A Savings and Loan Bailout, and Bush's Son Jeb
By JEFF GERTH, Special to The New York Times
Published: October 14, 1990
After Jeb Bush, a son of the President, and a partner bought a Miami office building using money an associate had borrowed from a local savings and loan, the Federal Government wound up repaying most of the loan.
After Jeb Bush, a son of the President, and a partner bought a Miami office building using money an associate had borrowed from a local savings and loan, the Federal Government wound up repaying most of the loan.
The savings institution became insolvent, and the Government paid more than $4 million to make good the loan as part of the bailout of the savings industry. Mr. Bush and his partner negotiated a settlement with regulators in which they repaid $505,000 and retained control of the building. While they still have a $7 million mortgage to pay on that property, the settlement with the Government lifted from their backs a $4.565 million second mortgage.
There is no evidence that Mr. Bush or his partner improperly influenced the settlement process. Mr. Bush, in an interview, said he was a ''victim of circumstance'' and had no involvement in the settlement talks.
Mr. Bush invited a reporter to come to Miami to review the partnership's records. ''We have nothing to fear or hide about the transaction,'' he said.
Making Good on Bad Loans
While the complex loan arrangement does not involve allegations of criminal behavior, it stands as an illustration of the poor lending practices of savings institutions that led the industry into desperate straits. The deal also illustrates how the Government has had to absorb a large portion of the thousands of bad loans that were made by savings institutions that failed in 1988. The rescue of these institutions will cost $70 billion.
The Government's repayment of the loan used by Mr. Bush and his partner was part of the bailout program approved by Congress, in which the Government guaranteed buyers of ailing institutions that it would make good on bad loans that had been made by those institutions. Had the Government not made such guarantees, it would have had trouble finding buyers for the institutions and would have had to pay off the depositors.
The loan was made by Broward Federal Savings and Loan in Sunrise, Fla., which became insolvent in 1988 because of what regulators said were poor lending practices on commercial loans in the mid-1980's. The cost of cleaning up Broward Federal has been estimated at $285 million.
Arrangement Is Defended
Federal officials defended the Government's previously undisclosed agreement with Mr. Bush and his associates, saying it was the best settlement available because of the weakened commercial real estate market in Miami and because the loan was secured by a risky second mortgage. They said no preferential treatment had been accorded the President's 37-year-old son and his partner.
When the office building was reappraised to reflect the decline in commercial real estate in the Miami area, Federal regulators concluded that it made sense to let the owners keep the building because its value was less than its first mortgage.
Evaluating the settlement is difficult, because crucial papers, including property appraisals, are not public documents. And a lawsuit about the complex loan arrangement, which might have resolved or at least provided a public discussion of various critical issues, was settled out of court.
History of a Deal
Debt Plan Causes Misunderstanding
In a series of interviews in their Miami office, Mr. Bush and his partner, Armando Codina, said the lengthy legal and regulatory process had cost them money, including Federal income taxes they are paying on the forgiven debt.
The two men attributed their problems to the failure of an associate, J. Edward Houston, to join them as an investor, as they had hoped. Instead Mr. Houston's company, the owner of another savings and loan, agreed to lend Mr. Bush and Mr. Codina the $4.565 million and borrowed the money from Broward Federal.
''The intention was to be an equity investment; instead he took a second mortgage and then at the last moment he borrowed the money from another institution,'' Mr. Bush said.
Jeb Bush's dealings in Miami are not related to those of his brother Neil, who was a director of the Silverado Banking, Savings and Loan Association in Denver. Neil Bush, who is 35, defended himself last month in Denver on civil charges by the Government that he acted improperly in his role as a director of Silverado, which failed in 1988 after making questionable loans, including some to Neil Bush's business associates.
An Active Republican
Jeb Bush has been prominent in Florida Republican politics and is state chairman of the re-election campaign of Gov. Bob Martinez. But his involvement in the complicated loan arrangement has gone unnoticed.
Mr. Bush's name is mentioned in the three volumes of records of a 1987 lawsuit filed by Broward Federal against the recipients of the loan proceeds, including a partnership owned by Mr. Bush and Mr. Codina.
According to the lawsuit, the loan transaction goes back to 1983, when Mr. Codina, a developer, obtained an option to buy a building at 1390 Brickell Avenue, the center of Miami's downtown financial district. Mr. Codina later assigned the option to a partnership, 1390 Brickell, of which he owned 80 percent and Mr. Bush the rest.
Mr. Bush is involved in the real estate business with Mr. Codina through a series of partnerships and corporations, under the umbrella of the Codina Bush Group. The Brickell Avenue building is managed by one of Mr. Bush's real estate companies.
Link to Savings Institution
Also in 1983, the J. E. Houston Financial Group, a company headed by Mr. Houston, a former Fort Lauderdale banker, acquired a small savings and loan, South Florida Savings. Mr. Houston became the president of the institution, rapidly expanded it and eventually moved its headquarters to a floor of plush offices at the five-story building at 1390 Brickell Avenue.
Mr. Bush, Mr. Codina and Mr. Houston's company were originally going to acquire the building together, the Bush-Codina partnership argued in court. Mr. Codina said all the parties expected to build a much bigger building on the land.
But one lawyer involved in the transaction said the planned investment by the Houston group had never been approved by Federal regulators, who would have had to approve any real estate transactions involving an insured savings and loan and an affiliated entity, like the Houston company.
Acquiring an Option
Instead of making the cash investment, Mr. Houston's company lent the Bush-Codina partnership $4.565 million and obtained a second mortgage on the building and an option to acquire half the partnership. Mr. Houston took that second mortgage, but not the option, and assigned it to Broward Federal as collateral for its loan. By retaining the option, Mr. Houston's company had the right to be consulted before the building could be disposed of.
''We didn't intend to get involved with a savings and loan,'' Mr. Bush said.
Mr. Houston never exercised his option to buy half the partnership and has a different view of the transaction, seeing it as a deal that turned sour for all parties. In an interview, he said, ''It was not my understanding that I was to convert into equity.'' He added, ''Both sides were unsatisfied, which is a sign of an arm's-length deal.''
The Money Flow
$11.5 Million Debt On $9 Million Sale
The deal closed on Feb. 1, 1985, and the proceeds of the Broward Federal loan passed through Mr. Houston's company to the partnership, records show. That same day the 1390 Brickell partnership purchased the office building for $9 million, according to public records.
As part of the acquisition, the partnership secured a first mortgage of $7 million from an insurance company. That and the $4.565 million loan provided $11.565 million. In addition to the $9 million sale price, the money was used for improvements costing $1.7 million and the establishment of reserve accounts of $1.16 million, Mr. Codina said.
His Role in Partnership
IntrAmerica Investments, a company controlled by Mr. Codina, is the general partner of the 1390 Brickell partnership. Court records show that Mr. Bush signed various documents in 1985 and 1986 as president of IntrAmerica. Mr. Bush said he had been active in getting the building leased but had not been involved in the subsequent litigation or settlement negotiations.
Broward Federal began the litigation in 1987, two days after regulators placed South Florida Savings, Mr. Houston's institution, into receivership. Contending that its loan to Mr. Houston's corporation was in default, Broward Federal sued the corporation and Mr. Houston, who had personally guaranteed the loan, and the Bush-Codina partnership, whose note Mr. Houston had pledged to Broward as collateral for its loan.
Seeking to protect the collateral it held on the defaulted loan, Broward Federal asked the court to declare it the owner of the partnership's second mortgage note. That note had been pledged to Broward along with the income from the building and a reserve account as collateral for the Houston note.
Disputing Who Should Pay
For two years, claims and counterclaims flew over who should pay back the $4.565 million. The 1390 Brickell partnership argued that Mr. Houston or his company should pay. Mr. Houston argued that Broward Federal, having attached the partnership's note, should seek repayment from the partnership.
The lawsuit was twice set for trial, but the case was settled out of court under the auspices of Federal regulators, who were authorized to step in because of a Dec. 31, 1988, agreement under which Broward Federal's assets and liabilities were sold, under Government supervision, to California Federal Bank, a Los Angeles savings and loan.
The Negotiations
$7 Million Mortgage Derails One Accord
The agreement, like most of the other 1988 savings and loan deals, called for the Government to guarantee any loss experienced by the California institution in taking over Broward's affairs. In addition, the Government was obligated to pay the acquiring institution's costs in managing the loans and any litigation to resolve them.
In a settlement agreement dated March 10, 1989, California Federal and the 1390 Brickell partnership agreed that the partnership would relinquish ownership of the building and that Mr. Codina would turn over his option on a nearby property. It also required the Bush-Codina partnership to pay at least $745,000, mostly the balance in an interest reserve account set up as part of the loan.
This settlement was rejected by the Government because it ''didn't make sense economically'' since whoever owned the building was liable for the $7 million first mortgage, said Dan Griffin, an official of the Federal Deposit Insurance Corporation who supervised the negotiations.
Revising an Appraisal
Mr. Griffin said the office building had originally been appraised at $9.5 million but that appraisals in the first half of 1989 reduced the appraised value to no more than $6.5 million. Thus, the regulators concluded that it would be better to let the owners keep the property rather than have the Government take over a $6.5 million building that carried $7 million in mortgage debt.
The new apprasials were ordered because regulators felt the first appraisal was outdated given the changes in Miami's real estate market. The F.D.I.C. declined to release the appraisals or the names of the companies that did them.
Mr. Griffin of the F.D.I.C. said the settlement delays ''had nothing to do with Jeb Bush'' but were ''because of the size of the write-off and the disparity of the appraisals.'' 10 Cents on the Dollar Charles A. Fulton, a senior lawyer at the F.D.I.C. who was involved in the negotiations, said a search by lawyers had concluded there was little legal or financial leverage to recover anything beyond 10 cents on the dollar, in part because the search found that Mr. Houston had few recoverable assets.
Mr. Griffin said the recovery rate of 10 cents on the dollar was about average for second mortgages like the one made by Broward Federal.
After the settlement was rejected by Federal regulators in June, the Codina-Bush partnership tried to settle its debt, starting with an offer of about $325,000. That was rejected, Mr. Fulton and Mr. Griffin said.
The Settlement
Leftover Money Is Used for Payment
About the same time, the reserve account, then the focus of the negotiations and the ultimate source of most of what the Government recovered, was used by Mr. Bush and Mr. Codina to pay more than $200,000 in delinquent real estate taxes, Mr. Griffin and Mr. Codina said. That step was approved by California Federal Bank, but Federal regulators, who were supposed to oversee such transactions, did not learn about it until after it had taken place, Mr. Fulton said.
The final settlement of $505,000 paid by the Bush-Codina partnership consisted of the $437,000 remainining in the interest reserve accountand the balance in a small escrow account, $68,000, according to records and the F.D.I.C. officials.
The final agreement was put together in the summer and fall of 1989, drafted in December, and entered into the court file earlier this year. During this time, legal authority for approving the settlement shifted from the Federal Home Loan Bank Board to the F.D.I.C., as a result of President Bush's signing the savings and loan rescue legislation on Aug. 9, 1989.
The Issue of Taxpayers' Money
Both Mr. Bush and Mr. Codina expressed surprise that the settlement of the loan could be interpreted as the use of taxpayers' money to make good a loan whose proceeds went for their building. Asked if they were aware that the funds for the repayment of the Broward Federal loan came from the taxpayers, both men said no.
Mr. Bush and Mr. Codina said they had incurred additional costs as a result of the transaction, the largest being a $1.316 million tax liability this year when they declared the forgiven debt as income to the Internal Revenue Service.
Photo: The Government repaid more than $4 million of a loan that helped finance the purchase of a Miami office building by Jeb Bush, a son of President Bush, and his partner. (Associated Press)
