Ailing Tex. Bank Receives Billion-Dollar U.S. Bailout : Oil, Realty Loan Losses Are Blamed
The Federal Deposit Insurance Corp. today pledged nearly $1 billion to prop up a failing Texas bank-holding company in the second-largest government rescue of a bank.
The FDIC gave preliminary approval to a plan that would pump $970 million into the Houston-based First City Bancorp. of Texas, which has been hit hard by losses on oil and real-estate loans.
Control of the bank company, Texas’ fourth largest, will pass to a group of investors headed by A. Robert Abboud, a former banking executive who operates an investment firm in suburban Chicago.
Abboud’s group will inject $500 million into the restructured company by selling stock.
The package is the second-largest bank rescue in the history of the FDIC. The agency loaned $1.5 billion to Continental Illinois National Bank and Trust of Chicago in 1984.
No Shareholder Bailout
FDIC Chairman L. William Seidman said the First City assistance package “is no bailout of the old shareholders or of the old bank management. . . . This is a different transaction than the Continental Illinois transaction.”
The share of the old common stockholders will be reduced from the current 100% to less than 3%, he said.
“I suppose one of the criticisms that we’ll hear is that this is another example of the too-big-to-fail syndrome. Let me point out that for all practical purposes, in terms of the stockholders and management, the bank has failed. But in terms of all of the depositors, the bank continues,” he said.
As part of the transaction, the FDIC will acquire a 15% interest in the restructured company. It also is guaranteed repayment of $100 million of the $970 million it is contributing in the form of five-year notes.
The government notes along with additional notes provided by First City subsidiaries will be used to cover $1.79 billion in bad loans from the parent corporation. A special spinoff bank will be set up to try to collect on the bad loans.
Seidman said the assistance package was “the lowest-cost alternative to the FDIC when compared to alternative bids . . . (and) to a payoff of depositors.”
The FDIC’s recovery of its contribution would depend on the value of its 15% interest, he said.
As of June 30, First City had $12.2 billion in assets and owned 61 banks in Texas and one in South Dakota. Troubled by losses on real-estate and oil loans, it lost $160.9 million in the first six months of this year and $402 million in 1986. It suspended dividends on its preferred stock last month.
Hope to Instill Confidence
Seidman said that “we believe and hope” First City would be the last of the big Texas banks requiring assistance and that the package could lend some confidence to the ailing Texas bank system “based on the fact that there was substantial private capital as well as our own funds willing to come in.”
Abboud, chairman of First Chicago Corp. from 1975 to ‘80, said in a statement, “This investment is a strong vote of confidence in both First City and the future of the Texas region.”
Abboud, when chairman of First Chicago, gained prominence as a financial adviser to President Jimmy Carter in 1979. He was once believed to have been considered for appointment as secretary of the Treasury.
The assistance plan is subject to the approval of the shareholders of First City and approval of final documentation by the FDIC. It is by far the agency’s largest outlay this year.
As of Sept. 4, 122 banks had failed this year, including 36 in Texas. The FDIC assisted another 16 banks, 11 of those in Texas. Seidman has predicted 200 bank failures this year.
