America's Bumbling Bankers: Ripe For A New Fiasco

When a former top bank regulator was asked to comment on the quality of management of the nation's commercial banks, he thought for a moment. Then, for 20 seconds, he laughed uncontrollably.

It would be an exaggeration to say all banking executives are a laughingstock. Still, look at their record over the past decade. Almost 1,500 banks have failed. Many if not most of the 12,000-odd survivors have suffered sharp losses, caused by seemingly pandemic lapses in judgment. First came a slew of bad loans to the oil patch. Then came bad farmland loans and write-offs on Third World debt. Finally, reckless lending on commercial real estate and leveraged-buyout transactions. In between, bankers found time to lose big in dubious deals with the likes of developer Donald Trump and media mogul Robert Maxwell, who were able to borrow millions on their signatures alone, with few questions asked. As banks plunge into the 1990s, they are writing off more than $20 billion in loans every year--almost six times as much as at the start of the 1980s.

You would think bank executives might have wised up after this dismal performance. But you'd be wrong. Many management experts, academics, and bankers themselves complain that banks remain riddled with the mediocre management that has plagued the industry for decades. "I hope we learn from our mistakes," says John B. McCoy, chief executive of Banc One in Columbus, Ohio, and one of the handful of well-regarded bank managers today. Although McCoy thinks managers are improving, he adds, "we're starting from a very low base." Despite Banc One's stellar performance, McCoy rates his own management as a 3 or 4 out of a possible 5. "There isn't a 5 in our industry," he says.

TWICE SHY? A recent survey of CEOs at the top 300 banks seems to support McCoy's assessment. Conducted by Heidrick & Struggles Inc., an executive recruiter, in conjunction with American Banker, a trade paper, it found that more than 40% of the respondents felt that most bank CEOs didn't have the skills to provide leadership in a deregulated environment. More than half believed banks lacked sufficient management depth.

Lack of skills could be even more costly for banks in the 1990s than in the 1980s. The financial-services market is becoming intensely competitive. If bankers can't overhaul management, another loan fiasco--perhaps worse--seems certain. "My guess is we'll be caught again," says Terrence Murray, chief executive of Fleet/Norstar Financial Group Inc. in Providence. He gives the industry 10 or 15 years before another crisis. Others aren't so optimistic. Consultant David C. Cates believes banks may have only five years' grace: "Institutional memories are very weak."

It's true that the industry's problems can't all be blamed on bankers. Banks have often been hobbled by ill-conceived, overlapping state and federal regulations. They are required by law to serve such social needs as providing credit to poor neighborhoods, which sometimes conflicts with their goal of maximizing profits. And they have been inhibited from setting up interstate networks and diversifying into other financial services, which has made them more vulnerable to challenges from such nonbanks as Fidelity Investments and General Electric Capital Corp. But none of this accounts for the industry's record of blunders.

Why are bankers so consistently maladroit? The main reason is more than half a century of business in a sheltered, hidebound, predictable environment. Legal barriers helped protect banks from competition from other banks and outsiders. Deposit insurance and access to the Federal Reserve's discount window virtually guaranteed the survival of even the most pitifully run institutions. And hostile takeovers were unheard-of. The rule of "the three 3s" summed up the challenge of being a bank executive: Borrow at 3%. Lend at a 3-point spread. And be on the golf course by 3 p.m. "You had an industry where there was damn close to a guarantee that you would have some kind of profit," says Wayne Lewin, a management expert at the Bank Administration Institute.

Executives attracted by this comfortable way of life did not tend to be go-getters. Banks usually hired people who were good at taking orders and accomplishing well-defined, routine tasks. "The banking culture is dominated by people who want a less demanding career," says Cates. "It's more like government work."

Bank boards did little to disturb things. Directors in most industries are loath to interfere, but bank directors have been particularly timid. Typically, directors were recruited from the ranks of local business leaders. Many were actual or potential customers. And few understood the intricacies of banking. In 1989, just weeks before Bank of New England Corp. revealed the depths of its real estate problems, several directors purchased shares in the bank.

The dangers of poor management practices became all too obvious in the 1970s and 1980s. Big losses on loans to real estate investment trusts during the mid-'70s were but a harbinger of the waves of credit debacles during the '80s. A driving force behind the bad loans was that corporations, banks' best customers, started bypassing banks to borrow directly from the market via commercial paper. Rather than shrinking lending or expanding fee-based activities, banks fell over themselves lemming-like chasing after ever more risky borrowers.

There is not a lot of evidence that banks have learned enough to avoid repeating their mistakes. Despite the industry's horrendous performance, only a handful of CEOs, such as Walter J. Connolly Jr. of Bank of New England and A. Robert Abboud of First City Bancorp of Texas Inc., have lost their jobs. Many, perhaps most, of the CEOs responsible for the billions in loan write-offs continue to show up for work every morning.

Another bad sign is that banks haven't gotten much better at even their less-demanding functions. At a time when the public's faith in banks is sagging and customers are being lured away by more attractive financial products elsewhere, banks still have some of the worst records when it comes to customer service. "A customer who wants a loan is treated like a bad guy," says David Stone of New England Consulting Group. "The question bankers ask themselves is: 'How is this person going to screw me in two or three years?"' Likewise, bankers still show little inclination to vary loan pricing. Good and bad credit risks often pay the same.

And most bankers are still uncomfortable with marketing. Notable exceptions with credit cards aside, banks aren't good at selling. "There's a lot of noise about quality service," says consultant David Partridge of Towers Perrin. "But bankers still have a grocery-store mindset: Open the doors, and the customers will come."

There is no genetic reason that impels bankers to be lackluster. In fact, there are a fair number of well-run institutions. Several banks, such as KeyCorp in Albany, N.Y., and Banc One, have managed to avoid getting battered by bad loans. Although it suffered big write-offs on Third World loans, J.P. Morgan & Co. revamped its lending in the late 1980s and avoided debilitating forays into commercial real estate and LBO lending.

Other banks have shown commendable marketing savvy. At Fifth Third Bancorp in Cincinnati, every bank officer is required to make cold calls. The bank also conducts highly effective sales blitzes, in which 20 or 30 account officers descend on a region's local businesses for a day.

POP PSYCHOLOGY. When it comes to customer service, Seafirst Corp. in Seattle, a unit of BankAmerica Corp., has been a standout with its McDonald's-style approach. Individual branches are treated as franchises. Branch managers do all the hiring and set the hours to suit the local market. Seafirst also has 350 automated teller machines, which not only do standard banking tasks but also sell stamps and bus passes.

Other banks have proved to be innovative in motivating staff and dealing with the low morale brought on by heavy layoffs. After a cost-cutting plan that eliminated 700 jobs last year, CEO Samuel A. McCullough of Meridian Bancorp Inc. in Reading, Pa., helped relieve the tension by inviting 900 of his employees to a catering hall for a party. As guests entered, they were given a balloon, a marking pen, and a pin. They were asked to write on their balloons the name of some person or event they wanted to erase from their memories. "I told them all that McCullough was spelled with two C's and two L's," Meridian's chief recalls, although he doesn't know how many wrote his name. On command, everyone burst the balloons. McCullough has followed up with periodic phone-in sessions called "Just Dial Sam," in which employees can question the boss about the business.

Instead of figuring out better ways to manage their businesses, too many bankers these days are taking comfort that the worst of the crisis seems to be over. And they're congratulating themselves that they were able to survive, albeit with battered balance sheets. But merely overcoming the latest lending crisis is no longer enough. At the same time as competitors are whittling away at banks' once-inviolate franchises, legislative efforts to give banks expanded powers have made little headway. And taxpayers are getting tired of bailouts. Banking in the 1990s, in sum, will be even more demanding than in the 1980s. Bankers had better learn to master it, if the criticism--and the laughter--about their abilities are to die down.

      Financed drillers in anticipation that oil prices would keep going higher. 
      Prices started collapsing during 1981-82
      Lent to farmers who were expected to prosper from rising agricultural prices. 
      Prices dropped sharply in 1981-82
      Recycled petrodollars during the mid-1980's to less-developed countries who 
      promised they would repay their loans on time. Most didn't
      Lent to developers and investors who seemed certain to reap the benefits of 
      soaring real estate values. Prices plummeted in the late 1980s
      Financed buyout firms that planned to make a killing taking companies private. 
      Unable to handle the debt, many LBOs went bankrupt in the late 1980s
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