Los Angeles Times Interview : Richard Rosenberg : Rebuilding Bank of America’s Mighty Financial Role

<i> James Bates covers the banking industry for The Times. He interviewed Richard M. Rosenberg in the bank chairman's office</i>

One year ago, BankAmerica Corp. Chairman Richard M. Rosenberg picked up his telephone to place a call that would change California banking.

Following reports early last year that merger talks failed between two of his rivals, Security Pacific Corp. and Wells Fargo & Co., Rosenberg called Security Pacific Chief Executive Robert H. Smith to suggest combining with BankAmerica. The result, announced last August, will be banking’s biggest marriage ever.

Since taking over the parent of Bank of America in 1990, Rosenberg, 61, has launched on an unprecedented buying binge. Once the nation’s quintessential international bank, BankAmerica’s main push the past few years has been to expand its operations in the West through what Rosenberg and other BankAmerica executives believe are unprecedented acquisition opportunities stemming from the financial problems in the thrift and banking industries.

Rosenberg is also outspoken in his belief that there are too many banks in the United States and that reducing their numbers through mergers will help restore the industry’s health. The merger binge isn’t without pain for a lot of workers--some experts estimate as many as 100,000 banking jobs will be lost in 1992, more than 10,000 in the BankAmerica-Security Pacific merger alone.


A former Wells Fargo executive, Rosenberg is considered one of the country’s leading marketing experts (one of his ideas became the scenic checks that banks issue). He earned the right to succeed BankAmerica chief A.W. (Tom) Clausen through his role in banking industry’s biggest turnaround ever.

In the mid-1980s, BankAmerica nearly failed, dragged down by bad foreign loans and other problems. Rosenberg and a group of other former Wells Fargo executives working under Clausen not only stemmed the losses, but turned the bank into one of the nation’s healthiest institutions, poised to be one of the country’s most aggressive acquirers in the 1990s. Early last year, BankAmerica came within a shade of buying the failed Bank of New England from federal regulators, a move that would have given it branches on both coasts and brought BankAmerica a step closer to becoming a nationwide bank.

From his 40th-floor office, Rosenberg can look out at the sweeping, 180-degree view, from the Golden Gate bridge to the left and the East Bay hills on the right. Unlike the serious, statesman-like Clausen, Rosenberg is an affable executive whose comments are often marked with self-depreciating humor. During a recent speech in Los Angeles on banking, Rosenberg expressed shock that 750 people had showed up “because this is about the least exciting subject I can think of.”

Question: Since you announced the Security Pacific deal, there have been more questions about California’s soft economy and the real-estate market. How does this affect your view of the Security Pacific merger? Is it going to be tougher to achieve what you want?


Answer: If the economy continues to deteriorate, then there’s going to be greater pressure on the loan portfolios of every bank--including Bank of America and Security Pacific--which to me means the merger makes all the more sense. If the loan portfolios are having greater problems, or if there’s no growth in loans because there is no strong economy, then it really cries out for the greatest operating efficiencies that you can possibly have. One of the ways you control expenses is by eliminating redundant operations.

Q: There is a lot of anxiety among Security Pacific employees that they are going to bear the brunt of layoffs.

A: There is anxiety on both sides, because we have made the statement that we are going to pick the best person for the job in the new company. Obviously, that does create a lot of anxiety. To be honest, it’s clearly created more anxiety in the Security Pacific organization than at BofA.

Q: Why is that?


A: A disproportionate number of the computer systems are going to be BofA systems. I think it’s really important we make a decision early on which systems we are going to use. Someone who is working on those systems has a leg up. And the staff jobs are going to be heavily concentrated in San Francisco. That means people who don’t want to move might have more anxiety.

Q: Some contrarian views have come out in the last few months suggesting that economists don’t see as many savings in bank consolidations as some bankers do.

A: Many of those studies are not based on in-market mergers. They have been based on diversification out of an area. There was never a merger quite like this. The closest thing to it is the Crocker-Wells Fargo one, which totally disproves the studies.

Q: Why is consolidation so urgent?


A: The reason it’s urgent is because it is the only way we are going to get stronger, healthy banks in this country and to eliminate a substantial number of banks. There are too many banks chasing too few customers.

And no other nation allows “non-banks” to do the things we do. What other nation would allow the telephone company (AT&T;) to use the banking payment systems of Visa and MasterCard to take away one of the most profitable products of the banking system? There isn’t another country that puts the burdens we do on banks while allowing “non-banks” to skim off the most profitable business.

Q: Some recent Wall Street reports have essentially said “We like BofA, we like the merger, but we’re worried about the California economy and its banks.” How do you react to that view?

A: There’s been a tremendous amount of California-bashing. I think it’s really accelerated in the last several months. When you devote a special issue of Time magazine just to bash California you’ve reached a kind of a new height in California-bashing.


Q: When are you looking to see an upturn in commercial real estate?

A: I think to see really strong office building markets is probably going to take five years.

Q: What about California?

A: California is not going to be much better. We reflect the same kind of overbuilding in the office-building markets. Hotels are another segment which I think is going to take a long time. On the other hand, I think housing will come back.


Q: But there’s not a lot of money going into building homes.

A: But I think that once demand begins, there will be lots of money. The banks fundamentally have a lot of money to lend, and are anxious to lend on things that make sense. But when there’s no demand, it doesn’t make much sense to lend because we’re in a unique business. It’s the only business I know in which we work very hard to sell something, like a loan, and want the merchandise returned. I don’t know if there are too many other businesses of which you sell something and you want it returned.

Q: You’ve said you don’t like the term “credit crunch.” Why?

A: Because what the term implies is that banks are refusing to lend. And that just doesn’t make any sense at all. We don’t make any money if we don’t lend. What we’re really saying is that there is a scarcity of credit-worthy borrowers. That, to me, is not a credit crunch. A credit crunch is when you squeeze the banks so that there is no money left.


Q: A lot of bankers welcomed the phrase “bank reform” back in February, and then wished they had never heard of it by November. Are you among them?

A: Sure, when I think of the effort that we put in trying to educate the Congress on what we really needed and then to be so frustrated in the last moments with what came out. That stuff was written at 3 o’clock in the morning so everybody could go home for Thanksgiving. Yes, I’m one of those who wishes we’d never started on this.

Q: Does a bank like Bank of America, that is healthy and strongly capitalized, resent having to pay so much for federal deposit insurance to help bail out weaker banks?

A: Yes, if, in fact, real reform does not happen. It hurts a lot.


Q: How much is your insurance?

A: Our bill went from about $65 million in 1990 to $150 million in 1991. What this is really is a tax. A tax in a recession makes no sense anyway, but an increased tax on banks in a recession makes even less sense. Typically, you lend 10 times what the capital is. When you pay an FDIC premium, it is charged directly against your capital and earnings. So what you’ve done is take 10 times that amount ($150 million) out of your lending capability when everyone in Washington is saying banks have got to lend more in order to get this economy going.

Q: Why haven’t the final barriers been brought down on opening up branches in other states?

A: We are a nation where there are states in which you have protected monopolies. Who wants competition if you’ve got a small bank in a small town? One of the real strengths of California--and this came long before my time--was the genius of branch banking. You could bring deposits from the urban areas to agricultural communities at the time they needed them. At the same time, you could gather deposits and put the money to work wherever it was needed in the state.


Q: Historically, Bank of America has been considered an international, money center bank. But one might argue now that you’re a regional bank.

A: I’d like to go on record--because it’s absolutely true and it might ruin the morale of people who are making a lot of money for us if I don’t--that our operations in Europe and Asia have been very significant contributors to the earnings record, certainly over the last year. We’re in 36 countries, and we’re no longer in a country just to put a pin on the map and say “Hey, we’re in 36 countries.” It probably helps the stock a little bit to be classified as a regional bank, but in all honesty we still have a very substantial global presence.

Q: How do you feel about the credit-card flap in Washington, over the proposal to cap the interest rates banks can charge?

A: It was just absurd. First of all, the cost of money is, at most, 40% of the total cost of running a credit-card operation. We have almost made personal bankruptcy and, to some extent, corporate bankruptcy socially acceptable in the United States. Our personal bankruptcy losses have risen dramatically. What we’re seeing, because of unemployment in the state, is people who in many cases have been on the books for five, six or seven years who are paying as agreed. And boom! Personal bankruptcy. All that goes into the cost of the plan.


Q: But the guy at home is saying “Rates are going down and down, and I’m not even enjoying a half a percentage point out of this on my credit card.”

A: First, there’s tremendous competition. That’s the joke of it. What person put a gun to your head and said you have to borrow? At Bank of America, with our 19.8%, if you don’t want to pay 19.8%, all you have to do is pay it off. There’s nobody who says you have to pay 19.8%. The dangerous part about it (a rate cap) is we would have to have a risk profile totally different than what we have today. Is it going to help the economy not to bet on people? It has shown a basic lack of understanding of economic factors in the credit-card business.

Q: How much of the the pain of that mid-'80s period--when things were so uncertain at Bank of America--influences the way all of you are today? Is it something you always remember?

A. Yep.


Q: You have to remember bad times?

A: Absolutely. It makes you run scared all the time. Everybody’s nervous all the time, and I like nervous people. Nervous people think about everything.

Q: You’re nervous yourself?

A: All the time. And I want to see nervous people at all times. We’ve got a lot of good people who are aware and conscious of the fact that it always wasn’t that great here.