There Are Troubled Banks, And Then There's First American

It has been the talk of the town ever since a Bank of Credit & Commerce International executive bragged to undercover federal agents in 1988 that the Luxembourg-based rogue bank had secretly owned Washington's First American Bankshares Inc. for the past six years. Despite that, it took the Federal Reserve until March to order BCCI to sell First American. But now, with BCCI seized by British regulators and indicted for money laundering and fraud in New York, U. S. investigators are suddenly turning up the heat on top officials of the $11 billion bank group.

The Fed, the Justice Dept., two congressional panels, and the Manhattan District Attorney's office all want to find out whether First American's chairman, Washington superlawyer Clark M. Clifford, and president, Robert A. Altman, lied when they assured the Fed their bank was independent of BCCI. Through their lawyer, both deny any wrongdoing. But the Fed maintains that BCCI founder Agha Hasan Abedi and other officials recruited senior BCCI executives for First American's New York bank, even paying them extra salaries.

FRONT MONEY. Despite such disclosures, investigators have yet to find any sign that First American took part in the money-laundering schemes that government officials say pervaded BCCI. The bank didn't even collect any dividends, Fed sources say, although First American's assets and profits grew at a 20%-a-year clip through the 1980s. There is still "no evidence that First American was generating any funds for BCCI," says a puzzled Fed official. Whatever strategy BCCI had for its U. S. affiliate, it's now disintegrating.

On July 29, the Fed fined BCCI $200 million for illegally acquiring the bank. The Fed charges that BCCI gained control of First American in 1982 by lending funds to Middle Eastern front men. With the ownership of the bank thus clouded, efforts to sell BCCI's stake have ground to a halt. What's more, the bad publicity surrounding BCCI is beginning to take a toll on First American: Since June, 1990, the bank has lost some $500 million in $100,000-and-up deposits.

Some big depositors say they fear that if First American gets into trouble, the government won't protect accounts over the $100,000 federal insurance limit. For example, even before the Bank of England seized BCCI on July 5, Tom Condit, president of Washington's National Cooperative Bank, pulled several short-term deposits worth more than $1.5 million. So far, smaller savers haven't followed suit.

First American is suffering, though. Washington's real estate woes forced a $158 million loss in 1990, and this year looks no better. Nonperforming loans at First American's five banks tripled, to $469.8 million, between March, 1990, and March, 1991. On Apr. 18, First American's Washington bank signed an agreement with regulators to work out bad loans, improve appraisals, and boost its capital. First American also set aside $230 million in reserves.

Investigators have found only one clear way in which BCCI exploited its ownership of First American. The Fed maintains that BCCI, which suffered a huge trading loss in 1986, pumped up its balance sheet by manipulating the shares of First American's parent firm.

To raise funds, says the Fed, BCCI turned to Khalid bin Salim bin Mahfouz, owner of National Commercial Bank of Saudi Arabia. BCCI's front men pledged part of their stake in First American's parent to secure $390 million in loans and repurchase agreements from Mahfouz. They then paid off their loans from BCCI, bolstering its balance sheet.

Once BCCI was past its funding crisis, the Fed says, it bought back the stock from Mahfouz, lending the funds to the same front men to make the purchase. The loans inflated BCCI's assets, even though the transaction was a sham. Says a U. S. investigator: "They were moving the shares around in circles, and the loans just kept getting bigger and bigger." As part of the deal, BCCI lent Clifford and Altman money to buy shares in the parent firm. They later sold some of them at a $14.2 million profit.

Whether BCCI had an even deeper involvement with First American is yet to be determined. First American's New York bank, for example, served for years as one of several U. S. clearing agents for the Luxembourg bank. That relationship and others may come under increased scrutiny in coming weeks. In announcing the indictments of BCCI and its founder on July 29, Manhattan District Attorney Robert M. Morgenthau said that only "20% to 25% of what ultimately will be the result of the investigation" has emerged so far. It's unlikely the other 75% will do anything to ease First American's woes.