U.S. Seizes Bank Group in 3rd-Biggest Collapse : Economy: Rescue of affiliates in three New England states will cost $2.3 billion. Depositors are protected.

Moving swiftly to avert a full-blown financial panic in New England, federal officials on Sunday seized the Bank of New England group and promised to protect all deposits, even those above the $100,000 insurance limit.

The rescue of the Boston-based Bank of New England and its affiliates, Connecticut Bank & Trust and Maine National, will cost the federal insurance fund an estimated $2.3 billion, making it the third-biggest bank collapse in U.S. history.

Frightened depositors pulled $1 billion out of Bank of New England on Friday and Saturday after the bank announced it expected to report a final loss of up to $450 million for the fourth quarter of 1990. The cash crisis triggered the collapse of the closely-linked Connecticut and Maine institutions and forced regulators to step in.

All offices of the three banks will open for business as usual today, regulators told a hastily called news conference on Sunday night. But the banks, with total assets of $22 billion and deposits of $16.8 billion, now belong to the U.S. government.

In New England, consumers and businesses were already shaken by an ailing economy and the abrupt shutdown of 45 privately-insured credit unions and small banks in Rhode Island. Federal officials decided the region couldn’t handle the impact of new losses from wiping out $2 billion in uninsured deposits--amounts above the $100,000 protected by law. They decided to safeguard all deposits, despite the widespread talk in Washington about the need for new legislation to narrow the protection of federal insurance.

Regulators assured protection for all funds to “help the economy of New England, to stabilize the financial situation and cause the least disruption,” said L. William Seidman, chairman of the Federal Deposit Insurance Corp.

“I think New England will turn around just as Texas turned around,” Seidman said. Meanwhile, “we’re in a cycle . . . and it’s a very severe one.”

Extra currency can be trucked today to the branches of the seized banks from the Federal Reserve Bank of Boston if nervous customers demand cash. “Full banking services” will be available, and customers can cash checks or use automated teller machines, Seidman said.

The only immediate economic casualties will be investors in Bank of New England Corp., the holding company for the three institutions, which is now virtually bereft of assets.

But one political casualty could be the Bush Administration’s ambitious plan for major banking reform.

The Administration will soon unveil a legislative proposal to dismantle the walls keeping the banks from full participation in the securities and insurance fields. The proposal also would do away with the “too-big-to-fail” doctrine, under which all deposits at big banks have traditionally been given protection for fear of causing economic panic.

Administration officials say this leads to sloppy management at some banks, which need the market discipline of facing failure for risky investments.

However, Congress may be skeptical of this approach, having just watched the government guarantee all the deposits at the Bank of New England.

The use of this tactic “depends on the situation,” Seidman said, adding that the Treasury supported the decision to protect all deposits.

“It was clear to us (that) to . . . protect the stability of the system, (we) should protect all deposits,” Seidman said.

The government has two active bidders to buy Bank of New England “and other well qualified bidders might apply,” Seidman said. “We expect to announce a transaction soon. In the meantime, it’s business as usual.”

The FDIC is immediately placing $500 million in new capital into the Bank of New England, and $250 million into the Connecticut institution, based in Hartford. The Maine bank, based in Portland, does not need capital “at this time,” according to Seidman.

The federal insurance fund’s projected losses of $4 billion for 1990 included money set aside for the anticipated collapse of the Bank of New England, so Sunday’s events will not place any further strain on the fund, Seidman said.

The estimated losses are $2.3 billion from the takeover, but the final price tag won’t be known for years.

Bank of New England has $5 billion to $6 billion in loans on which payments are delinquent. Many of these loans cover real estate properties that may be seized for failure to pay them.

The buyer of the bank would want only good assets--loans that are current in their payments. The government will take many of the bad assets, probably including billions of dollars worth of office buildings, shopping malls and homes that must be unloaded at fire-sale prices.

The government’s skill at selling billions of dollars of empty office buildings, partially completed shopping centers and single family homes will determine whether it loses all the anticipated $2.3 billion.

The potential loss from Sunday’s FDIC seizure of Bank of New England is exceeded only by the takeovers of two Dallas-based banks, First Republic Bank Corp. in 1988, with projected losses of $2.9 billion, and MCorp in 1989, with an anticipated deficit of $2.7 billion. Continental Illinois in Chicago was seized in 1984, and will cost $1 billion.

The final tally on each of these operations won’t be complete until the government sells the last warehouse or piece of land financed by delinquent loans from the banks.

Seidman, a precise man not given to hyperbole, would say only that the Bank of New England salvage operation will prove to be “among the largest losses” for his fund, which is financed by premiums from the banking industry.

The Administration and regulators are considering a plan to require banks to provide an additional $25 billion to restore the badly depleted insurance fund.

Fresh in mind is the savings and loan crisis, which will cost taxpayers at least $130 billion, not including the interest on 30 years worth of bonds being sold to pay off depositors who had money in hundreds of defunct S&Ls.; No one--neither members of Congress nor Administration officials nor regulators--wants to call on the taxpayers to bail out the bank insurance fund.

Seidman believes that the fund, if augmented by another $25 billion from the healthy segment of the industry, can weather the current economic downturn.

The New England region is particularly hard-hit because of the plunge in real estate values and because of ineptitude during the 1980s by management at the Bank of New England, according to Seidman. “They made loans that couldn’t be collected,” he said.

But the current management, led by chairman Lawrence Fish, enjoys the confidence of regulators and will be permitted to keep operating the financial institution, even as it comes under government ownership.

Fish came from Boston to Washington on Thursday to tell regulators about the anticipated $450-million loss, largely from real estate.

“They were tossing in the towel,” Seidman said.

He directed his staff on Friday to begin planning a financial rescue. The Treasury Department was kept informed as FDIC staff personnel huddled with specialists from the Office of Comptroller of the Currency, which regulates national banks.

The officials decided to create a “bridge bank,” to keep the New England institutions open and operating without a pause. This averted the need to close the banks, at a massive loss of public confidence, or delay action until a buyer could be found. The Comptroller of the Currency declared the three ailing institutions insolvent and chartered three new banks to take their place: the New Bank of New England, the New Connecticut Bank & Trust, and the New Maine National Bank.

The same names, with only the addition of the word “new” is calculated to reassure customers that business goes on in a calm and orderly fashion.

One subsidiary of Bank of New England Corp. that will not be affected by the bank failure is Bank of New England Trust Co. in West Palm Beach, Fla., regulators said.