B of A Pledge Isn’t Charity but Market Development

While the financial world was abuzz last week at Travelers Group Chairman Sanford “Sandy” Weill’s $9-billion acquisition bid for Salomon Bros., BankAmerica Corp. made far less of a splash with a pledge of $140 billion over 10 years in small-business loans and mortgages for lower-income and minority borrowers.

Weill knows value. Eleven years ago, he offered $1 billion cash as part of a takeover offer for BankAmerica, the holding company of the Bank of America, which was then near insolvency.

Weill was rebuffed, but went on to build a financial powerhouse combining Travelers insurance, the Smith Barney brokerage and several other firms. Now he wants Salomon Bros., the investment bank that has had its troubles. If the deal goes through, 1,500 jobs will be cut as Travelers tries to become a globe-girdling giant to compete with other giants.

The Travelers-Salomon deal reflects consolidation among non-bank financial firms, similar to the banking merger derby of recent years, but it doesn’t show us anything particularly new about business in our time.

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The BankAmerica pledge, by contrast, reflects the future. Bank of America is investing in building new markets, creating new customers for the long haul in the real world of small business and homeowners.

The bank pledged to make $8 billion a year in loans to small businesses, some backed by Small Business Administration guarantees. It pledged almost $4 billion a year in mortgages for low-income neighborhoods, and $1 billion a year for loans for affordable multifamily housing. BofA will lend the money mostly in California and the nine other Western states where the San Francisco-based bank does most of its business.

To be sure, the bank’s move was inspired partly by the Community Reinvestment Act, the 20-year-old federal law that orders banks to make sure they lend to inner cities. But BofA’s program goes well beyond act requirements and pledges 10% of the bank’s annual loans to small business and minority communities.

“We’re going back to our roots,” says Donald Mullane, executive vice president. His comment recalls the bank’s long rise to glory as lender to fishermen, farmers, upstart movie producers--Walt Disney got his first $100 loan from BofA.

And it is also an oblique reference to the departure from those roots that almost killed the bank. Like most U.S. banks in the 1970s, Bank of America fanned out across the world, lending to governments in rich and poor nations. One BofA chairman defined the approach by saying he would rather lend to sovereign nations than to start-up companies in nearby Silicon Valley.

That business judgment turned out to be simply wrong. Governments stiffed BofA; the bank lost $2.3 billion over three years in the mid-1980s and was given up for dead. The stock price sank to the equivalent of $2.63, adjusted for a split. Then-prosperous Japanese banks were asked for support loans and declined. Weill and others made takeover bids that were refused.

BofA, as did most U.S. banks, had to restructure and recover by investing in Treasury bonds while the Federal Reserve held interest rates steady.

But it recovered to face a changed world. Big companies by the late 1980s raised money from the worldwide commercial paper markets and didn’t need banks. Small depositors had found mutual funds and they also withdrew from banks.

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So BofA and other banks turned to small business as a growth area for loans. But it was a more efficient, computer-assisted kind of lending, one in which even small companies, if they met average credit-worthiness criteria, could get loans with a one-page application.

The discovery that even small companies could be good credit risks led to the realization that minority communities could also contain good business opportunities. Indeed, mortgages in low-income communities have as good a record on repayments as do those in wealthier neighborhoods.

Thus new immigrant communities in California--and in Florida, Texas, New York, Arizona, Nevada and many other states--have become growth areas for banking and finance. Community Reinvestment Act , or CRA, commitments have risen by $175 billion in the last three years alone.

Then why aren’t the inner cities blooming? Because sometimes people need more than money. They need education in how to run a business, or how to handle mortgage debt.

That’s a bone of contention between the big banks and savings and loans--such as Washington Mutual, which pledged $45 billion in loans when it acquired Great Western--which talk about loans to low-income neighborhoods but have trouble following through.

“They don’t bridge the gap between their own credit criteria and the borrower who doesn’t have credit history, who needs hand-holding,” says John Bryant, head of Operation Hope, an organization backed by banks that runs financial education centers in central and East Los Angeles.

“I hear the CRA commitments but I don’t see the billions of dollars,” says Wayne Bradshaw, president of Family Savings. Bradshaw knows about credit-worthiness. Family Savings holds $270 million in mortgages, 85% of them in central Los Angeles, and there’s no greater loss ratio than in any other Southern California area.

“In fact, we don’t need more bank loans in this community, we need equity investors to back small-business ventures,” says Mark Whitlock of FAME Renaissance, the economic development arm of Los Angeles’ First African Methodist Episcopal Church. FAME has just started an equity investment fund for community business.

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What do all those heartfelt comments mean? They mean a great strength in our society. Let’s recognize that the emphasis in all communities today is raising capital for home mortgages and small business. Small business, not welfare, is seen as the key to development.

And impatience to see the CRA money working is healthy impatience.

It is in that light that many see BofA’s multiyear pledge. “It has to help bring more money into communities all over the region,” says William Hanna, president of Cedars Bank, a small Los Angeles-based institution with $150 million in assets that has just opened in Irvine and San Francisco.

“It’s great. BofA and California lead the nation in lending to minority communities,” says Robert Gnaizda, counsel of the Greenlining Institute, a nonprofit community rights coalition.

But again, BofA’s program and those of other banks and thrifts is not a private-sector war on poverty. “This is outreach for market development,” says Mullane, who concedes that reaching out doesn’t return the same average profit as the bank’s other activities. “But it’s where the future is,” he says.

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Surprisingly, Wall Street’s hard-eyed investors seem to agree. BofA stock, which closed Friday at $72.19 a share, sells at a premium price-to-earnings ratio compared with stocks of banks located elsewhere in the country. Wells Fargo and other California banks also sell at premiums.

The reason, says analyst Raphael Soifer of investment firm Brown Bros. Harriman, is that California and Western states, driven by new small businesses, once again lead the U.S. economy in growth. That’s why other banks and financial institutions--particularly NationsBank, which is constantly rumored to be seeking a California merger partner--want to get into this market.

Amadeo Peter Giannini, who founded Bank of America in 1904, wouldn’t be surprised. One of the great stories in business history is of Giannini lending to San Francisco’s Italian immigrant fishermen when Crocker Anglo, Hibernia and other now-forgotten banks wouldn’t let them in the door.

Those banks saw unlettered immigrants, but Giannini saw hard-working small-business men borrowing to buy the fishing boats with which they made a living.

His insight was the foundation of what became at one point the largest bank in the country--and the “roots” to which it returned again last week.