VIEWPOINTS : Will Merger Mania Strike U.S. Banking? : Just Too Many Uncertainties to Suit the Raiders
If I were T. Boone Pickens Jr. or Sir James Goldsmith or Saul P. Steinberg, I could cast my covetous eye on any business anywhere; and if I had a place to stand, and Drexel Burnham Lambert could buy me a long lever, I could move the world, whether the world liked it or not.
Unless I wanted to buy a bank. To buy a bank, I would need more than just money. I would need the permission of the bank chartering agency, state or federal, plus the consent of the Federal Deposit Insurance Corp. and, probably. the approval of the Federal Reserve Board. And, incidentally, I wouldn’t get that permission, because I have interests outside banking, and the regulators, especially the Fed, are all but violent about the need to maintain what they consider a line of demarcation between banking and commerce.
A bank can take over another bank without breaking that line, and these days, neither the Justice Department nor the Fed is likely to put up the old argument that an acquisition eliminates “potential competition.” Still, an honest-to-God takeover fight in the spirit of Carl C. Icahn or Ronald O. Perelman can scarcely be imagined. Those fights involve convincing stockholders that their institution is very badly managed. Every bank, though, is to a degree a confidence game because there are never enough liquid assets to pay off all the depositors. And, as a BankAmerica statement pointed out when First Interstate Bancorp was still on the scent, it’s illegal in most states to make statements that impair the credit-worthiness of a bank.
First Interstate’s bid for BankAmerica, which was withdrawn Feb. 9, prompted much discussion about whether “hostile takeovers” are a good idea in banking. To be sure, we already see at least a hundred takeovers a year arranged by regulators where a financial institution doesn’t have any choice about whether somebody will take it over. The most dramatic examples of this sort of unfriendly takeover have come with the S&Ls--in; California, for example, Fidelity Savings & Loan, which was peddled by the Federal Home Loan Bank Board to Citicorp over the dead bodies of its owners (and state authorities, too).
Investors Weren’t Sure
We don’t call these transactions hostile takeovers because they are government-sponsored. But virtually all intrastate mergers of competing banks are to a degree government-sponsored. The risk arbitrageurs and the big stock players never got involved in the Fi1920168992price of BankAmerica stock stayed more than $4 below even an uncharitable valuation of the First Interstate bid. In large part, that was because nobody was sure which way the government was going to jump. Professionals don’t like to risk money on deals that live or die by the whim of a regulatory agency.
Although a bank is a limited liability company like any other from a stockholder’s point of view, it remains very much a pig in a poke for a raider. The “regulatory accounting” by which banks present themselves is even more misleading than Generally Accepted Accounting Principles, which is saying a lot. No banker, for example, would lend to a business that insisted on counting its overdue accounts receivable as part of its capitalization, but the banking regulators not only encourage but essentially require banks to capitalize their “loan loss reserve.” A non-financial corporation or a Wall Street investment house will have to mark its financial assets to market--present a balance sheet that reveals the current sales price of the stocks and bonds and other securities it holds--while a bank can continue to carry most assets at par however low the price falls. Loans to the government of Peru, for example, which sell at about 20 cents on the dollar, appear on the banks’ published balance sheet as worth a whole buck.
Can’t Determine Assets
Worse yet, an unfriendly outsider can’t even find out what a bank’s assets are. Though unpleasant surprises are far from unknown, the purchaser of a non-financial company can usually get a good notion of precisely what he is buying, because the great bulk of it is bricks and mortar and inventory. But when you buy a bank, you buy a loan portfolio, and except to government examiners, bank loan portfolios are secret; and there’s the rub. First Interstate, indeed, left itself a loophole, that its offer to purchase BankAmerica could be reduced or abandoned if an examination of the loan portfolio found that book value should be much less than indicated in published reports.
The takeovers that the FDIC has assisted come after government examiners have pawed through the portfolio, and they offer purchasers the chance to slough off what they don’t want to own. Even where the object of a takeover is sound, the acquirer, by securing regulatory permission, gains a sort of informal, unenforceable warranty. The regulator, after all, is obliged to consider the safety and soundness of the acquiring bank, not to mention the government’s own liabilities as the reluctant but locked-in guarantor of the deposit insurance funds.
The First Interstate-BankAmerica war was not really a fight between institutions; it was a vendetta between Joseph J. Pinola, First Interstate’s chairman, and A. W. (Tom) Clausen, BankAmerica’s chairman. As the stock market indicated from day one, this left everyone with the feeling that Pinola was prepared to pay too much, which depressed the price of First Interstate and boosted BankAmerica’s stock somewhat. But Pinola couldn’t lay a glove on BankAmerica until the Fed gave what the Catholic Church calls a nihil obstat . This might or might not have been given; if it had been given, everyone would have considered it, whatever the phrasing of the press release, a slap at the current management of BankAmerica. When you read about a hostile takeover of a bank, in short, remember that it can happen only if the government is at least a little hostile, too.
