Feature

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."

The co-defendants repeatedly charge that various internal memos and documentary evidence the feds cite in their suits are quoted out of context, misunderstood or misrepresented, and they also offer the same catch-all defense any child knows to try in a pinch: it wasn't our fault and, besides, everybody was doing it. Their joint response states: "United Savings' problems stemmed primarily from the depressed real estate market in the areas served by United Savings in the early 1980s and from other forces beyond its control that resulted in the failure of every similarly sized thrift and many of the largest bank holding companies in Texas."

Hurwitz's co-defendants in the OTS action responded jointly with him to the charges, and declined to return phone calls from the Press to elaborate in their defense. However, some of United Financial Group's old annual reports and shareholder communiques offer an unintentionally humorous insight into what some of the players might have been thinking, back when the game was still in full swing.

In UFG's 1987 10-K report to the SEC, Jenard Gross -- who doubled as president of both United Savings and its parent, UFG -- made this pledge to stockholders: "I will not suggest to you that we have the answer to making United profitable in 1988 E. I can and will promise you, however, that our management team is of such strength and character that we will make the most out of this environment."