Boston Co. Learns All That Glitters...Geoffrey Smith
When Donald Trump bought his yacht The Princess in 1988, he didn't have to throw a lavish celebration party. His lender threw it for him. Boston Co., the American Express Co. subsidiary that loaned Trump the $29 million purchase price, spared no expense. Champagne and caviar flowed as top executives toured the 282-foot yacht at its berth in Boston Harbor. For Boston Co. Chairman James N. von Germeten, the Trump loan represented the transformation of his firm from a stodgy trust-fund manager for New England's old-line elite to a big-time backer of the nouveaux riches, especially celebrities and real estate developers.
Trump is now trying to avoid bankruptcy, and Boston Co. has repossessed The Princess, although it will be lucky to get $10 million for it. After much financial distress, the company is beginning to turn its own ship around. And it may be a tough sail. Von Germeten was fired in 1989 after an internal review revealed that Boston Co. falsely inflated 1988's pretax profits by $44 million. Von Germeten declined comment. In 1990, Boston Co.'s main unit reported a $138 million loss and added $90 million to its loan-loss reserves. And in the first quarter of 1991, domestic nonperforming loans increased to $155.9 million from $39.9 million in 1989 and constitute nearly 20% of its $343 million personal-loan portfolio.
REVERSE COURSE. All of which has been yet another embarrassment for AmEx and its beleaguered Shearson Lehman Brothers Holdings unit. In good years, Boston Co. contributed 25% of Shearson's bottom line. Yet for the past two years, it has hobbled AmEx's aggressive efforts to turn Shearson around.
In charge of the turnaround effort is former AmEx treasurer John R. Laird, who was installed as CEO in September, 1989. Laird, 49, is engineering a fundamental strategy shift that is starting to show results. He has scaled back the high-risk personal-banking business and shrunk assets from $17.4 billion in 1988 to $9.3 billion. And he is steering Boston into the lower-risk business of providing fee-based financial management services to big institutions, much like crosstown rival State Street Bank & Trust Co. In 1991's first quarter, Boston Co. earned $21 million, mostly from fee income. "It's moving in the right direction," says John Kriz, an analyst at Moody's Investors Service. "Its prospects are good."
Indeed, Boston Co. is expected to provide a boost to Shearson's second-quarter operating profits, although Shearson will post a big loss because of a $144 million write-off of its stock in First Capitol Holdings Corp., the failing California insurer. "Like Shearson, Boston Co. is a turnaround in progress," says Shearson Chairman and CEO Howard L. Clarke Jr.
Laird's first step has been to stop most lending to individuals. "No more celebrity loans," says Laird. The loans had been made by Boston Co.'s main unit, Boston Safe Deposit & Trust Co., a century-old special-purpose bank that can take deposits but only make personal loans. Besides the U. S. nonperforming loans, it has an additional $61 million in its $600 million British mortgage portfolio. Yet less than 1% of its $4.2 billion in jumbo mortgages--$350,000 or more--is nonperforming. Still, analysts remain skeptical that Boston Co. has solved all its lending problems. "I am still very worried about that loan portfolio," says Alison A. Deans, an analyst at Smith Barney, Harris Upham & Co.
TOO RISKY. Laird's biggest chore has been to liquidate a controversial $7 billion internal investment portfolio that had been a profitmaker under von Germeten. Shearson raised the money by selling CDs and then turned it over to Boston Co., which reinvested it in securities. Since 1989, the strategy has yielded only marginal profits. In Laird's view, the risks outweighed the returns.
Laird's big bet is on institutional money management and administrative services. He is increasing institutional assets under management, which grew at double-digit rates for most of the 1980s, reaching $25.5 billion at the end of the first quarter. Laird expects similar growth from pension fund administration. Boston Co. is the fourth-largest U. S. pension fund custodian, with $141 billion under administration. While that industry grew only 1.8% last year, Boston Co.'s custodial assets grew 7.7%, according to Pensions & Investments, an industry journal.
Laird is also looking for a buyer for The Princess. If he finds one, that would expunge not only a depreciated asset but a symbol of his company's errant brush with the excess of the Eighties.
Geoffrey Smith in Boston, with Leah Nathans Spiro in New York