Bank Takes Loss While Fed Looks Into Ownership : Encino: Independence reports $16.9 million in red ink for the quarter. Questions linger about possible ties to a Luxembourg institution that laundered drug money.
Fulvio V. Dobrich, chief executive of Independence Bank in Encino, has a simple rule for separating his responsibilities from those of Saudi financier Ghaith R. Pharaon.
“My job is to run the bank,” Dobrich said. “His job is to own the bank.” Trouble is, the rule hasn’t really made life simple for Dobrich lately.
Dobrich has had to explain to some of Independence’s biggest depositors why the Federal Reserve Board is looking into exactly who does own Independence--Pharaon or somebody else. The Fed wants to know if Bank of Credit and Commerce International, a large and shadowy Luxembourg institution that pleaded guilty in 1990 to drug-money laundering, secretly owns some of the Encino bank.
Dobrich, who has been the bank’s chief executive since 1989, simply tells depositors what Pharaon has told him: The Saudi businessman is the bank’s sole owner.
But the BCCI question isn’t the only one troubling the San Fernando Valley’s biggest bank--as measured by assets--and keeping regulators on its doorstep. Since 1989, the Federal Deposit Insurance Corp., eyeing Independence’s troubled real estate loan portfolio, has required Pharaon to put about $17.6 million in additional capital into the bank, which has $659 million in assets.
Despite the infusions, a new sign of the severity of Independence’s real estate problems came Monday when the bank announced that it lost $16.9 million in the first quarter that ended March 31--its largest quarterly loss ever--in part because of a $6.2-million provision for possible loan losses and a $6.1-million writeoff of investments in real estate joint ventures. Many of the bank’s problem assets are in its portfolio of construction loans on properties in Southern California, Dobrich said.
A year ago, the bank had a profit of $1.5 million in the first quarter.
The loss comes as Independence is being dogged by the question of a connection to BCCI. Such a tie would violate Fed rules, which require U. S. banks to disclose--and obtain agency approval of--foreign ownership of their institution.
The question of links to BCCI has “not been good publicity for this bank, by any stretch of the imagination,” Dobrich said. After all, BCCI last year pleaded guilty in federal court in Florida to laundering money in a case involving Colombian drug lords.
The situation Independence finds itself in is at least reminiscent of First American Bank, a Washington institution whose chairman is former Defense Secretary Clark Clifford. The Federal Reserve last month ordered BCCI to divest any secret control of First American. Clark, a prominent Washington figure, has said he had no idea that four wealthy Arab investors who acquired control of First American may have been fronting for BCCI.
As Pharaon was acquiring Independence for about $25 million in the fall of 1985, BCCI was close in the background, according to documents obtained by government investigators. In late September, 1985, BCCI’s London office arranged for a $5-million letter of credit--from another international bank based in Paris--to guarantee a loan to Pharaon from the Bank of Boston, according to the documents.
At the time, Pharaon was said to own an 18% stake in BCCI. (Recent estimates of the stake have varied, however, and Dobrich said Pharaon sold the stake before buying Independence.)
Dobrich said he knew nothing of the letter of credit from the Paris-based bank, called Banque Arabe et Internationale d’Investissement. He said, however, that part of about $25 million Pharaon paid to acquire Independence came from an $11-million loan from the Bank of Boston. That loan, Dobrich said, was repaid when Pharaon’s Saudi businesses encountered financial problems in 1986.
In any case, Pharaon and Dobrich don’t deny that BCCI had some role in the Independence deal.
For instance, Pharaon has said his stock in Independence is held in a custody account at BCCI’s London office. And, indeed, it was BCCI that suggested to Pharaon that he buy Independence in 1985, according to Dobrich.
Independence was then owned by a number of east Asian investors. BCCI’s Hong Kong office heard that the bank was for sale and passed on the news to its London office, Dobrich said. Not long after taking over Independence, Pharaon named Kemal Shoaib--a former BCCI executive--as its chairman.
Even so, Dobrich maintains that Independence and BCCI rarely came into contact after the 1985 acquisition--and then only over two construction loans that Independence made to developers who also borrowed from BCCI. Those loans, which totaled about $2.5 million, were made to separate borrowers on properties in Los Angeles and Palm Springs. They have been paid back, Dobrich said.
The question of ties to BCCI has nevertheless been a recurring one for Independence.
About two months ago, the FDIC sent an examiner to the Encino bank with a list of about 25 names of people affiliated with BCCI, Dobrich said. The examiner scoured Independence’s customer lists to see if the names turned up, but told Dobrich that none did, Dobrich said. The examiner added that it was the third time in as many years that the examiner had looked for such links and found none, according to Dobrich.
Dobrich said he does not know when the earlier checks took place, but speculates that the examiner looked for ties to BCCI during bank examinations in 1988 and 1989. But once, in June, 1989, when Dobrich and Pharaon were meeting with FDIC officials in San Francisco to discuss Pharaon’s planned infusion of about $10 million into Independence, the regulators asked whether BCCI was to be involved, Dobrich said. Pharaon explained that the money was to come from the sale of stock.
But despite the inquiries, Dobrich said he’s never picked up the phone to ask BCCI officials about the stories. “It’s like me calling up Bank of America and saying, ‘Excuse me, but do you own me?’ It’s just ridiculous,” he said.
It’s not so easy to downplay Independence’s financial troubles. The first-quarter loss reduced capital--the money that serves as a cushion against future losses--to about 5.5% of the bank’s assets, contrasted with the 7% the bank should have under an agreement with the FDIC.
This time, more capital may not come from Pharaon. In addition to directly contributing $17.6 million in capital during the last two years, Pharaon also bought the bank’s interests in an estimated eight real estate joint ventures for about $20.3 million in 1990.
So to raise the additional capital, Independence is planning to look beyond the Saudi investor. The bank plans to hire an investment banker and may find a new investor to buy part of the company. Independence’s plans may also include selling some branches or shutting down other operations, Dobrich said.
The Federal Reserve continues to look into possible links between Independence and BCCI, despite Dobrich and Pharaon’s assurances that there are none. But with regard to Independence’s finances, Dobrich believes that he’s had the final word. Compared to the FDIC’s most recent report on the bank’s loan problems, Dobrich said, “our own assessment is a great deal more severe.”
