Big Not Always Bad

Washington Mutual’s proposed acquisition of H.F. Ahmanson sends another loud signal that it may be time to retire the notion that small is always beautiful in business.

The big bank that results from this merger--$150 billion in assets--may well contradict conventional wisdom by benefiting consumers even as it brings competitive pressure on smaller lenders.

It will bring that pressure, if it can get its costs in line, by offering lower rates on mortgages and free checking accounts.

What’s going on in the financial services industry in California is an evolutionary battle for survival. Washington Mutual, or WAMU as it’s known, for the letters of its ticker symbol, is a survivor because it adapted sooner to changed mortgage markets and because it aggressively went out and acquired other thrifts across the U.S.

In Southern California, the Ahmanson deal will complete a sweep of the once-great institutions that built this region. Last year, WAMU won Great Western Bank in a competition with Ahmanson, which hesitated and blundered in its acquisition

attempt. WAMU acquired American Savings two years ago, and it will acquire Coast Federal Savings & Loan in the deal with Ahmanson.

That doesn’t mean it has a clear field in the thrifts’ traditional business of making home loans. On the contrary, WAMU’s new size will enable it to compete only with the state’s leading mortgage lenders--Calabasas-based Countrywide Credit Industries, San Francisco-based Bank of America and Norwest of Minneapolis.

Those mortgage lenders long ago took business away from savings and loans by devising low-cost operations to funnel funds from capital markets into mortgages, which they then repackaged as government-backed mortgage certificates. In simple language, they figured out how to bring low-priced loans to consumers, and that is why they prevailed in the marketplace.

Angelo Mozilo, co-founder and vice chairman of Countrywide, says he isn’t fazed by the WAMU-Ahmanson union. “They had to merge because their costs were too high,” he says. Still, he concedes that the combination will create a stronger competitor. “It will probably be better for the consumer because the competition will tend to lower rates.”

And WAMU has ambitions beyond mortgages. The Ahmanson acquisition will make it the second-largest financial institution in California, after Bank of America and ahead of Wells Fargo. And it intends to compete on all fronts. “We want to make consumer loans, home equity loans, apartment loans, and we’re beginning to get into small-business lending,” WAMU Chairman Kerry K. Killinger said Tuesday.

That gives fair warning to smaller institutions, including commercial banks that didn’t see much threat from WAMU on Tuesday. “We offer services to entrepreneurs that big banks with computerized programs don’t give,” said Russell Goldsmith, president of Beverly Hills-based City National Bank, which specializes in private banking for the film community.

Downey Savings & Loan in Newport Beach, one of the remaining S & Ls based in Southern California, has a similar attitude about size. “The public is upset with all these big mergers,” says Maurice L. McAlister, Downey’s chairman. “We’re experiencing their frustration with the mergers like you wouldn’t believe.”

But such complacency could be dangerous. Ultimately, customers are attracted by lower prices, says Don M. Griffith, chairman of El Segundo-based First Coastal Bank. “As WAMU cuts costs, it will be able to make loans at better rates. Nobody can sit back and say they won’t be affected competitively,” Griffith says.

That’s especially true, as WAMUAhmanson won’t be the last of the big mergers. Other banks will likely buy their way into the rich California market. Wells Fargo is now a “target” for acquisition by NationsBank or Banc One, says analyst Donald Destino of Jefferies & Co.

Is all this productive? Yes, it can be. The point is not generally appreciated that the merger derby we see going on in banking ultimately brings lower-cost loans and services to customers. Sure, customers most often notice computer snafus and new fees for services. One way that WAMU can offer free checking is by imposing stiff fees on bounced checks or accidental overdrafts.

But in the final analysis, the great numbers of financial service firms allowed in our market--including giants such as GE Capital, stockbrokers such as Charles Schwab and others, and the great numbers of mutual fund companies handling consumers investments--have made the financial system a low-cost source of funds for consumers and industry.

Curiously, the process has left Southern California stripped of big bank headquarters. And that’s not beneficial, says George Graziadio, chairman of Imperial Bank, an Inglewood-based regional bank. “Losing another headquarters is not good,” Graziadio says, referring to WAMU’s proposed firing of 3,500 Ahmanson employees and closing of branches.

Still, others note that WAMU’s investment in Southern California--in the form of shares paid out to Ahmanson shareholders and the investments it will make to combine the two companies--would benefit the local economy. And Mozilo adds that his company “is open to hire 2,000 people right now. The merger makes good employees available.”

Evolution never was a simple process.

Two Giants Join Forces

* Ahmanson’s fate may have been sealed with failed takeover bid.

* Recent thrift consolidations have some customers fuming.

* What’s next for thrift chiefs Kerry Killinger and Charles Rinehart?

More Coverage, D2, 13

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Banking on Change

Continuing a wave of consolidation in California’s banking industry, Irwindale-based H.F. Ahmanson agreed to be acquired by Seattle-based Washington Mutual for $9.9 billion. If approved, the deal would form the state’s second-largest banking institution. The merger would draw to a close the history of the 109-year-old Home Savings of America, which was purchased by Ahmanson in 1947 for $162,000.

THE IMPACT

* Employees: Washington Mutual said it would slash 3,000 to 3,500 jobs and close 160 to 170 branches, mostly in Southern California.

* Consumers: Consumer advocates question whether the deal would limit lending choices and lead to higher fees and less service. However, the deal may provoke an aggressive scramble to attract consumer deposits and make home loans--a benefit for consumers.

* Industry: Analysts say the merger derby in California banking will continue, with Wells Fargo the next target. With Ahmanson, Washington Mutual would become the nation’s largest mortgage lender and its seventh-largest banking institution.

THE NEW MARKET

The acquisition would make Washington Mutual California’s second-largest banking institution.

BankAmerica: 20.6%

Washington Mutual*: 17%

Wells Fargo: 13.8%

Golden State Bancorp: 6.4%

Union Bank: 5.2%

Other: 37%

*Figure is for combined company of Washington Mutual and H.F. Ahmanson.

FEWER INSTITUTIONS

Number of banks and savings and loans in California:

‘90: 571

‘97: 370

Sources: California Bankers Assn., California Department of Financial Institutions, SNL Securities, FDIC

Researched by JENNIFER OLDHAM / Los Angeles Times

Chronology

H.F. Ahmanson & Co., an insurance company that acquired Home Savings of America in 1947, grew with Southern California, financing homes and creating equity for the masses. Highlights in the 71-year-old Ahmanson’s history:

* 1927: Howard Fieldstead Ahmanson founds the company at age 22, before he graduates from USC. The company, specializing in casualty insurance, quickly becomes the state’s largest underwriter.

* 1930s: The company prospers during the Depression by handling foreclosures.

* 1943: Ahmanson gains control of North American Insurance Co.

* 1947: To capitalize on a nationwide housing boom, Ahmanson purchases Home Savings of America, founded in 1889 by Walter A. Bonygne Sr. as Home Investment Building & Loan Assn.

* 1961: Ahmanson’s purchase of 18 financial institutions in the 1940s and ‘50s, which are consolidated under the Home Savings name, helps the thrift become the first savings and loan with $1 billion in assets.

* 1965: To cushion itself against the failing mortgage market, Ahmanson shifts its mortgage emphasis from tract housing to apartment buildings.

* 1968: Howard Ahmanson has a heart attack and dies while on a trip to Belgium.

* 1974: The company acquires Stuyvesant Insurance Group from GAC Corp.

* 1981: Ahmanson purchases Bankers National Life Insurance Co. As part of an effort to expand nationwide, it begins to merge out-of-state institutions into the Home Savings network under the Savings of America name.

* 1987: Home Savings reports $27 billion in assets, becoming the largest originator of adjustable-rate mortgages.

* 1989: Charles R. Rinehart becomes chairman and chief executive of Home Savings.

* March 17, 1998: Ahmanson says it has agreed to be acquired by Washington Mutual for $9.9 billion.

Sources: Company reports, International Directory of Company Histories

Researched by JENNIFER OLDHAM / Los Angeles Times