Headline:The Case Against Hurwitz In one of the last big S&L cases from the '80s, two federal agencies are pursuing Charles Hurwitz over the failure of united Savings. And for once, Hurwitz may have no place to hide.

Spokesman Irelan is equally adamant on the subject. "Neither Maxxam nor Charles ever signed any commitment to maintain the net worth of the S&L. He didn't, never. You may see something that UFG -- before it was acquired by Maxxam -- had signed a net worth maintenance agreement. When that was discovered, the regulators came to us and wanted us to sign to maintain the net worth, and we said, 'No. We won't.' "

Both federal suits also contend that Hurwitz and his associates were able to keep their game for as long as they did because they cooked United's books and then lied to regulators about it. In their joint response to the OTS, Hurwitz and his co-defendants insist that they never lied. But they do make an interesting attempt to shift the blame to the thrift's accountants, as if to suggest, "If we were keeping bogus books, why didn't the bean counters call us on it?" Well, the feds counter, we think you were lying to your accountants, too.

"To 'keep the doors open,' to forestall regulatory intervention and to insulate UFG, MCO and Federated from the need to make capital contributions to United Savings, Hurwitz and his colleagues covered up the true state of the association by a pattern of deceptive financial reporting and balance sheet manipulation," the FDIC charges. "The effect was to keep United Savings operating despite its desperate condition E. Moreover, by failing to honor UFG, MCO and Federated's net worth maintenance obligation, significant wealth was preserved by Hurwitz and his colleagues for distribution to themselves or for other investment purposes." In any case, when regulators seized United Savings on December 30, 1988, the thrift's net worth was a negative $261 million -- about $500 million less than it was supposed to have on hand under its net worth maintenance agreement.

Besides violating the net worth maintenance agreement and engaging in a quid pro quo with Drexel, both federal agencies charge Hurwitz and his associates with numerous unsafe business practices. The FDIC zeros in on United's junk bond portfolio, while the OTS homes in on the thrift's real estate lending practices. For good measure, the OTS action also charges Hurwitz and the other defendants with unsound compensation practices that cost United millions it didn't have to spare.

The FDIC takes particular exception to a loss-plagued collection of mortgage-backed securities, which were essentially sophisticated bets on the direction of interest rates. It was called "Joe's Portfolio" after Joe Phillips, the thrift's junk bond analyst, but it might as well have been dubbed the "Runaway Train." The portfolio managed the neat trick of losing a bundle as interest rates plunged from 10 percent to 7 percent in the three months ending in January 1986, and then losing millions more when interest rates roared back up to 10 percent in the spring of 1987. The feds say "Joe" may have been in charge of the trading, but his superiors were to blame for not jerking him back in line and terminating the portfolio after the size of the losses became apparent. (Phillips could not be located for this story and is not a defendant in either suit.) For instance, in one eight-week period of late 1986, Joe's Portfolio lost $23.7 million. By the time the final gong sounded, United and a related mortgage subsidiary had lost more than $275 million trading these ill-considered securities.

"Hurwitz, United Savings' officers and board members did little or no due diligence on their own," the FDIC charges. "They had little or no appreciation of the complexity of the instruments they acquired. Worse, the institution itself had no procedures or policies with respect to such securities, and few if any internal controls. As a result, Joe's Portfolio was seriously flawed from the beginning."

The feds also accuse United of juggling losses from its mortgage-backed securities trading so the losses wouldn't show up on the balance sheet and trigger a cash call on Hurwitz under the terms of the net worth maintenance agreement. "Instead of trying to reduce the interest rate risk in United Savings' large portfolio, respondents speculated on the direction of interest rates, recognized gains on one side of its portfolio without recognizing the losses on the other side, increasing the risk to United Savings and misrepresenting to [regulators] that United Savings was not in violation of its minimum net worth requirements," the OTS charges.

In detailing the charges related to United's real estate lending practices, federal regulators appear to indulge in a bit of sarcasm, accusing the defendants of not even reading newspaper headlines to learn that Texas commercial real estate was crashing around their ears. They say the thrift used rookie real estate appraisers, took promoters' words for the profit potential of their projects and repeatedly threw good money after bad.

As might be expected, Hurwitz and associates categorically deny every single accusation lobbed at them, with Hurwitz stressing that he had limited involvement in the day-to-day operations of United Savings. The bottom line, Irelan insists, is "Maxxam did not run United Savings, and Charles did not run United Savings."

Interestingly, in their formal 113-page response to the OTS action, Hurwitz and his co-defendants offer a grab bag of possible explanations for their actions. Here's a sampling of some of the justifications Hurwitz and his colleagues make to the feds: 1) We were just following the advice of a series of articles published in the Dallas Federal Home Loan Board's quarterly magazine; 2) accounting procedures on mortgage-backed securities were evolving in 1985-1987, and you are trying to hold us accountable retroactively for today's standards; 3) we just did what our accountants and outside auditors told us to do; and 4) "Hurwitz's actions and decisions were taken in the exercise of his best business judgment at the time and are not legally subject to the FDIC's second-guessing."

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