Hearing May Be Last Stand for First Interstate

An extraordinary four-day public hearing session that federal regulators are convening in Los Angeles and San Francisco today could mark a last stand for First Interstate Bancorp in its struggle to resist an $11-billion hostile takeover by upstate rival Wells Fargo & Co.

Executives of First Interstate and its would-be rescuer, First Bank System Inc. of Minneapolis, worked through the weekend on two fronts, sources said. They discussed the impact of an adverse ruling Friday by the Securities and Exchange Commission, and they prepared for the unveiling today of a $12.5-billion commitment to community reinvestment activity in California over the next decade.

First Bank’s merger offer now trails San Francisco-based Wells Fargo’s bid by more than $1.4 billion in stock value--a gap that would virtually guarantee a Wells victory in the coming shareholder vote.

Going into the weekend, some experts predicted First Interstate would throw in the towel and try to negotiate a buyout by Wells.

The Wells bid gained strongly Friday after the SEC barred First Bank from buying back any of its own shares for a full two years after its merger. Buying back shares--which increases the value of the shares that remain in public hands--was one of the key ways that First Bank had hoped to add value to its offer.

“First Bank needs help from the courts or the regulators because Wells is winning in the marketplace,” said banking analyst Rafael Soifer of the New York investment firm of Brown Bros. Harriman.

The $12.5-billion reinvestment pledge that First Interstate will announce today appears timed to neutralize whatever advantage Wells may have gained last month with its own $45-billion, 10-year community lending plan. It is also meant to impress advocacy groups that will gather at this week’s hearings, hosted by the Federal Reserve Bank of San Francisco.

Much of Wall Street is dismissing the Fed hearings as a sideshow. “In terms of who wins or loses in the battle for First Interstate, I think it will be a negligible factor,” said analyst Thomas Brown of Donaldson Lufkin & Jenrette.

But the banks involved are taking the hearings seriously. Wells has been waging an advertising campaign in newspapers and on radio in Los Angeles touting its reinvestment pledge as the largest in U.S. banking history. And the bank’s professorial chairman, Paul Hazen, has been getting pointers from media consultants on how to sharpen his speaking style.

First Interstate had been planning to ferry as many as 1,000 employees to a rally outside the Los Angeles hearing site at Kinsey Auditorium in Exposition Park. However, in a memo dated last Thursday and obtained by The Times, First Interstate Vice Chairman Bruce G. Willison abruptly canceled the demonstration, citing concerns it might cause traffic problems or undermine the impact of pro-First Interstate testimony from local politicians and community groups.

The Fed hearings are intended to explore the potential effects of a First Interstate takeover, especially upon access to credit and bank services by low-income and minority groups and other “underserved” populations.

Perhaps because of the hostile nature of Wells’ bid or the intense political interest it has attracted in First Interstate’s hometown of Los Angeles, the hearings are by far the most extensive ever conducted in a U.S. banking deal.

The Wells bid is the subject of hearings today, Wednesday and Thursday, while First Interstate and First Bank’s joint proposal will be discussed Tuesday. Hazen and First Interstate Chairman William E.B. Siart will anchor their bank’s testimony in Los Angeles, while First Bank Chairman John F. Grundhofer will appear Tuesday in San Francisco.

Although Wells’ lending program dwarfs First Interstate’s pledge in absolute size, First Interstate’s Willison said in an interview that the two are not strictly comparable. The Wells lending target is for the entire 13-state area where it would operate after a merger, and First Interstate’s deals only with California. Both pledges come to 4.5% to 5% a year of the assets of the respective institutions, Willison said, $25-billion First Interstate Bank of California and the $100-billion institution that would be created by a Wells-First Interstate combination.