Centrust Bank

CenTrust Bank Scandal

CenTrust, first called Dade Federal Savings and Loan, was founded in 1934 during the Great Depression and eventually became a stalwart of the South Florida business establishment. By the early 1980s, Miami had a corporate community that any city would envy. The companies were large and growing. They contributed mightily to local causes. They virtually invented a skyline where none existed as late as the early 1980s. CenTrust Bank and David Paul gave huge sums of money and much effort toward founding the New World Symphony in the 1980s. But the local corporate world was shaken badly at that time. In South Florida, home of fragile physical, social and economic climates, big business became an endangered species. Prominent in the downtown skyline were buildings built by financial institutions that had failed or were in serious trouble. By November 1983, CenTrust had losses of $500 million and was headed toward insolvency and federal takeover. David Paul, pledging little more than some real-estate holdings, gained control and quickly remade and personalized the institution. Before long, the company's stock-ticker symbol became DLP, Paul's initials. At the end, as senior managers deserted him, David Paul held the posts of chairman, president, chief executive officer and chief operating officer.

South Florida became a center of risky banking practices in the 1980s, and CenTrust was one of hundreds of thrifts traumatized by inflation and soaring interest rates.

Through this time, Drexel's former junk king Michael Milken, sold billions of dollars of high-yield junk bonds to cooperative companies with big piles of cash such as CenTrust Bank, Columbia Savings & Loan, Imperial Corp. of America and First Executive. The companies were loyal buyers of Drexel underwritings. They paid fat trading and investment banking fees to Drexel and helped the firm to launch bigger and bigger deals.

CenTrust held more than $1 billion in junk bonds and worked closely with Drexel. The relationship was launched when Drexel led an underwriting syndicate of five investment bankers that raised $12 million in subordinated debt to bolster CenTrust's capital base. Eventually, CenTrust also bought $1.4 billion in junk bonds from Drexel. Moreover, in early 1989, Lincoln and CenTrust sold warrants and other assets to each other through Drexel, with each recognizing substantial income.

In 1989's third quarter, thrifts marked down their junk by about 10%, or hundreds of millions of dollars. Thrifts suffered more than mutual funds, because they were clogged with battered Drexel-underwritten issues.

The episode marks the first time a financial institution has been brought down primarily because of its involvement in the junk-bond market. CenTrust reported a $119.5 million loss for its fiscal year ended Sept. 30, 1989, after writing down a ton of junk and reserving for losses. Under thrift rules, CenTrust needs about $130 million of equity capital but currently has an equity shortage of $283 million.

After all this happen, CenTrust planned to sell most of its branches to raise capital and create a separate unit to hold its junk until maturity to avoid turning accounting losses on bonds real losses. Months later, they planned to merge with Hamilton Holding Co., but neither the sale of its branches nor the merge gotten executed.

CenTrust Bank, the non-operational Miami savings and loan that invested heavily in junk bonds, also invested heavily in political candidates. The thrift's chairman, David Paul, also had dozens of meetings and meals with politicians, most of them Democrats. The get-togethers included a June 1988 lunch with former President Carter and seven meetings with Florida Rep. Bill Nelson, a member of the Banking Committee.

Just how far CenTrust's fortunes had deteriorated became clear in December 1989, when the Office of Thrift Supervision slapped a cease-and-desist order on the thrift, attacking its sloppy bookkeeping and criticizing Mr. Paul for allegedly extravagant spending when the thrift was experiencing serious operating losses and declines in its capital. In January 1990, dozens of somber, conservatively dressed banking examiners carrying briefcases and cellular phones stepped off elevators and emerged on the 45th floor of the tower, where the company's executive offices were based. The officials, most from the Federal Deposit Insurance Corp. (FDIC), enter through the complex. A second wave arrived within 20 minutes and took possession of other CenTrust operations. They ordered corporate employees to leave their offices without removing any documents. They advised employees to take their identification badges so they could re-enter the building the following business day. Federal officials said they seized CenTrust to protect