Chase Bank to Cut 5,000 Jobs, Tells Huge Loss
In the latest sign that the economy’s deterioration is seriously hurting the nation’s banking system, Chase Manhattan Corp. said Friday that it is taking drastic steps to shore up its financial health, including cutting 5,000 jobs.
The nation’s second-largest banking company said also that it will take $1 billion in write-offs that will contribute to an expected loss of about $625 million in its current third quarter. That would be one of the largest deficits ever reported by a U.S. bank.
Layoffs and other measures to reduce staff, which have already begun, will eliminate 12% of the 41,000 employees Chase had at the beginning of the summer. Chase has only about 300 employees in California, a bank spokeswoman said.
Chase’s hastily prepared announcement followed a blizzard of rumors this week that the company was facing a liquidity crisis--or inability to raise short-term financing--which, if true, could have dire consequences not only for Chase but for the whole banking system. But the Chase spokeswoman, Amy L. Sudol, denied there was such a crisis. “Our funding activities are normal,” she said.
Banking industry analysts said Chase’s problems reflect a downturn in the real estate market, especially in the Northeast, and a consequent increase in the number of real estate loans that are delinquent or have other problems. They reflect also the general weakening of the economy and the expected effect of rising oil prices due to the Middle East crisis. Higher interest rates outside of the United States also are causing a capital squeeze, as investors move money out of this country.
At the same time, federal regulators are pressuring banks to take bold cost-cutting steps to stave off a banking crisis similar to the savings and loan debacle. If banks don’t take steps to cut costs and stem losses, the consequences could include failures of some of the largest banks, analysts said.
George Salem, a banking analyst with Prudential-Bache Research in New York, said he expects that, within the next couple of months, perhaps five or six of the country’s dozen largest banking firms will be forced to take steps similar to Chase’s, particularly including cutting dividends paid to shareholders. Such banking companies, he predicted, may include Los Angeles-based First Interstate Bancorp, Chemical Banking Corp., Manufacturers Hanover Trust and Citicorp, the nation’s largest banking company.
Salem called Chase’s announcement “a historic event.” He said it amounts to an acknowledgement that one of the nation’s largest “money center” banks is experiencing the same severe problems that until now have visibly affected only smaller regional banks. A federal agency reported this month that profits of commercial banks nationwide fell 24% in the second quarter, compared with the same period in 1989.
James P. Hanbury, an analyst with Wertheim Schroder & Co., said that, by sharply cutting costs, Chase is “trying to get in better shape; but, while they’re trying to get in better shape, the world around them is changing for the worse.” He added: “The problems these banks have were pretty serious even before the Middle East crisis began.”
Richard X. Bove, an analyst at Dean Witter Reynolds, said that, in the current environment, all banks probably will have difficulty raising short-term financing and consequently will have to pay steep interest rates, if money is available at all.
“If this continues, it’s going to have a very big impact, not just on the banks, but on the U.S. economy,” Bove said.
Analysts said investors were spooked by recent reports by General Accounting Office and Congressional Budget Office projections of a gloomy outlook for banks. Bove asserted that the reports “crossed the line from, ‘We’re telling you about something that’s wrong,’ to ‘We’re shaking confidence in the whole banking system.’ ”
The reports included a warning that the Federal Deposit Insurance Corp. fund that insures commercial bank deposits could be wiped out if a recession brings on a spate of bank failures.
In its announcement, New York-based Chase said that its goal is to cut its operating expenses by $300 million in 1991, mostly through staff cuts. Chase said its expected third-quarter loss of about $625 million will partly reflect a series of steps, including taking a writeoff, or charge against earnings, in the third quarter of $350 million to cover costs of its corporate restructuring.
The company said it is setting aside an additional $650 million to cover potential losses from bad loans, including Chase’s worsening portfolio of commercial real estate loans. The firm in September, 1989, increased its loan-loss reserves--money set aside to cushion against losses from bad loans--by $1.15 billion, mainly to cover losses on loans to developing countries. That move was followed by similar actions from several other big New York banks.
Chase also said it expects its board of directors next month to reduce the company’s quarterly dividend payments on common stock to 30 cents a share from 62 cents.
In a press release, the company asserted that the cuts will put it in strong financial shape. Chase predicted that it will show a strong profit in this year’s fourth quarter of more than $140 million.
A significant part of the company’s restructuring apparently will be the closing of several offices in Europe and Latin America and trimming and consolidating other operations there. The company said that 1,600 of the 5,000 workers expected to be cut have already left under a “voluntary separation program” that began in August.
Sudol, the Chase spokeswoman, refused to specify which types of employees most likely will be subject to layoffs.
The rumors of a liquidity problem at Chase were touched off when the company was due last week to reset the interest rate on $200 million of bonds, which had been yielding 9.66%. There reportedly was a scarcity of buyers for those securities, and Chase was forced to raise the yield, or effective interest rate, on the bonds to an astronomical 13.017%.
The rumors of a crisis at Chase had caused its stock to plunge in recent days to a 12-year low. On Friday it closed at $12.75 a share, off $1, in New York Stock Exchange trading.
Shares of other banks also turned in weak performances. Manufacturers Hanover fell $2.875 a share to finish at $23, Citicorp dropped 87.5 cents a share to close at $15.75 and Chemical Banking slipped 87.5 cents to end at $16.875.
