This Starry New Hollywood Bank Is No Hit So Far : Entertainment: Gerald Breslauer’s plans for a showbiz financial institution find the rich and famous wary. Besides, they already have a bank.

Gerald Breslauer, business manager to such stars as Michael Jackson and Steven Spielberg, long dreamed that he would close the circle of celebrity wealth by creating a manager’s bank.

He and his clients, and his friends and their clients, would own the bank. They would keep an eye on their own deposits, enjoy the profits and, perhaps, fatten the bank up for eventual sale.

In a rough approximation of that vision, associates of Hollywood’s Breslauer, Jacobson, Rutman & Sherman management firm in February joined the star-packed Creative Artists Agency to pay a total of $6 million for stakes of nearly 10% each in National Mercantile Bancorp. The company owns Mercantile National Bank, a small business bank with offices in Century City and Irvine.

Yet the results have been anything but dreamy so far.

Mercantile National profits have plunged since the investment, and the parent company’s stock has lost half its value in a weak market.

The bank quickly found itself in a war for deposits with a rival, Beverly Hills’ City National Bank, where most of Breslauer’s clients kept accounts. It also has become the focus of heated debate among Hollywood’s agents, lawyers and managers--many of whom were Mercantile National customers when the investments were made--as to the wisdom of banking with an institution partially controlled by potential business rivals.

The fortunes of Mercantile National during the past year provide a behind-the-scenes view of a part of Hollywood business few outsiders see. The attempt to create a glamorous celebrity bank may prove that the normally cool, detached business of banking does not mix with the heated currents of star finance. It also shows that Hollywood executives, usually wide open to creative business arrangements, may be uncomfortable when it comes to something as sacred as the personal or corporate bank account.

In recent weeks, InterTalent, a hot Hollywood agency that has been locked in a fight for clients with much larger CAA, and Hansen, Jacobson, & Teller, a law firm that represents director David Lynch and other entertainment clients, have left Mercantile National.

Spokesmen for each firm declined to comment. But insiders at both cited uneasiness about the confidentiality of their accounts as well as other concerns. The questions have intensified since last April, when Mercantile National installed a new president, William Hughes, who had worked closely with CAA during his previous tenure as a Security Pacific executive.

No one interviewed for this story accused Mercantile National’s officers or investors of any impropriety or cited any evidence that customer information was shared with or requested by anyone other than bank officers. One Breslauer associate also pointed out that it is still too early to measure the success of the investment. “This was intended to be a five-year, not a one-year investment,” the associate said.

But individuals with half a dozen entertainment-related corporate customers--including the law firms of Bloom, Dekom & Hergott and Silverberg, Katz, Thompson & Braun, and the newly combined Leading Artists and Bauer/Benedeck talent agencies--said they have worried that Breslauer or CAA Chairman Michael Ovitz might ultimately get access to their financial information, particularly if either were to join the bank’s board.

“As much as we like Breslauer and company, and the same goes for Michael Ovitz, whatever we do is none of their . . . business. We felt great trepidation over this, but we were given major assurances,” said one attorney whose firm continues to bank at Mercantile National.

A CAA spokesman said his agency has no active involvement with the bank whatever, although he acknowledged that CAA officers “introduced” Hughes to the bank’s board as a replacement for previous the chief executive, Terry T. Tomich, who left shortly after the investment groups bought in.

Hughes and Tomich declined to be interviewed for this story. So did Breslauer, for whom the investment is beginning to look like a rare misstep.

At age 62, Breslauer enjoys extraordinary trust and friendship in a field where even a small mistake can cost clients.

“The reason I have Gerry in my life is that he is incredibly decent, honorable and trustworthy. These are not unimportant qualities,” said music and film entrepreneur David Geffen, a longtime client. Geffen referred Jackson, Bruce Springsteen and other performers to Breslauer, helping turn his firm into what many observers describe as Hollywood’s premier management company.

With six partners and roughly 100 employees, the Breslauer firm is smaller than its principal rival, Gelfand, Rennert & Feldman, which was purchased by accounting giant Coopers & Lybrand last December for an undisclosed price. But it represents an unusual share of big earners, including Springsteen, Jackson, Prince, producers Don Simpson and Jerry Bruckheimer, Fox Inc. Chairman Barry Diller and music executive Irving Azoff, among others.

One former Breslauer associate estimates that the company directly manages about $750 million in assets and has a “sphere of influence” exceeding $1 billion, including a consulting role in investments for lawyers and agents who aren’t regular clients of the firm.

The money has been invested heavily in apartments, commercial centers and other real estate, usually through a network of partnerships that spread risk by allowing each client to participate in each deal, while cloaking the identity of individual investors.

Breslauer, who was born in Brooklyn but attended Los Angeles High School, grew naturally into his role as Hollywood’s chief financial officer. Just out of UCLA in 1951, he joined a business management firm headed by Benjamin Bisgeier, who handled Tony Martin, Robert Young and other entertainers. While with Bisgeier, Breslauer also did accounting work for several savvy real estate developers, including Donald Bren, who went on to purchase Irvine Co.

Breslauer got his foothold in the new Hollywood in the early 1970s, when he took then-unknown director Steven Spielberg under his wing after seeing Spielberg’s early film “Amblin’ ” at producer Ray Stark’s home.

While Spielberg became a magnet for younger filmmakers, Breslauer also struck an early alliance with Barry Hirsch, an entertainment attorney who in turn worked closely with Michael Ovitz in the early 1980s, when Ovitz was pushing Creative Artists Agency to its predominant position in the film and television industries.

Breslauer’s firm grew thanks in part to referrals from Hirsch and Ovitz. At the same time, he and his partners occasionally co-invested with the agent and lawyer.

In recent years, Breslauer’s financial contact at CAA has been Robert Goldman. Though little known in Hollywood, Goldman has played a critical role in managing CAA’s investments and the construction of its headquarters building in Beverly Hills. A former business manager who is now on the agency’s staff, he has been a longtime friend of Breslauer and, according to a Breslauer associate, helped form the original plan for a “manager’s bank.”

Oddly enough, according to individuals familiar with the deal, Goldman became interested in Mercantile National after he was introduced to bank director Arpad Domyan by a construction contractor who was working on both men’s homes.

Mercantile National had expanded its entertainment department under Julie Smith, a young officer who enjoyed strong Hollywood contacts as the daughter of Joe Smith, the head of Capitol Records. But the bank’s board was interested in attracting new capital and connections that would allow it to make bigger loans and push into the lucrative area of film production lending--a relatively low-risk business in which banks lend, say, $15 million to a small production company for several months, while the company shoots a film that will be paid for by a major studio on completion.

In an arrangement agreed on in 1989 but made final only last February, a CAA-sponsored investment partnership paid $3.2 million for 287,615 National Mercantile shares, while the clients and partnerships affiliated with Breslauer’s firm paid $2.9 million for 261,330 shares.

The two groups thus paid $11 a share for stock that now sells for about $5. On paper, the CAA group has lost $1.6 million on its investment, and the Breslauer-related partnerships and clients have lost $1.4 million.

To be sure, bank stocks everywhere have been hammered as the economy slows and concerns grow about bank real estate lending. Even the nation’s best banks have seen their stocks fall sharply.

But Mercantile National’s problems have gone beyond the industry’s woes. Immediately after the CAA/Breslauer buy-in, the bank posted a $1-million loss in one quarter stemming from a $2-million loan made years ago to Carl M. Rheuban, a former Los Angeles savings and loan executive now under investigation by the FBI. Earnings dropped 20% the following quarter to $726,000 as it set aside nearly $1 million for potential losses on loans.

As the banking business slowed, according to bank executives, Mercantile National’s overhead soared, largely thanks to the arrival of service-hungry entertainment customers, who brought their business to the bank from City National and elsewhere. Public records show the bank spent $54,000 more for messenger services in the second quarter than it did a year earlier and $42,000 more for “marketing and customer entertainment expenses.”

Simultaneously with the buy-in, Mercantile National hired City National’s entertainment lending chief, Irene Romero, a longtime Breslauer associate who had joined that bank seven years before, when the manager moved his clients’ accounts from Wells Fargo, where Romero had then worked.

An investment by Breslauer in a bank and a move by Romero had clearly been in the works for some time. John Keating, chief executive of California United Bank in Encino, said he spoke with Romero at length about joining his bank.

“I interviewed her and talked to her a bunch of times. She said she had to talk to Gerry Breslauer,” Keating said.

Romero is known in Hollywood’s financial community as a strong, businesslike bank official who carefully tends to the needs of difficult customers. But her defection touched off a behind-the-scenes fight between the two banks when City National Chairman Bram Goldsmith began personally lobbying Breslauer clients to stay with his bank.

A City National officer says about a third of the Breslauer roster, with cash deposits in the tens of millions of dollars, stayed behind. One person familiar with Mercantile National said that the bank expected Romero to attract $200 million to $300 million in deposits but that the amount has been less than half that amount.

At same time, Romero’s arrival at Mercantile National added another layer of expense, as salaries began to zoom. According to executives familiar with the bank, Romero was hired at an annual salary of well over $200,000. She also got a new Porsche.

All told, sources familiar with the bank said, the cost of beefing up the bank’s entertainment business reached $800,000--a considerable expense for a bank that had only $388 million in assets at year-end and never reported an annual profit higher than $3.5 million.

“They were staffing up and creating a mini-City National. It bothered us because there was too much overhead. It was a big nut for them,” said Scott Black, president of Delphi Management, a Boston investment firm that was once a large investor in the bank.

Precisely how much involvement Breslauer and CAA have had with the bank’s management is the subject of fierce debate within the bank and among customers and ex-customers. Board members downplay the involvement of Breslauer and CAA, disputing any suggestion that they run the bank behind the scenes. Board member Robert E. Thomson said of Breslauer: “I’m not sure I would recognize him if I met him.”

Tomich quit shortly after the buy-in by the Breslauer group and CAA. His relationship with the bank’s directors had become strained, according to friends, in part because he wasn’t consulted early on about the new investors and Romero’s hiring.

Initially, Breslauer and Goldman were expected to join the National Mercantile board, a natural step for representatives of such big investors. But Romero objected to the move, believing it would hurt her business. Directors have broad access to bank information, and Romero was concerned that some customers would fear for the confidentiality of their dealings.

At least one bank intimate now maintains that the board was “star struck” at having CAA as an investor. And two individuals closely familiar with the investment say bank officers and the new investors clearly underestimated the backlash among customers who suspected that the agency might ultimately acquire access to their accounts.

“What (Romero) is capable of doing, to date she hasn’t been able to do. It’s not because of her but because of a lot of jealousy of other business managers who don’t want to make Mike Ovitz and Gerry Breslauer richer than they already are,” said one banker who works closely with the entertainment business. Despite his proximity to wealth, Breslauer appears not to be among the super-rich. On a 1989 balance sheet prepared by Breslauer but filed by his wife in a recent divorce case, the manager recorded a net worth of $4.6 million.

Ironically, however, one Breslauer intimate says the manager had counted on much stronger involvement from CAA’s Ovitz, who hasn’t proved a major source of referrals or deposits for Mercantile. In some respects, major CAA partners were almost indifferent to the investment, failing, for example, to show up for a dinner celebrating the closing of the deal.

Even so, competitors have been quick to argue that Breslauer and CAA have too big a stake to remain passive--particularly since Smith, who declined to be interviewed for this story, left for rival First Charter Bank a month ago and soon took InterTalent with her.

“Anybody who has nearly 20% of a company has a lot to say,” says California United’s Keating.

Another competitor, who declined to be identified, adds of the bank investment: “This was an ego trip. . . . (Banking) is a tough game in Southern California. Every money center bank and every foreign bank has been in the market for years.”