TIME: Almanac 1993/TIME Almanac 1993.iso/time/012191/0121200.000

Text File | 1992-08-28 | 8KB | 172 lines

                                                                                BUSINESS, Page 54

Special Report: Crisis in Banking

Requium for a Heavyweight


The Bank of New England rescue proves a marvel of efficiency but
raises a disturbing question: How fair are big bailouts?

BY JOHN GREENWALD -- Reported by Robert Ajemian/Boston, Gisela
Bolte/Washington and Kathryn Jackson Fallon/New York


    Call it a tale of two bank failures. When Boston-based Bank
of New England Corp. collapsed last week, federal regulators
rushed to bail out the region's fourth largest banking company
(assets: $22 billion).  To prevent a run on deposits that could
spread throughout troubled New England and beyond, Washington
even stood behind deposits of more than $100,000, the limit
covered by federal insurance. But when the small, black-owned
Freedom National Bank (assets: $121 million) failed last
November in New York City's Harlem, the Federal Deposit
Insurance Corporation saw no risk of a widespread panic and let
holders of large deposits suffer heavy losses. Stunned
charities, churches and other customers lost $11 million in
accounts that exceeded the $100,000 limit.

    Such favored treatment for the customers of big banks was
a heated issue last week, as consumers and politicians braced
for a possible wave of new banking failures. "The situation is
patently unfair -- just plain wrong," said Henry Gonzalez, the
Texas Democrat who heads the House Banking Committee. Concurred
John Jacob, president of the National Urban League, which lost
more than $200,000 at Freedom National because of the
government's double standard: "I think it is grossly
discriminatory against banks that happen to be small." Amid the
outcry, the FDIC said it was reviewing its policy at Freedom
National.

    The question of fairness could arise often this year if a
prolonged Middle East war creates an oil-price shock and
plunges the U.S. into a deeper recession. In a gloomy
assessment of the banking outlook, FDIC chairman L. William
Seidman warned Congress last week that more big banks could go
bust in 1991 unless the current recession is "short and
shallow." A run of large failures would swiftly bankrupt the
FDIC's deposit-insurance fund, which stood at $9 billion last
month. Even without a sharp downturn, Seidman said, the fund
will fall to a record low of $4 billion by the end of 1991, as
an estimated 180 banking firms fail.

    For American savers, already reeling from the savings and
loan debacle, the banking crisis has inspired rising anxiety
about the safety of their money. In a TIME/CNN poll of 1,000
adults surveyed last week by the firm Yankelovich Clancy
Shulman, just 7% said they felt very confident about the
soundness of U.S. banks, while 59% said they were only somewhat
confident or not confident at all. Bigness is not necessarily
reassuring: 52% said they had more faith in local banks than
in larger ones, while 36% felt safer with their money in major
institutions.

    Few experts expect bank failures to come close to rivaling
the S&L fiasco, which could cost taxpayers as much as $1
trillion over the next 30 years. U.S. banks have a total of
$200 billion of capital  to cushion losses, for example, while
the S&L industry was virtually broke throughout the 1980s.
Seidman told Congress that taxpayer funds would not be needed
to finance bank bailouts under current economic conditions. But
he added that "it is certainly not beyond the realm of
possibility that taxpayer money will be needed" if conditions
deteriorate sharply.

    To help calm public fears, the Bush Administration is racing
to prepare plans to reshape the U.S. financial system. The
White House wants to make banks more profitable by scuttling
laws that bar them from branching across state lines and
diversifying into fields like the sale of securities. The
Administration is also considering adding $25 billion to the
FDIC fund through a special assessment on banks or an increase
in their insurance premiums -- though that added cost could
force some of the weakest institutions to go under.

    The Bank of New England collapse may have ended prospects
for a long-sought reform to limit federal-insurance coverage.
The Administration and leading lawmakers want to restrict
depositors to a total of $100,000 in federal insurance per
bank; in the S&L bailout, some big customers are being repaid
the full $100,000 for each of several accounts in a single
institution. Yet any move to cut back this blanket coverage
could lead to the type of bank panics that the FDIC sought to
avert in New England. "You only exacerbate the problem of runs
when you limit insurance," says Lawrence White, a New York
University economist who advocates bailing out all depositors
at failed banks in the name of fairness.

    In fact, the FDIC has consistently covered all depositors
in large bank failures to prevent runs. "The government can get
away with relatively small-scale pocket picking," says Bert
Ely, a financial consultant based in Alexandria, Va. "But on
a major scale you cannot do it. The consequences are just too
significant."

    Regulators moved swiftly last week to keep the failure at
the Bank of New England Corp. from rippling through the
region's ailing economy. They acted when nervous depositors
withdrew $800 million from the holding company's three major
banks, including the flagship Bank of New England, after the
firm predicted a loss of up to $450 million for the fourth
quarter of 1990. On Jan. 6, a Sunday, the government seized the
banks and said it would immediately pump in $750 million as
part of a $2.3 billion bailout financed by the FDIC fund. The
rescue covered more than $2 billion in accounts worth more
than $100,000, and $55 million in uninsured deposits at foreign
branches.

    While depositors kept their money, Bank of New England Corp.
creditors and share-owners took a drubbing. Bondholders with
a $706 million stake in the company saw their portfolios shrink
to about $35 million, since the government now owned the firm's
loans and most other assets. Owners of Bank of New England
stock, which fell from $9 a share a year ago to about 50 cents
a share just before the bankruptcy, saw their investments
vanish. The losers included CBS president Laurence Tisch and
his brother Preston, who held some 500,000 shares they acquired
last year as part of a contrarian strategy of investing in
troubled banks in the hope of a rebound.

    For its part, the FDIC hopes to sell the failed banks to a
strong institution by the end of the year. But the agency will
have to swallow up to $6 billion of sour loans, and the messy
task of liquidating them, to make the deal appealing to buyers.
The FDIC said it was talking with six possible suitors for the
banks, including Ohio's prosperous Banc One Corp. and San
Francisco-based BankAmerica Corp., the second largest U.S.
banking company behind Citicorp in New York City.

    Many other banks could do well just to survive the
recession. Troubled lenders include such giants as Citicorp,
which expects to report a loss of up to $400 million for the
fourth quarter of 1990, and neighboring behemoths Chase
Manhattan and Chemical Bank. While such firms seem unlikely to
fail, they could wind up as merger partners with other big
banking companies. Experts are particularly gloomy about the
prospect for banks in New England. According to Gerard Cassidy,
who follows the industry for the investment firm Tucker,
Anthony, as many as 24 of the region's medium-size banks with
assets of as much as $2 billion each could fail in 1991. Also
under pressure is MNC Financial, a Baltimore-based banking
company (assets: about $27 billion) that lost $241.9 million
in the first nine months of last year.

    For the U.S. banking system, 1991 will be the maximum-stress
test. The extent of the pain will depend on such influences as
the outcome of the Persian Gulf crisis. But with too many banks
chasing too little business in a slumping economy, the industry
is headed for contraction. How the government responds to the
shake-out will determine the shape of U.S. banking for the rest
of the 1990s -- and beyond.