let someone corporate entity make off with the goods while everyone looks the other way.

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And one wild deal begets another wild deal. The disease spreads and ultimately the pressures become difficult to resist and merger-conversions start moving whether or not it is the true desires of the management or the depositors. And deals move under theses pressures even when there are serious questions about what the schemes may mean to financial stability and the safety of deposit insurance funds.

HOW MANY HANDS IN THE COOKIE JAR?

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Not only has the conversion mania created a new and aggressive breed of insiders, but it has spawned a sophisticated team of "outsiders" who roam the country opening accounts at mutual institutions in the hopes of cashing in on lucrative stock deals offered at discount prices in a conversion.

The New York Times says some of these operators have opened hundreds of accounts as a "relatively inexpensive way to get stock at low prices."

Apparently, this band of "sophisticated outsiders" has sometimes created situations where depositors' demand for stock far outstripped the banks' ability to satisfy it.

At Home Savings Bank in Hollywood, FL, depositors and management submitted orders for $105 million of stock in late 1992, but the company was issuing only $24 million. Some of the requests for stock were in the form of buy orders for lots of a half million dollars each.

"An awful lot of people from New York City somehow found out and made deposits so they could buy the stock," an executive of the institution was quoted as saying.

INADEQUATE DISCLOSURE

True, depositors, sifting through the crumbs on the table, do

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get rights to buy stock also

and in many cases this can be lucrative. But, lucrative is a relative term and while the depositor is playing in the nickel-and-dime end of the market, the merger-conversion schemes are letting big time operators make off with million-dollar fortunes. Depositors, in effect, get "hush money" so the corporate executives and their lawyers can work quietly on the big end of the deals.

One principal area of concern for CFA is the poor and often misleading disclosure given to mutual depositors of a proposed conversion to a stock company. Depositors are both misinformed by management about the nature and consequences of a conversion and provided woefully inadequate time and resources to respond to management recommendations for conversion.

The simple fact is that depositors are at an overwhelming disadvantage to appreciate the significance of and to respond to proxy statements that are written in incomprehensible legalize and often delivered in junk mail packaging.

the

But, as the Committee heard last week in the case of CCB Financial Corporation's purchase of Shelby Savings and Loan, simple and clear disclosure does work. Many of the depositors steady customers who have kept their mutual institution alive during good and bad times don't necessarily want to cede control of their institution.

RECOMMENDATIONS ON H.R. 3615

The Mutual Bank Conversion Act, H.R. 3615, takes an important first step to curb the raging wildfires of greed that have been set in many states through the passage of liberal conversion statutes. The bill would provide for parity between Federal and State rules governing the conversion of mutual associations. This would end the perverse incentives currently at play in the market place for management to compromise their fiduciary obligations to mutual depositors. H.R. 3615 should be passed if only to prevent a larger forest fire of greed from taking hold.

But, in its current form, it is not enough.

H.R. 3615 does nothing to correct the weaknesses in current Federal conversion rules. Real safeguards for fair play in the distribution of proceeds must be firmly established in statute.

The simply fact is that even under OTS rules management can walk away with enormous unearned windfalls. Our analysis is that under OTS rules insiders can obtain up to 57% of the stock of a converting mutual.

Call it what you will, but CFA can find no public policy rationale for insiders having any advantage over the depositor