First City Goes Down For The Second Time

First City Bancorporation has the dubious--and perhaps unique--distinction of being a two-time loser. On Oct. 30, for the second time in four years, regulators have had to rescue the Houston-based bank holding company. First City Bancorporation of Texas Inc. was in 1988 among a series of major Texas banks that collapsed. The later failures got taken over by larger entities and are faring quite well. But at First City, which has $8.8 billion in assets, everything that could go wrong with its rescue did.

It almost seems as if fortune singled out First City for punishment. The initial collapse resulted from the mid-1980s' plunge in oil-and-gas prices. That slammed Texas, flattening First City and other major Lone Star State banks. The others, though, benefited from deep-pocketed buyers who steered them away from flamboyant, big-time lending toward more conservative banking practices. The upshot is that the 1980s' failures or near-failures, such as MCorp (taken over by Banc One), First RepublicBank (NCNB), and Texas Commerce Bancshares (Chemical Banking), have weathered the national recession quite nicely. But First City suffered from an unwisely aggressive strategy under A. Robert Abboud, the hard-charger who took over in 1988. After a brief earnings surge, the red ink began gushing, with $224 million in losses last year and almost as much expected in 1992 (chart).

After tossing out Abboud in 1991, the bank's board cobbled together a plan to turn the place around by selling off subsidiaries, negotiating cheaper leases, and raising $100 million in fresh capital via a stock sale. "We certainly had no indication the regulators didn't like our plan," laments board member Ralph S. O'Connor.

The feds' action, just four days before the Presidential balloting, has inspired an enticing conspiracy theory. "Obviously, it had something to do with the election," says Hugh M. Ray, an attorney for a First City bondholders' group, which has petitioned a Dallas court to force the holding company into Chapter 11. Under the political scenario, career regulators didn't want to be pilloried by a Clinton Administration for holding off the bad news--in a state crucial to President Bush--until after the voting. The feds scoff at the idea, noting that the chiefs of the two bank regulatory agencies, the office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., are Republican appointees.

Indeed, regulators maintain that they moved only because their annual examination, which started in September, uncovered mounting loan losses. They ordered First City to immediately and dramatically increase loan-loss reserves for its Houston subsidiary. But the bank was unable to comply. Its capital-raising plan would have taken until December at the earliest to get results, and regulators doubted it could come up with enough capital. Says an official with the comptroller's office: "It's too dangerous to leave an insolvent bank sitting around." So the feds pounced. This time, the rescue will cost $500 million in federal funds.

LUCKLESS VENTURES. Could a double dip have been avoided? Another reason the other Texas problem banks succeeded was that the government assumed their bad loans. First City had to keep its lousy portfolio. The feds did kick in $970 million to cover past losses, but "they didn't get the money they needed to cover the hole," says Dallas consultant Anthony J. Montelaro. A total of $1.4 billion would have been required.

Still, First City might have muddled through--if it hadn't been saddled with Abboud's bold and luckless ventures. Longtime Chicago banker Abboud, who couldn't be reached for comment, promised investors fast growth and rich returns. The investment group ponied up $500 million to fund his ambitions. But he couldn't find many promising deals in the weak Texas economy. His solution: leveraged buyouts and dicey deals. Unfortunately, a passel of loans to such supposed worthies as Drexel Burnham Lambert, Circle K, Federated Department Stores, and Garfinckel's went bye-bye when they filed for bankruptcy.

Other banks are interested in First City's twice-felled carcass, reasoning that a long-awaited Texas upturn will provide lucrative opportunities. The real enticement for bidders is federal aid. Some 13 of its 20 subsidiaries are profitable, and First City could be sold off piecemeal. At least five banks are eyeing a bid. "We're certainly interested in a government-assisted transaction," says Chemical spokesman Kenneth Herz. At First City, it's try, try again.

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