Japanese Banks Threaten to Sue B of A on Bad Loans
Several Japanese banks said Friday that they were considering legal action against BankAmerica to recoup several hundred million dollars they expect to lose in a badly managed U.S. student loan program plagued by computer software problems.
A group of Japanese banks and Citicorp, the largest U.S. bank, had issued letters of credit to guarantee notes sold by the California Student Loan Finance Corp. The quasi-public body packaged student loans and sold them in U.S. credit markets. BankAmerica is the trustee for $1 billion worth of the notes.
Investors who bought the notes are now facing large losses because of heavy defaults by former students on the packaged loans. The federal government has withdrawn its guarantees on the loans, saying they were badly administered. As a result, the letters of credit are likely to be called to cover investors’ losses.
BankAmerica had said earlier this week that the loan losses could total between $450 million and $650 million, but various other banks involved with the program believe the estimate is far too pessimistic.
“We think BankAmerica is responsible for the issue, and this is stipulated in the indenture,” an official of one Japanese bank said. A spokesman for Dai-Ichi Kangyo Bank said it was considering legal action and other ways to recoup its potential losses.
The other Japanese banks included Industrial Bank of Japan, Bank of Tokyo, Mitsubishi Bank, Mitsubishi Trust and Banking, Fuji Bank and Sanwa Bank.
BankAmerica also said earlier this week that it was adding an unspecified sum to its reserves in the first quarter to cover the defaulted loans. The company, which has been recovering from financial problems over the past several years, said the charge would not have a material effect on its 1989 earnings. It had also taken a $96-million fourth-quarter charge for the same program and other bad loans.
The loan program ran into problems when United Education & Software, which was hired by the California Student Loan Finance Corp. to administer the loans, changed its computer system in October, 1987. For the next eight months or so, the new system ran amok, losing track of many borrowers.
