Lessons of Texas Boom, Bust Were Lost on New England

In June, 1988, U.S. Comptroller of the Currency Robert L. Clarke told banks that aggressive uncontrolled expansion can lead to deep trouble.

“Growth for growth’s sake, or growth without the resources to back it up, is a highly risky strategy because it leaves the bank exposed when the economy turns down,” he said.

Those words read like an epitaph for the Texas banking industry, where eight of the 10 largest holding companies were failing, crushed by awesome credit losses during a bust in the oil economy.

But up in New England, Clarke’s message was a prophecy of things to come.

Banks caught in the euphoria of a construction boom have watched the economy turn sour. The real estate market has tumbled, giving banks a staggering amount of bad loans and putting one of the region’s largest banks--Bank of New England Corp.--in a fight for survival.

These troubles echo the story in Texas, but analysts say New England should not have a repeat performance, even though bankers apparently failed to learn from mistakes made in the Southwest.

“I suppose they thought it could happen to dumb Texans, but not happen to wise, conservative Yankees,” said L. William Seidman, chairman of the Federal Deposit Insurance Corp. “Poor management shows up when the economy goes bad.”

The New England banking industry in recent months has resembled an infirmary’s list of wounded.

Among the nine states that showed the biggest increases in troubled real estate loans from December, 1988, to last September, six were in New England, industry estimates show.

Bank of Boston Corp., the region’s largest bank, reported a record $125-million loss for the third quarter of 1989, and for the year it had a 78% drop in earnings.

Bank of New England said losses in 1989 should surpass $1 billion, and it is trying to sell $6 billion in assets.

Analysts say Bank of New England has been one of the biggest victims of the regional real estate slump, since it competed aggressively to make construction loans earlier in the 1980s, sacrificing sound credit policies in order to build its empire.

The eagerness shown by Bank of New England and other banks to lend their money for construction projects is one of the biggest similarities to what happened in Texas, experts say.

The economies in both regions had been robust: in Texas the driving force was oil and energy; in New England it was largely the high-tech and defense industries.

The growth in these economies fueled rapid buildups in office space and housing, providing a quick avenue for banks to boost assets by making construction loans. In both cases, however, this led to excessive speculation by developers, which resulted in overbuilding.

Thus, as the Texas economy, and then the New England economy, began to slide, building projects had trouble finding tenants, developers couldn’t make loan payments, and the banks lost money.

“It was one big party,” said Gerard Cassidy, a banking analyst with Tucker Anthony Inc. in Portland, Me. “Then the party stopped, and now the hangover started.”

“There were projects built that should have never been built, no question,” said Leo Spang, senior vice president of commercial real estate at Shawmut Bank in Boston.

But Spang said the trouble is more manageable in New England, partly because the economy is more diversified and there simply was much less speculation.

Analysts agree with that assessment and say New England should not experience the flurry of bank closings similar to what occurred in Texas.

“The Texas debacle was so much greater in size and magnitude,” Cassidy said. But he added, “There are too many similarities to rule out that New England will become another Texas.”

Banks in Texas and in New England each made the same mistake in judgment, said Alex Sheshunoff, president of Sheshunoff & Co., a banking information and consulting firm in Austin, Tex.

“They underestimated the capacity of builders to overbuild,” he said. “As the phrase goes, ‘The demand was for a million square feet of space, and 10 developers went out and built it.”’

Some banks in New England showed more restraint.

Fleet-Norstar Financial Group Inc. in Providence, R.I., for example, quit making loans for condominiums about three years ago, said Robert Lougee, a company spokesman.

The condo market, in particular, has been a major source of troubled loans, but at Fleet-Norstar “there were obviously some who saw overdevelopment going on,” Lougee said.

He noted, however, that banking officials foresaw a downturn in the real estate market based on their own experiences, not on any lessons from Texas.

“It’s sort of the history of finance,” said Robert Litan, a banking expert with the Brookings Institution in Washington. “No one learns from the last disaster, especially when they didn’t have any part in it.”

The federal government, though, appears to have learned from the Texas experience, and analysts say regulators have been more swift to crack down on New England banks.

“Here it’s taking (regulators) only several weeks to realize what’s going on,” said Mas Kakutani, a banking analyst with Moody’s Investors Service Inc. in New York. “The deterioration of New England banks has been more severe than anything we saw in Texas, in terms of quickness.”

“We are certainly trying to reflect some of the lessons learned from Texas,” said Seidman at the FDIC.

Seidman said regulators were taking a cautious look at New England before the serious problems surfaced, and he said officials in the future will pay closest attention to banks that grow the fastest.

“Once bitten, twice shy,” he said.