Replies

If it's the ad accusing Simon of (1) being the son of a rich man, and (2) mismanaging a savings and loan, it's a pretty effective ad. The overwhelming majority of voters will form their entire impression of a candidate from TV ads. As I understand it, the Simon campaign is not planning to run any TV or radio ads until late in the campaign, gambling on the idea that most voters don't pay any attention to a campaign until the last couple of months. I hope the Simon campaign is guessing correctly, because right now Davis has the field entirely to himself as regards campaign ads.

Personally, I think Simon's strategy is very, very risky. Most voters don't have a clue who he is, and Davis could well create a lasting negative impression long before Simon begins to introduce himself to the electorate.

I agree.

I believe the longer Simon allows these Davis ads to go uncontested, the more time these ads have to satuate and ferment. By the time Simon thinks people are starting to pay attention, their may already be dubious feelings or an entrenched negative impression about him.

From Today's Sacramento Bee:
http://www.sacbee.com/content/opinion/story/3193001p-4241587c.html

Davis' ad distorts Simon's S&L business record

It's not usually hard to feel sorry for little guys who get crushed by an overreaching and arbitrary government agency.

But what if the little guys are millionaires, and the "crushing" includes a taxpayer bailout of their failing savings and loan? The clear lines in such a story, admittedly, get a little hazier.

Yet that is what happened in the case of the Simon family and their investment in Western Federal Savings and Loan. The story is important just now because Bill Simon Jr. was one of those investors. And Simon is running for governor, the Republican candidate challenging Democrat Gray Davis in the November general election.

Simon, who has little experience in government, is running in part on his record as a "successful businessman." Davis, never a bashful campaigner, has taken that challenge head-on, airing ads this week that question Simon's fitness for office based on the failure of the savings and loan he helped direct.

"If he can't run an S&L," Davis asks, "how can he run California?"

Simon's business record is fair game. But this commercial is a cynical attempt by Davis to mislead ill-informed voters. While it is true that the savings and loan failed, the business went down only after the government broke its word to the investors. Simon is not the villain here. He is the victim.

Here's what happened.

In 1988 Simon's late father, William E. Simon, a former U.S. treasury secretary, wanted to buy a reasonably healthy Los Angeles-based savings and loan called Western Federal. Before he could do so, though, federal regulators encouraged him to also buy a failing and debt-ridden thrift, Bell Savings, and merge the two. To induce him to rescue Bell, the feds made certain promises to Simon and his investment group.

One of those promises had to do with capital reserves. Savings and loans, like banks, must maintain a certain amount of cash in reserve as a hedge against bad investments and uncollectible loans. Bank managers typically want to minimize these reserves, because any capital kept idle for this purpose is money they can't invest to earn higher returns for the business.

Federal regulators told Simon's group that, by merging the two institutions, they could claim "good will" from Bell's business as part of their reserves. In business, good will is the amount you pay for a company above and beyond what its assets are worth by themselves. It represents the intangible value of a company's place in the community, but it is not something you could auction off if you had to raise some money to pay your bills.

The Western Federal deal was one of a series of late-1980s transactions brokered by the Federal Savings and Loan Insurance Corp. Faced with mounting losses that would have kept the fund from covering all of its insured deposits, the agency gave sweet terms to investors, many of them well-connected, who were willing to put up some of their own money to turn around failing thrifts. The Simon group invested $210 million and got a $500 million note to cover Bell Savings' bad loans, plus tax advantages worth another $170 million.

Despite those benefits, the deal still would not have penciled out without the accounting provision allowing the new, merged entity to count $116 million in good will as part of its reserves. But a year after the deal was done, Congress abruptly changed the law, prohibiting the very technique that had made the Bell rescue possible.

Eliminating this kind of creative accounting made sense for the long run, but doing it retroactively had a devastating effect on Western Federal. Overnight, a huge gap opened in the thrift's balance sheet. The Simons and their partners would have had to come up with an additional $150 million to keep their business in line with the new regulations.

The Simon partnership didn't have another $150 million to throw into this enterprise. So they gave up. The feds seized Western Federal and spent $92 million to stabilize it before turning it over to new owners. The Simons, meanwhile, lost $40 million in the deal.

They weren't the only ones treated this way. Investors in hundreds of other savings and loans were given the same raw deal. Some sued the government. The Supreme Court eventually ruled in a 7-2 decision that the 1989 law represented a breach of a contract. The government had promised the investors one thing and done another.

Based on the high court's decision, Western Fed's investors filed a claim for damages. A federal court found the Simon group's petition valid. The only issue remaining is deciding how much the breach of contract contributed to the S&L's eventual collapse.

Davis describes this lawsuit derisively in his campaign ad as Simon "asking taxpayers to pay him back his investment." Well, OK. Two courts, including the highest court in the land, have ruled that the government shafted Simon and the other investors. His family never would have agreed to the deal to save Bell without a clear, written promise from the government that was later broken. Given the facts, who wouldn't do the same thing in his shoes?

Simon is still a long way from proving that his background in business would make him a good governor. But the Western Federal story, rather than being an example of bad management, is a clear-cut case of bad government. If Davis can't see that, maybe he is the one who is unfit to be governor.

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About the Writer
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The Bee's Daniel Weintraub can be reached at (916) 321-1914 or at dweintraub@sacbee.com