TIME: Almanac 1993/TIME Almanac 1993.iso/time/011491/0114200.000

Text File | 1992-08-28 | 12.7 KB | 271 lines

                                                                                BUSINESS, Page 38

Pillars of Sand


The recession is putting banks through their worst trauma since
the 1930s; the crisis could finally force Washington to
overhaul the U.S. financial system

By JOHN GREENWALD -- Reported by Robert Ajemian/Boston, John E.
Gallagher/New York and Michael Riley/Washington


    Guards posted outside dozens of shuttered financial offices
in Rhode Island last week were ominous portents for the
troubled U.S. banking industry. Only hours after he was sworn
in on New Year's Day, Governor Bruce Sundlun shut down 45 banks
and credit unions to prevent a run on deposits in the wake of
the collapse of the private firm that insured them. While such
private insurance has become a rarity, the closings aggravated
the growing anxiety about the health of the entire financial
system, as the U.S., already reeling from the savings and loan
debacle, sinks into a new recession.

    Not since the Great Depression has the outlook for so many
banks seemed so grim. The epicenter of distress is the
downtrodden Northeast, where lenders in New York and New
England are writing off bad loans at a furious pace. Many of
the worst headaches are in New York City, which is home to
seven of the 10 largest U.S. banks. Experts predict that such
giants as Citicorp, the biggest U.S. banking company, Chase
Manhattan (No. 3) or Chemical (No. 8) may have to merge with
other large firms to survive. "There is a high chance for a
major consolidation over the next one or two years," says James
McDermott, who follows the industry for the Wall Street
investment firm Keefe Bruyette.

    Such a marriage would be just part of a broad upheaval that
seems certain to reshape American banking this year. From Main
Street to Wall Street to the White House, 1991 looms as a
watershed for the staggering industry. Calling financial reform
a top domestic priority, George Bush is preparing a proposal
to free banks from regulations that bar them from crossing
state lines or diversifying into new fields. Congress began to
put forth its own proposals last week. Meanwhile, more than
1,000 of the nation's 12,400 commercial banks are on the
government's watch list of troubled lenders, a level four times
as great as during the 1981-82 recession. And the Federal
Deposit Insurance Corp. expects 180 banks with total assets of
$70 billion  to fail this year. The cost of closing them will
drain more than half the cash now in the FDIC fund that insures
bank deposits, leaving a meager $4 billion on hand, unless
something is done to shore up the fund.

    The industry's problems have affected consumers and
companies by discouraging banks from lending to any but their
most creditworthy customers. The resulting credit crunch helped
bring on the recession and drive up unemployment, which the
government said last week reached 6.1% in December, the highest
level in more than three years. Moreover, big banks have kept
lending rates high to bolster sagging profits, which fell to
$3.8 billion in the third quarter of 1990, down from  $5.3
billion in the April-June period. Most major banks waited until
last week to lower their prime rate a half-point, to 9 1/2%,
even though the Federal Reserve Board had dropped its discount
rate, on which the prime is largely based, two weeks earlier.
Many banks are raising service charges for everything from
automated-teller-machine transactions to penalties for bounced
checks.

    The biggest risk is the prospect of a widespread bank
collapse. The trigger could be a protracted war in the Persian
Gulf, which could, in turn, deepen the recession and force
debt-laden companies into massive loan defaults. Collapsing
banks would aggravate the downward spiral by drying up credit
and leaving taxpayers with another painful bailout bill. The
disaster scenario may be plausible, but most experts doubt that
bank failures will come close to the magnitude of the S&L
fiasco, which will cost Americans as much as $1 trillion over
the next 30 years. Despite the banking industry's problems,
89% of U.S. commercial banks were profitable in last year's
third quarter. The S&L industry, by contrast, lost $1.5 billion
during the period.

    Big banks have been sliding into trouble since the 1970s,
when many of their best customers began drifting away. Major
companies found they could raise funds more cheaply by
borrowing in money markets, rather than turning to banks. And
depositors could get higher returns and adequate safety by
putting their savings into money-market funds instead of
passbook accounts. The defections left banks to chase riskier
business, such as Third World lending or leveraged buyouts, to
keep their profits up. "Banks just can't compete with other
providers of services that they have traditionally offered,"
says Gary Gorton, a finance professor at the Wharton School.
"So banks have had what is left over."

    Many of the biggest high rollers were New York City banks
that lavished loans on everyone from Latin American dictators
to Donald Trump. At the same time, they helped finance the
1980s real estate boom that has filled U.S. cities with vacant
office towers and dotted suburbia with empty condominiums.
"Citicorp was hurt the most," says Thomas Brown, a Paine Webber
banking analyst. "Then come Chemical, Chase and Bank of New
York."

    The banks took part of their lumps in huge write-offs last
year. Conceding that the full value of many loans will never
be collected, Citicorp said it expects to report at least $300
million in losses for the fourth quarter. Chase lost $623
million in the third quarter, while Chemical reported a $43.7
million deficit for the same period. The problems have taken
their toll on workers as the troubled banks have slashed
payrolls and shuttered divisions and offices. New York City
banks have eliminated 15,000 jobs since 1987, or 8% of their
work force.

    Attrition has been heavy across New England, where bad real
estate loans have put some banks on the endangered list.
Boston's Bank of New England said last week that it may report
a loss of as much as $450 million for the fourth quarter. The
deficit moved the troubled bank to the verge of collapse.

    The pain was most immediate in Rhode Island last week when
bewildered customers learned that more than half the state's
banks and credit unions closed their doors. "I've had all my
money in here since 1967," said a tearful depositor who found
herself locked out of her credit union. "It's $10,000. It's my
life's savings. And now I might lose it all." Sundlun shut the
institutions after their private insurer, the Rhode Island
Share & Deposit Indemnity Corp., was sapped by the failure of
a Providence bank whose president vanished in November with $13
million in funds. While 22 credit unions were scheduled to
reopen this week under federal deposit insurance, Sundlun
pledged to bail out shuttered lenders that are too weak to
qualify for such coverage.

    Banking's woes are spreading beyond the Northeast. In
California, where banks are generally suffering less than in
other regions, Security Pacific Corp. last month projected a
loss of at least $320 million for the fourth quarter. More than
half the bank's problems stemmed from loans outside California,
particularly to builders in Arizona. Experts are worried that
a further downturn in California's slumping real estate market
could cause a flood of red ink at the state's other big banks.

    The shaky health of the industry led Congress last week to
introduce bills to shore up federal deposit insurance and
strengthen federal bank supervision. Sponsors included Henry
Gonzalez, the Texas Democrat who chairs the House Banking
Committee. Meanwhile, the Treasury Department is drafting plans
to permit banks to enter new fields to increase their
profitability. The key points in the proposals:


    Federal deposit insurance. All sides want to rescue the FDIC
fund. The Administration is considering plans to levy a special
assessment on banks or raise their insurance premiums to add
at least $25 billion. The proposals would limit depositors to
a total of $100,000 in federal insurance; in the S&L bailout,
some big customers are being repaid the full $100,000 for each
of several accounts.

    New lines of business. To give banks a broader base of
profits, the Administration wants to scuttle Depression-era
laws that severely limit bank activities. It would allow banks
to underwrite securities and may urge that they be permitted
to sell insurance or to affiliate with other types of
companies. Banks would be prevented by so-called fire walls
from risking federally insured deposits in the new ventures.
Moreover, only healthy, well-capitalized banking companies would
be permitted to enter new fields.

    Interstate banking. The White House would permit banks to
open branches across state lines and thereby create nationwide
networks of loans and deposits. While most states permit some
form of interstate banking, their separate policies subject
banks to a crazy-quilt pattern of rules and regulations.

    Government supervision. The Administration and Congress want
to consolidate the federal authority to regulate banking. That
would simplify a regulatory process that is parceled out among
such agencies as the Federal Reserve Board, the Comptroller of
the Currency and the FDIC.

    The proposals to broaden banks' powers are certain to
inspire a wide range of opponents, from insurance companies to
small-town bankers. "Full national branch banking is only going
to lead to greatly increased financial concentration," says
Kenneth Guenther, executive vice president of the Independent
Bankers Association of America. "It only means that the big
will get bigger." Such arguments lead congressional staff
members to consider the expansion of banking powers a long shot
at best.

    In any event, 1991 will see a major shake-out among banks
as weak ones fail or merge with stronger partners. But barring
a severe worsening of the recession, most of the industry
should survive the slump. "If the New York banks can pull
through, the present situation is very manageable," says John
McCoy, chairman of Ohio's financially robust Banc One Corp.
Concurs Thomas Theobald, chairman of Continental Bank in
Chicago, which the government rescued from a brush with
bankruptcy in 1984: "The system has had its heart attack, but
we view that as a warning and a way to recovery. It's not fun.
It's tough. But, thank God, we're going through it." Since
confidence in the economy is so closely tied to the fitness of
banks, everyone can only hope that they are right.


____________________________________________________________ How
Safe Is Your Money?


    Don't stuff your cash in the mattress just yet. Bank experts
say there are good ways to gauge your bank's soundness:


    CHECK FOR INSURANCE. Make sure your account is covered by
federal insurance, which covers deposits up to $100,000.
Private insurance funds are generally more risky.

    BE WARY OF HIGH RATES. If a bank or thrift tries to lure
savers with interest that is far higher than the competition's,
it could be a sign that the institution is desperate.

    STAY INFORMED. Watch for news of changes at your
institution. Is there management turmoil? Are regulators
clamping down? Don't panic at rumors, but stay alert.

    KNOW YOUR BANKER. Teller machines have created impersonal
banking relationships. It's better to become acquainted with
the staff, whose attitude can be telling.

    LOOK AT THE NUMBERS. Make sure your bank has equity of more
than 5% of its assets -- a healthy figure. Or check with a
rating agency like Veribanc of Wakefield, Mass.


____________________________________________________________ The
Trigger Man


    Behind the crisis in Rhode Island stands a single man:
Joseph Mollicone Jr., president of the failed Heritage Loan and
Investment. Behind Heritage's collapse, investigators say, was
$13 million in funds  that Mollicone stole after recording them
on the bank's books as loans to customers. Mollicone was the
epitome of a powerful and successful banker before he vanished
last November after his son dropped him off at Boston's Logan
Airport for a flight to Newark. He drove a black Porsche, lived
in a posh neighborhood and was friendly with local politicians.
But there were signs of a darker side to Mollicone's nature.
Among other things, he reportedly used his political ties to
rig bids for government leases. The FBI has launched a global
search for Mollicone, but authorities said they had no clue
to his whereabouts.