Banking on a Grand Scale : Bank of America Is Swallowing Competitors Across The Country, But The Sick California Economy And A Consumer Backlash Could Unsettle Its Accounts

THE ELEVATOR TAKES 30 SECONDS TO SPEED 600 FEET THROUGH THE CENTER OF the carnelian skyscraper rising from San Francisco’s financial district. Easing to a stop at the 40th floor, its doors open to a wood-paneled chamber, with a glass door on one side, a security guard behind a console on the other. Once assured that the visitor is expected, the guard electronically opens the door, revealing a spacious floor framed by bay windows and covered with a thick, creamy carpet.

Set against one of the windows, punctuating the billion-dollar view, are the bronze-colored bust of a stern-faced man and a 150-year-old ship’s helm made of oak and Honduras mahogany. The bust is of Amadeo Peter Giannini, a onetime produce buyer: Fed up with local banks for ignoring San Francisco’s Italian immigrants, Giannini in 1904 founded the Bank of Italy--predecessor to what would become the Bank of America--in a converted saloon in the city’s North Beach area.

As for the helm, it once guided the Portsmouth, the ship that Cmdr. John B. Montgomery and a detachment of Marines steered into San Francisco Bay in 1846 to plant the first American flag over the area. When he accepted the helm 51 years ago as a gift from his employees, Giannini decreed that it should always be a “permanent fixture” in the bank’s headquarters. “I hope it will remind all to keep straight on our course,” he said.

If ever there was a time when Bank of America needed to keep on course, this is it. No bank in the nation’s history has grown so large so fast as Bank of America did in a single moment at 12:01 a.m. on April 22 when its parent company, BankAmerica Corp., swallowed Los Angeles rival Security Pacific Corp. The record $5-billion acquisition came as the bank was already on an unprecedented two-year expansion binge that for the first time put the Bank of America name on branches from Honolulu to Houston.

Bank of America has long saturated California. A decade ago, it boasted of having “a branch within a mile and a half of virtually every Californian.” But the newly energized Bank of America is something else. It is now so large that the assets in its California operation exceed the combined assets of the next 50 largest banks in the state. About one in two California households has some sort of tie to the bank, either through a credit card, checking account, savings account or loan. The bank now has more than 2,000 branches across the West, more than double the number three years ago and more than the nation’s largest bank, Citicorp, has around the world. With almost $200 billion in assets, B of A is closing in on the No. 1 position in the United States.

The bank’s torrid pace is even more remarkable when one considers that five years ago the mere survival of B of A was in doubt. Its customer list was loaded with deadbeat borrowers ranging from farmers to sovereign nations. B of A was the banking industry’s Soviet Union, in dire need of financial perestroika. What followed was a Lazarus-like comeback--$1 billion in profit three years in a row--matched with a top-to-bottom management make-over. B of A is now poised to be the first nationwide, honest-to-God bank of America.

B of A executives won’t speculate about invading Manhattan before the end of the decade, but they can hardly mask a desire for a coast-to-coast presence. “Nationwide banking is going to come,” says chief executive Richard M. Rosenberg, “and there is no more logical bank to be among the few that will be nationwide than the Bank of America.”

All this is taking place against a backdrop that at times resembles a chess game being played out on a map of the United States. Participating are some of the nation’s strongest regional banks headquartered in places as diverse as Columbus, Ohio; Charlotte, N.C.; Albany, N.Y., San Francisco and Minneapolis. All seek to influence the biggest realignment of the nation’s financial system since the Great Depression. Each is trying to outmaneuver the others for choice acquisitions, trimming the nation’s glut of financial institutions while molding huge new ones with the muscle to compete against Japanese and European giants.

To hear bankers tell it, their industry is under assault from all sides. One government study shows that almost half of the U.S. commercial lending market is controlled by foreign banks. In a little more than two years, American Telephone & Telegraph has launched the most successful new credit card to date, part of an ongoing encroachment on banking’s sacred turf by industrial companies.

But consumer and public-interest groups note that consolidation results in huge banks that can dictate fees and rates, in less choice for consumers and in thousands of job losses. The ink was barely dry on the Security Pacific deal when B of A told its customers that they can no longer sue the bank in court but can be forced into arbitration procedures. B of A claims this will reduce skyrocketing legal disputes; critics call it the kind of arrogance that huge size breeds. B of A also has been slow to respond to demands for lower credit-card rates. “Bank of America now has sufficient size that they can pretty much set prices with little fear that they will be undercut. They can set service fees and interest rates and generally know that the market will go along,” says Ken McEldowney, executive director of the public-interest group Consumer Action in San Francisco.

While B of A is concerned about consumer backlash, the real wild card in its future is California’s economy. Acquiring Security Pacific is as close as a bank can get to a winner-take-all wager on the Golden State. If the state is on the tail end of what will be a slow national recovery, the deal is likely to vindicate the bank’s senior executives for championing the cause of banking consolidation.

But success is no sure bet. Already cracks have appeared, with Security Pacific’s former chief executive quitting out of frustration with his new job. More important, B of A although spread across the West now, has by far the largest chunk of its chips in California. As little as three years ago, no bank would have minded being the biggest in the biggest state--a state that, boosters bragged ad nauseam, has the seventh biggest economy in the world.

But a strange thing happened to a “recession-proof” state. It is now in the worst economic downturn since the Great Depression, one beginning to rival in depth the brutal Texas slump of the mid-1980s. Nearly one in four offices in downtown Los Angeles is empty, thousands of well-paid aerospace workers are losing their jobs, and bankruptcy courts are buried in petitions. There is record budget paralysis in Sacramento. Earthquakes follow riots. Californians are demoralized. Even the San Francisco Giants want to flee the state for Florida.

For a lender like B of A hard times mean more rotten loans. Acquiring Security Pacific makes B of A the largest lender in the United States for offices, shopping centers, new housing tracts and other real estate--risky lending areas that are as appealing to bankers as a deadly virus. A plunging state economy could mean setting aside more money to cover bad loans if borrowers are unable to repay. Security Pacific itself lost $1.6 billion between late 1990 and this past spring, much of it related to problem real estate loans.

“When Bank of America made the bid for Security Pacific last year, they didn’t know how bad the California economy was going to be,” says Prudential Securities bank analyst George Salem, Wall Street’s resident bear when it comes to California and its banks. “The bet on the California economy was much more optimistic then than it would be today. The truth is that the California economy is in a structural decline.”

If that’s true, no less than banking’s most aggressive expansion, along with the chance to become the country’s first true nationwide bank and undisputed banking leader, could be on the line. For B of A, the California slump is all the more reason to spread its risks geographically. Banking these days offers little room to fail. Earn a mere $1 in profit for every $100 in loans, and you are hailed as a genius. A few too many bad loans, and you’re a fool.

“This business operates on very narrow margins, and there’s not much room for complacency,” Rosenberg says. “It’s fun to be a winner, but people have a tendency to forget. In California, you see lots of competitors, once considered the best, who are stumbling.”

LEADING B OF A’S AGGRESSIVE PUSH IS A threesome whose combined years of service with the bank wouldn’t earn them a 20-year pin. A few feet from Rosenberg’s office is the executive suite of Frank N. Newman, 50, the bank’s brainy numbers cruncher. The son of a printer from Quincy, Mass., Harvard-educated Newman is vice chairman and chief financial officer. A dapper dresser with a wispy mustache, Newman still shocks more staid B of A executives by wearing a beret. Says one former senior executive: “He’s the one who would score the highest if you gave them all an SAT test.”

Next to Newman’s office sits vice chairman Lewis W. Coleman, 50, considered one of banking’s deep thinkers. The only San Francisco native of the trio, Coleman comes from a prominent financial family, but he seemed a long shot to follow in those footsteps. He flunked out in his first try, at Wesleyan University in Connecticut, where parties took priority over studies. He returned home to pump gasoline but later pulled himself together and tackled Stanford University; now he is one of the country’s leading experts in dealing with debt-laden developing countries.

In another corner is Rosenberg’s office. The son of a textile salesman from Fall River, Mass., Rosenberg, 62, nervously stalks around the 40th floor sans coat, attire once considered startling at the infamously stuffy B of A. He also brings something else long missing from B of A’s upper echelons: a sense of humor. One quote he delivers gift-wrapped to journalists: “There is nothing more boring than banking.” Not to him, he quickly adds, but to the man and woman on the street.

Rosenberg is a Mel Brooks look-alike with a boisterous Boston-accented voice. He once planned to be a newspaperman, studying journalism at Suffolk University in Boston. Instead, he became one of banking’s most creative salesmen. For most of his career, spent at cross-town rival Wells Fargo Bank, Rosenberg tried to figure out more ways to sell people on credit cards, checking accounts and loans. He is credited with coming up with checks that look like postcards, so a person paying the electric bill can scribble the amount over a picture of, say, Yosemite’s El Capitan.

Rosenberg is the ninth man to inherit the formal job of running B of A and the informal job of keeping alive the Giannini flame. Though Giannini died in 1949, his presence still fills the bank. In the years just after his death, the bank would honor him with a minute of silence on the day marking the founding of the bank. One still hears the name frequently, as in “Giannini would have wanted this” or “This is what Giannini had in mind.” Stephen McLin, the bank’s top strategic planner in the mid-1980s, recalls being told once to forget about buying a Nevada bank. The reason? Giannini had despised gambling for moral reasons. Today, through acquisitions, B of A is the largest bank in Nevada.

Giannini’s name is invoked most often these days when the subject is nationwide banking. A man doesn’t name his business the Bank of America if his ambitions stop at the Sierra Nevada. California was his prototype. Deposits from money earned on a vegetable farmer’s harvest in Fresno financed a clothing store’s expansion in San Francisco. Deposits from the state payroll in Sacramento financed Los Angeles factories. Any downturn in one part of the state’s economy wouldn’t sink the bank because it had spread its risks all over the state.

Giannini nearly succeeded a couple of times in making B of A a nationwide bank but in the end was thwarted by laws that protected New York’s financial elite. So, instead of countrywide banking, Giannini’s legacy is what he considered a kind of populist banking in California, with, for many years, branches in more California communities than McDonald’s. B of A grew in tandem with California’s postwar boom, taking the crown as the world’s largest bank by 1950, back before the spectacular growth of Japanese and European banks. Yet it also was becoming an unwieldy, sometimes arrogant institution that Giannini had never envisioned. B of A wasn’t so much a bank as it was a public utility, and transacting business at a branch became as pleasurable as standing in line at a post office. Donald A. Mullane, now an executive vice president, recalls that as a teller in Long Beach in the late 1950s, he was advised to remember two rules: Keep an arm’s length from customers and always wear a clip-on tie. Those two steps were considered the best protection against an angry customer who might reach over the counter to grab the teller’s tie.

To the world, B of A was Establishment power. It was a Bank of America branch near Santa Barbara that was torched by rebellious students in 1970 in one of the most violent acts of the Vietnam-era protests. Cynics called a black granite sculpture by artist Masayuki Nagare outside the bank’s headquarters “the banker’s heart.” The building, opened in 1969, became an instant San Francisco landmark. It was from the top of the B of A building that the “Scorpio” sniper claimed his first victim in “Dirty Harry.” The impersonal look of the skyscraper’s smooth granite exterior reflected the way some people viewed the bank itself. Even vice chairman Coleman acknowledges that before he started working there, “Bank of America from the outside always struck me as sort of monolithic, faceless and impersonal.”

As with many large companies in the frenetic takeover era of the 1980s, the bank became a sitting duck when its problems began to escalate mid-decade. First Interstate Bank in Los Angeles shattered banking protocol by launching an unsolicited takeover bid in 1986. B of A management fiercely beat it back. B of A was hemorrhaging red ink from bad foreign loans, many of them made during the expansionist reign of chief executive A. W. (Tom) Clausen. His successor, Samuel Armacost, lost his job after five years in 1986 to, of all people, Clausen. To this day, the debate rages over whether Armacost bungled or merely inherited a time bomb from Clausen. It was during this upheaval, amid doubts that anyone could save the bank, that Rosenberg, Coleman and Newman were tapped. “In my own mind I was saying ‘Jesus, is it possible to manage this place? Or is this like the federal government?’ ” Newman says.

But with fresh management, B of A slashed fat, cut thousands of employees from the payroll and reined in the kind of loose lending that had put it on the edge. Foreign debt, a third of the bank’s total loans in 1983, was ultimately pared back to 14%. The B of A that emerged from the rubble in 1989 also possessed something that had been missing for years: a fighting attitude and a knack for exploiting its long-dormant saturation of California. And for the first time in years, it was aggressively using its branches to pursue the business of the “little fellow,” Giannini’s paternalistic nickname for bank customers. In the end, B of A’s strength wasn’t the loan its MBAs made in Sao Paulo or Singapore, but the mortgage its loan officers made in Fresno, the checking account it serviced in Riverside, the San Fernando Valley doctor it financed and the shopper using the bank’s credit card in San Diego stores.

B of A’s new financial strength gave it a large cushion, the financial shock absorber that protects a bank against losses. It was able to scoop up hundreds of branches from the government’s financial junkyard after the savings and loan fiasco, building its operations beyond California.

But those were small potatoes compared with what was to come. During the late summer of 1990, shortly after Rosenberg inherited command from Clausen, bank directors attending a retreat at the Ritz-Carlton at Laguna Niguel got a clear message: They shouldn’t be surprised if they were soon asked to approve a huge acquisition. Says Coleman: “Our dance card was out there.”

THE BIGGEST BANK MERGER IN U.S. HISTORY PROBABLY WOULD NEVER HAVE taken place had it not been for an extraordinary screw-up in December, 1990. The fiasco, pieced together from interviews involving participants, set off a chain reaction that eventually scuttled what amounted to an oral merger agreement between Security Pacific and San Francisco competitor Wells Fargo & Co. The agreement was to have been kept secret until both companies reported year-end 1990 financial results.

For both banks, it was to have been a crowning achievement. Riding on the merger was a $100 side bet between Security Pacific’s chief executive, Robert H. Smith, and the man he had succeeded in the top spot less than a year earlier, the late Richard J. Flamson III, who doubted a deal could be struck.

On Dec. 6, a call came in to Security Pacific’s lawyers from some of its financial executives seeking permission to sell $100 million in bonds to investors: Security Pacific needed a routine fix of funds. The lawyers gave their blessing, believing that the bonds were being offered in Tokyo. Instead, the bonds were being sold in New York that week, an action that would require Security Pacific to immediately disclose its bombshell to investors.

In a move that baffled the financial community, Security Pacific abruptly scrapped the offering, issuing a vague, one-sentence statement saying that there were “a number of strategic and financial options under consideration.” The foul-up looked amateurish to Wall Street. A disillusioned Wells Fargo chief executive Carl E. Reichardt called the deal off, spurning a request to announce it early. Still facing questions from securities regulators, Security Pacific put together a stunning announcement that it might lose $360 million in one quarter because of bad loans and because it was disbanding various operations (these would have been scrapped in a Wells Fargo merger).

By January, B of A’s informal intelligence network had picked up rumors that talks between its two biggest rivals had been called off, a development made public a short time later in the Wall Street Journal. Rosenberg now had a chance to make the kind of deal he wanted, but he had to move before Security Pacific and Wells Fargo patched things up. There was one key question to answer first: Would the deal fly with antitrust officials at the U.S. Justice Department? Rosenberg, Newman and Coleman huddled and concluded it could--provided they made a case that traditional antitrust concerns are increasingly irrelevant in a fragmented industry facing intense new competition from corporations such as Ford Motor Co. and AT&T.;

After about a week of discussions, Rosenberg called Smith, who surprised the three B of A executives with his eagerness to talk. Smith’s reaction: “I don’t think BankAmerica ever entered my mind.” In hindsight, Smith’s willingness shouldn’t have been much of a surprise. Security Pacific had come close to the altar before. Richard Cooley, who headed Wells Fargo from the late 1960s into the early 1980s, confirms that Wells Fargo and Security Pacific once agreed to merge during his tenure, but lawyers scuttled the plan at the last minute, fearing antitrust rejection. Security Pacific executives once informally courted New York’s giant Chemical Bank. And they once nearly sold 25% of the company to Japan’s Dai-Ichi Kangyo Bank, now the world’s largest.

B of A’s interest couldn’t have come at a better time. Once known for its innovation and boasting that it would become the West Coast’s “premier financial institution,” Security Pacific was unraveling. The loose, entrepreneurial structure the bank encouraged had resulted in flabby controls on lending. Bad loans from Arizona to Australia eventually pushed the bank deep into the red.

Rosenberg and Smith found much to agree on in two three-hour conversations. Security Pacific’s deteriorating financial condition made many of the issues easy. The name B of A would survive and Rosenberg would be the chief executive, with Smith holding down the No. 2 position of president and chief operating officer. Rosenberg would be flexible on a number of issues, such as an even split of former B of A and Security Pacific directors in the new bank. But there was one critical area that was not negotiable: The combined bank would use B of A’s more thorough policies to evaluate loans. Then Smith abruptly withdrew from the negotiations. The overhaul at Security Pacific was more complicated than he had expected, especially with the economy sliding. “I didn’t think it was dead,” Rosenberg says, “but I thought it was a real long shot.”

In July, 1991, Smith called again, saying he wanted to chat. Negotiations began in earnest, and extraordinary precautions were made to keep the meetings secret. The deal was given the code name “Project Sunshine,” and clandestine meetings took place in hotel suites throughout San Francisco and Los Angeles. Coleman bought a laptop computer to keep his information private. B of A already had great cover. Virtually every would-be matchmaker on Wall Street, in banking and in the press, was still pairing Security Pacific with Wells Fargo, leaving B of A with First Interstate. No one expected B of A to link up with Security Pacific.

Shortly before final agreements were reached, Rosenberg began informing key staff members who had been kept in the dark, testimony to the tight security. Senior vice president Ronald Rhody, who would be in charge of handling the announcements, was called up to Rosenberg’s office and escorted into an adjoining room. The door was kept open; closing it would have raised suspicions. The two faced the window so their voices wouldn’t carry out of the room.

At 12:50 p.m. on Friday, Aug. 9, Rosenberg, Newman and Coleman sat together staring at a clock. That weekend, directors of the two banks would meet to seal the deal. In 10 minutes, the New York Stock Exchange would close. A nervous Rosenberg asked, “Do you think we can keep it quiet until 1 o’clock?”

With the OKs of the banks’ respective directors, Coleman, Newman and Rosenberg took to the phones Sunday. In Seattle, a disbelieving Luke Helms, who heads B of A’s Washington bank, known as Seafirst, was mowing his lawn when Rosenberg called. “After he hung up, I still couldn’t believe it,” Helms recalls.

The announcement was prepared through the night. As the news was going out, copies of USA Today were arriving at B of A headquarters. Anyone who had the time to read it no doubt chuckled at the gossipy one-liner at the end of business columnist Dan Dorfman’s column that day. “West Coast talk persists,” Dorfman wrote, “that a Wells Fargo takeover of Security Pacific is just a matter of time.”

B OF A’S SPIN CONTROL WOULD EMPHasize the term “merger.” Virtually everyone else termed it an “acquisition.” B of A’s executives clearly call the shots. With Smith’s abrupt departure, only one-third of the executives in the upper tier of management are from Security Pacific.

Key to making the merger work financially, however, is cutting about $1.2 billion a year in overhead from the combined banks and making sure there are no further surprises lurking among Security Pacific loans. Consolidation, using bankers’ arithmetic, means that one big bank plus one big bank equals three, four or maybe even five banks in influence and financial wherewithal. And a more powerful bank can better handle the growing invasions of banking’s turf.

Large corporations that once were banks’ blue-chip customers now bypass them altogether, opting instead to issue corporate IOUs through Wall Street. Consumers buy homes with mortgage money supplied by forest-products companies in Tacoma, Wash. People who a generation ago would have deposited in a passbook savings account now entrust their savings to whiz-kid money managers in Boston, who can usually offer a better return than the rock-bottom interest rates at banks. Indeed, if Ford Motor Co.’s financial-services operations--its car financing, credit cards and a large savings and loan--were a bank, it would have posted the third-highest profit of any bank last year. The bank with the biggest profit: B of A.

For Giannini’s “little fellows,” B of A argues, a bigger bank offers more branches, more automated tellers, more service and more loans. Yet a growing number of critics say the benefits of mergers have been oversold by bankers, in part to blunt a potential backlash from employee layoffs needed to cut costs. In B of A’s case, about 10,000 to 12,000 positions out of a combined force of 91,000 will be eliminated within three years (former Security Pacific executives and competitors say it will ultimately be a lot more). Hundreds of branches will close between now and next April.

The bank’s most critical battle is probably being fought for skeptical customers such as Harold Salomon. His Security Pacific branch in Costa Mesa has operated as four different banks. Shortly after B of A acquired Security Pacific, Salomon and his wife declared they were fed up and vowed to search for a new bank. “We’re really tired of the whole thing,” he says.

The battle for the hearts and minds of customers like Salomon will be won or lost by the foot soldiers in the branches. B of A’s Schwarzkopf is Thomas Peterson, a silver-haired former Army sergeant. One story often told about Peterson goes like this: While on the road one afternoon, he stopped at one of the bank’s branches he’d never visited before. He immediately grabbed a bottle of glass cleaner and a rag, stormed outside and scrubbed clean a filthy automated teller machine, warning a nervous manager to never let it happen again.

One of Peterson’s first commands after joining B of A was to reduce to seven pages the “War and Peace”-sized booklet of memos that was routinely dumped on each branch every week. He also told branch managers to pay for any parking ticket given to customers who had to wait too long at the bank.

But whether customers of B of A or other expansionist banks actually benefit from consolidation is something Washington policy makers haven’t quite figured out yet. They continually ask themselves whether it is better to have fewer, bigger banks that can compete globally or to have hometown bankers decide which shopping centers are built and how much money goes to United Way. “Consolidation is power, and how much power do you want to give financial institutions?” asks Kenneth A. Guenther, executive vice president of the Independent Bankers Assn. of America, a trade group that lobbies for smaller banks. “Power serves the needs of the institution and the chief executive, but does it serve broader needs best?”

Indeed, the big-bank backlash continues. Despite having its community-reinvestment programs rated outstanding by federal regulators, B of A has been sharply criticized by community groups for its sluggish performance in low-income and minority loans. Responding to that pressure, the bank last year boosted home loans to blacks in California by more than a third.

B of A’s fear of customer mutiny was clear in Washington state, where some residents resent the fact that the two largest banks, both from out of state, linked up. There, executives with B of A’s Seafirst went on an unprecedented telephone blitz recently to retain customers.

Throughout the West, competitors are targeting former Security Pacific customers, and some analysts estimate that as many as 10% of B of A’s customers, more than most banks have altogether, will flee as a result of the merger. B of A vows it will do everything to keep them, but, Peterson admits, “It’s easy to say and hard to do. If you’re a customer in a branch that gets consolidated, we have to be sure that (the transition) is as easy for you as possible.”

Provided California’s sick economy doesn’t thwart its plans, B of A over the next five years will move selectively across the country, first developing a seamless banking operation stretching from the West Coast through the Southwest. As it moves east, the bank is running into some of the best regional banks in the country with ambitions as big its own. In a few months it will compete head-to-head in Arizona against Ohio’s Banc One, which is buying Arizona’s largest bank.

In Texas, B of A is now mixing it up with Banc One, New York giant Chemical Bank and NationsBank, a powerful regional bank from North Carolina whose name is a dead giveaway for where it is headed. Texas showed just how fast B of A can move. The bank entered the state last year by buying a one-office operation in Houston. Early next year, it will finalize the purchase, initiated last month, of First Gibraltar Bank, the state’s largest thrift; B of A will then rank second in branches and fourth in customer deposits in Texas. As each new acquisition is added, the computer screens will move to another potential target--maybe in the Midwest, South or East.

The pursuit of Giannini’s “little fellows” continues, on a grand scale.