One Fast-Lane Bank That Crashed : Finance: Beverly Hills firm specialized in prestige dealings, with high-profile officers and clients. It went broke and taxpayers paid.
It was founded in 1982 as First National Bank of Beverly Hills, then renamed The Merchant Bank of California two years later. But most people knew it by another name: “Marshall Manley’s bank.”
Manley was the bank’s brash founder and chairman. He headed the Los Angeles office of one of the nation’s best-connected law firms, arranging for the firm to rewrite the wills of former President Ronald Reagan and his wife, Nancy, while they still lived in the White House. He invested in such major Hollywood films as “Midnight Express” and “California Suite.” With the kind of contacts Manley enjoyed, what could go wrong?
Eventually, just about everything. The Beverly Hills bank set off on an irreversible course of bad lending, piling up problem loans in its early days that would explode like time bombs years later. More than $7 million in capital--the lifeblood of all financial institutions--disappeared. Finally, one Friday afternoon last June, state banking regulators quietly pulled the plug.
The collapse of Merchant Bank is a familiar story to those who must pick up the rubble: a history of mismanagement, vague business plans, excessive bonuses and “absolutely terrible loans,” as one regulator put it.
One unsecured loan, for example, was made to a borrower who planned to buy jets in Liberia, then pay off the loan selling dried fish to the Greeks. Another loan went to a man who claimed as his principal asset the rights to jockey Bill Shoemaker’s life story for a book he said he would sell at racetracks.
America’s banking landscape is littered with small banks founded by wealthy investors looking for the prestige and influence a bank brings. Many times, however, they underestimate the pitfalls.
“All you’ve needed to start a bank is $3 million of capital and five directors who haven’t been convicted of a felony,” complains Bram Goldsmith, chief executive of nearby City National Bank in Beverly Hills.
Merchant Bank was founded in 1982 by Manley, who ran the 100-lawyer Los Angeles office of Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey, the nation’s fastest-growing law firm in the early 1980s.
Opening a bank seemed like a logical extension of Manley’s influence. Wealthy associates and clients of the Finley, Kumble firm could be steered to Merchant Bank. Presumably, Manley’s bank connections would in turn lead to more law business.
The bank was opened on the second floor of a Wilshire Boulevard office building, well distanced from the noisy street traffic. Co-founder Robert Y. Rector was named chief executive, with Manley serving as chairman.
Manley now plays down his role with the bank, arguing that he was merely an investor, not an operating employee. “I didn’t make the loans,” he says. “I didn’t borrow the money. I wasn’t in the business.”
But former Finley, Kumble partner Steven J. Kumble says it was well known around the law firm that Manley, as the bank’s largest individual shareholder and chairman, could exert considerable influence over the bank.
“Everybody knew it as ‘Manley’s bank,’ ” Kumble says.
Manley left the bank as chairman in July, 1985, citing other commitments. Within four months, regulators made the bank face up to some of its problem loans, resulting in a $2.8-million quarterly loss and forcing the bank to scramble for a quick infusion of money.
Manley insists today that no major problems had surfaced when he resigned. “At the time I left, the finances of the bank as far as they were reported to anybody were fine,” he says.
The bank was profitable at first, earning $351,000 by 1984. But in 1985, regulators began unearthing a disaster.
As with a lot of small banks that have failed in the past few years, Merchant Bank was enamored with real estate, one of the riskiest areas of bank lending today.
The list of soured projects included a Salt Lake City apartment complex that couldn’t be filled, a troubled Tampa, Fla., shopping center and a problem office building in Seattle.
All told, the 1986 report details $2.2 million in loans that were so bad the bank had no hope of collecting them.
The bank lost more than $8 million in 1985 and 1986, nearly wiping it out.
According to a Federal Deposit Insurance Corp. report, one reason the bank had so many problems is that a large number of eventually worthless assets were accumulated by the bank so its executives could justify the big bonuses they were receiving.
Why didn’t anyone recognize that the loans were bad? According to the state banking report, Merchant Bank regularly renewed its loans without collecting interest. As a result, these loans still appeared to be solid, and the problems went undetected.
Regulators found loans were routinely made at below-market rates to bank directors, executives, friends and associates and that bonuses were excessive.
One audit found that the bank was making payments on a loan that co-founder Rector had taken out at another bank so he could repay a bonus to yet another bank that previously employed him. Two years earlier he had been ordered to repay that bonus because regulators found it was excessive. Rector could not be reached for comment for this story.
For two years the bank was put on a kind of probation, operating under cease-and-desist orders issued by the FDIC. The bank needed money fast if it was to survive. Investors came up with $4.5 million in 1986, largely from Finley, Kumble partners.
Where did they get the money? One of Finley, Kumble’s partners was on the board of directors of the National Bank of Washington, a troubled bank seized by regulators last August. The partners borrowed $2.2 million from the bank, using it to buy stock in Merchant Bank.
Court papers filed by 20 of the partners allege that Manley pressured them to borrow the money to buy the stock.
In addition, U.S. Bankruptcy Court documents refer to a confidential memorandum from Finley, Kumble’s management committee saying that certain partners would be expected to buy $3 million in Merchant Bank shares. Kumble said he believes Manley applied intense pressure out of fear that he could face charges if the bank collapsed.
Manley denies that he ever pressured anyone to invest in the bank.
The new infusion was supposed to give new life to the bank. But more bad loans made earlier in Merchant Bank’s life kept surfacing. The FDIC threatened to take away the bank’s deposit insurance, a certain death-blow. The only alternative--and preferred course for regulators--was a sale.
But the bank had little appeal for a buyer. About the only valuable asset the bank had were tax benefits it had accumulated. Two proposed sales to Southern California banks fell through, one in 1989 after Congress changed laws so that a buyer could not enjoy such a bank’s tax benefits.
But there was good news, even on the day Merchant Bank was seized. Nearby Western Bank, which had come close to buying Merchant Bank before, agreed to assume the bank’s deposits and would make Merchant Bank’s former office one of Western’s branches, saving the jobs of most Merchant employees. Western’s chief executive, Hugh S. Smith Jr., described the cost of the deal as a “nominal amount, just enough to make it a binding contract.”
The closing was for the most part unnoticed in Los Angeles’ banking community.
Merchant Bank was the 85th of 169 banks that failed nationwide in 1990. The taxpayer tab came to $48.5 million, paid for by the dwindling bank insurance fund that protects the nation’s taxpayers from an ultimate day of reckoning similar to the savings and loan bailout.
Manley now lives in New York, where he has encountered a new set of problems. He was ousted last year as chief executive of AmBase, a financially troubled insurance firm that he attempted to build into a “financial supermarket” that included the Carteret Savings & Loan in New Jersey.
RISE AND FALL OF MERCHANT BANK
* 1982: Founded as First National Bank of Beverly Hills, later renamed The Merchant Bank of California. Co-founder Marshall Manley, who ran the Los Angeles office of the law firm Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey, is named chairman.
* 1984: Bank earned $351,000 and appeared healthy.
* 1985: Manley leaves the bank in July, citing other commitments. Federal and state bank examiners begin unearthing problems, and in December force the bank to recognize problem loans. Bank posts a $2.8-million quarterly loss and is forced to scramble for an infusion of money.
* 1986: State banking report says Merchant Bank had “an excessive and disproportionately large volume of poor quality loans.” Bank loses more than $8 million in 1985 and 1986. Bank is put under cease and desist order by the FDIC and told to raise more capital. Laurence A. Cox Jr. named chief executive.
Investors pump in $4.5 million in 1986, much of it coming from Finley, Kumble law partners who borrowed money to buy the stock from the troubled National Bank of Washington. Some 20 partners would later complain in court documents that Manley pressured them into buying the stock.
* 1989: Western Bank in Los Angeles nearly buys Merchant Bank for its tax benefits, but the deal falls apart after federal laws affecting the benefits change.
* 1990: After being shopped around to more than 100 banks and investment groups, regulators shut Merchant Bank in June. Western Bank assumes its deposits and takes over its Wilshire Boulevard branch.
