FDIC Rescues Houston Bank a Second Time : Finance: First City Bancorp. got $1 billion when it failed in ’88. Tottering again, it gets a new pledge of government backing.

The government has decided for a second time to make federal funds available to First City Bancorp. of Houston, which received more than $1 billion from the Federal Deposit Insurance Corp. after it failed in 1988 and now is on the verge of going under a second time.

The FDIC has offered to provide an open-ended guarantee to cover First City’s future losses if private investors will pump additional cash into the bank to keep it afloat, First City disclosed in a Securities and Exchange Commission filing Tuesday.

FDIC officials Tuesday refused to reveal details of the pledge, but banking industry sources say it could cost the government $300 million to $400 million to guarantee First City’s losses.

The guarantee will not cost the FDIC any money if First City is eventually able to collect on all its loans, which are not now being paid on time, but there is no certainty that will happen, the bank said in its SEC filing.

“We’re talking Round 2 of federal assistance; clearly, it’s an embarrassment to the FDIC,” said Frank Anderson, a banking investment analyst at Stevens Inc. of Little Rock, Ark.

First City received special treatment from the FDIC in 1988 when it got into trouble because of plunging oil prices and bad loans on Texas real estate. Instead of following its usual practice of closing First City and paying off depositors--which would have drained $1.8 billion from the deposit insurance fund--the FDIC decided to keep First City open. The government pumped about $1 billion into the bank, and another $500 million in new capital was raised by private investors led by veteran banker A. Robert Abboud, who became First City’s chairman.

This technique, known as open bank assistance, is highly controversial. Advocates say it can be far cheaper than shutting a bank down and can avoid the disruption of a city’s economy that occurs when a bank fails. Critics contend that deposit insurance is meant to protect depositors and not to keep failed banks alive. They also question whether it is truly cheaper.

The FDIC used open bank assistance to keep open Crossland Savings Bank of New York. The Resolution Trust Corp. is scheduled to decide soon whether to use a similar tactic at a group of large California savings and loan institutions that are in serious financial trouble.

One of those California institutions, HomeFed Corp., parent of the nation’s seventh-largest S&L;, said Tuesday that it lost more than $800 million last year and will need federal help to survive.

First City said Tuesday that the FDIC has offered to give it additional open bank assistance, following much the same approach used the first time, with private investors putting up at least $300 million in additional capital. First City said several investors have expressed interest in the deal, and banking industry sources said BankAmerica Corp. in San Francisco and Texas Commerce Bankshares Inc. in Houston are considered the leading potential bidders.