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In January 1988, Midwest Federal Savings & Loan placed an ad in the Star Tribune touting "another great year."
The ad noted that the company reported net income of $8.4 million in 1987.
"And regulatory capital now stands at $142.5 million," said Harold Greenwood Jr., former Midwest chairman and chief executive.
In reality, Midwest had been broke for years.
Greenwood was deposed last month by federal regulators who took over the savings and loan institution. Now he and three of his executives are under investigation involving allegations of fraud, embezzlement, kickbacks, bribery and obstruction of justice.
For several years Midwest hasn't had any real net worth, the sum by which assets exceed liabilities. It now appears that when the final tallies come in, that might be a negative number close to two-thirds of $1 billion.
How is it that an institution in such tough shape could publicly declare only a year ago, with the backing of its regulator, the Federal Home Loan Bank Board, that it was in the pink when it actually was in the red?
The same ways a lot of other troubled S&Ls did it. They failed to write off bad loans and overstated their net worth, critics and competitors charge.
Midwest did not previously disclose to the Bank Board examiners hundreds of millions of dollars in nonperforming mobile home loans that it had bought from Green Tree Acceptance Corp., and commercial real estate investments, some of which finally were written down in the fourth quarter of 1988.
But part of the blame can be traced to Regulatory Accounting Principles (RAP), suspect accounting techniques that the Bank Board recommended to thrifts as a way to soften earnings squeezes caused by high interest rates that began a decade ago. RAP was seen as a way to ease the S&Ls into the deregulated 1980s, a temporary buffer to buoy weakened S&Ls until they could better cope in a newly competitive environment. Instead RAP only made things worse by letting some institutions and bad managers carry worthless assets on their books and essentially plug net worth with IOUs.
"RAP is crap," said Bert Ely, an accountant and S&L analyst in Washington, D.C. "Crummy regulatory accounting practices. They're absurd. Midwest was under water by December 1984."
