American Express to Further Bolster Ailing Shearson

American Express Co. plans to inject still more capital into its troubled Shearson Lehman Bros. brokerage unit by buying some of its worst assets, a senior executive said Friday.

Michael P. Monaco, American Express’ chief financial officer, said in an interview that the company has tentatively decided to buy Shearson’s Balcor subsidiary, a Skokie, Ill.-based real estate company that has had huge losses.

Balcor is valued on Shearson’s books at about $1.5 billion. Monaco said the purchase by American Express “will probably happen some time this year.”

Monaco also said American Express is considering buying all or part of a $500-million “bridge loan” Shearson made to Prime Computer Inc. in 1989 as part of that company’s leveraged buyout. Shearson had planned to hold the loan for just a brief period. However, the collapse of the junk bond market and problems at Prime made the loan impossible to unload.

The purchase of troubled assets is an attractive way for American Express to shore up Shearson’s weak capital base because it doesn’t involve an infusion of cash, Monaco said. He said it will be carried out by transferring assets and capital between American Express’s balance sheet and Shearson’s.

The executive also confirmed that Shearson has begun trying to sell other assets to outsiders as part of a plan to concentrate on core businesses. He said these include Irvine-based Shearson Lehman Mortgage Corp., which services more than $18 billion in mortgages, and a mortgage lending unit in England.

American Express spokesman Lawrence A. Armour emphasized that the purchase of Balcor hasn’t been approved by American Express’ board and therefore is not “a done deal.”

Shearson in 1990 reported the largest quarterly loss in Wall Street history: $915 million for last year’s first quarter. Prompted by worries that Shearson might collapse, American Express abandoned plans to lower its stake in the unit and instead pumped in $750 million in capital to acquire the 30% of Shearson it didn’t already own.

Recently, after drastic cost-cutting and an upturn in the securities business, Shearson has had strong operating results. But shaky real estate holdings through Balcor and other troubled assets have caused continuing worries among securities analysts that Shearson might need still more capital.

Earlier this month, Shearson suffered another setback when First Capital Life Insurance Co. was seized by the California insurance commissioner and its parent First Capital Holdings Corp. was forced into Chapter 11 bankruptcy.

Shearson owns 28% of First Capital and said it will take a charge to earnings of about $144 million as a result of the insurance company’s failure. Shearson is also being sued by First Capital policyholders who bought the policies through Shearson brokers.

Analysts have said Shearson may face significant additional losses because of its stake in First Capital.

Monaco declined to disclose any financial details of the planned purchases, such as how much American Express would pay for Balcor.

Lawrence W. Eckenfelder, a securities industry analyst at Prudential Securities, said the main benefit to Shearson of getting the troubled assets off its books would be to improve Shearson’s standing with credit-rating agencies. An improved rating would reduce the firm’s cost of borrowing for its normal financing needs.

Analysts also said that because the transfer of assets won’t involve American Express putting more real cash into Shearson, the move probably won’t have a big impact on the parent company.

One veteran American Express analyst, who asked not to be named, said the effect of the move will depend on what price is assigned to the assets and how much return the company can eventually realize from them.

Balcor sold real estate partnerships that have declined substantially in value. It also has bad loans on its books from commercial lending activities. The subsidiary has been carried on Shearson’s books as a “discontinued operation” that is being wound down.

Monaco said a transfer of ownership of Balcor to American Express makes sense because management changes have already been made so that unit now reports to an executive of the parent company, not to Shearson.

He said Balcor and the Prime Computer loan have tied up a disproportionate amount of Shearson’s capital. Transferring these assets to the parent “would be a meaningful way of strengthening Shearson’s capital base and getting them to focus on their core businesses.”