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BankAmerica's Unlearned Lesson : Clausen Returns, to Reap What His Mismanagement Sowed

October 22, 1986|ROBERT J. SAMUELSON | Robert J. Samuelson writes on economics from Washington

In the annals of management, the tale of BankAmerica is an arresting one. Five years ago, it was the world's largest bank, respected and apparently well-managed. Since then, it has lost its reputation and about $1 billion. There may yet be more losses, and the tale now takes a truly bizarre turn with the naming of former BankAmerica president A. W. "Tom" Clausen, a man deeply implicated in the bank's troubles, to be its new top executive.

Perhaps 30% of all Californians do business with BankAmerica. Aside from its name, the bank's size and stature make its problems symbolic of a greater loss of faith in American management. It's comforting to think that the people running big corporations know what they're doing, but at BankAmerica they didn't. The top executives were often the last to discover basic problems. In theory, the board of directors oversees the bank, but the directors have been consistently weak. By bringing back Clausen, they now show that they're more comfortable with a familiar mediocrity than someone of proven competence.

Clausen returns to BankAmerica after five years as president of the World Bank, which makes loans to developing countries. In this job he showed little imagination to help ease the Third World debt crisis. As head of BankAmerica between 1970 and 1981, he quadrupled the bank's size and retired in a congratulatory glow. But he left an overstaffed and undermanaged bank, whose sloppy credit controls and high administrative costs underlie the current crisis. Clausen took BankAmerica on the equivalent of an alcoholic binge. It was a euphoric high until the hangover.

The good news, according to most banking analysts, is that BankAmerica isn't about to collapse. It has roughly $6 billion in capital: shareholders' investment plus reserves for loan losses. Even this figure may be low. Parts of BankAmerica's empire probably can be sold for more than their stated value. This cushion may be enough to absorb more losses in the bank's existing loan portfolio. The bad news is that BankAmerica has been so mismanaged that its longer-range future looks precarious.

There are some extenuating circumstances. In the 1980s banking is a tougher business than at any time since World War II. The aftermath of the 1970s' inflation left billions in bad loans to farmers, developing countries and real-estate developers. Deregulation has intensified competition and forced banks to invest more for new services while absorbing large loan losses. Volatile interest rates make bank costs and revenues less predictable. All banks have faced these problems; BankAmerica has coped worse than most.

At mid-year its non-performing loans and investments--those not paying all or some of their interest--totaled nearly $5 billion. That's about 6% of all loans and more than two-thirds higher than the average for 15 large U.S. banking firms, says Keefe, Bruyette & Woods, Inc., bank analysts. Many of these loans will ultimately become losses. Unless BankAmerica stages a miraculous recovery, it will need new capital to protect against future losses or another recession. Where's the capital to come from? The bank is so weakened that a company half its size, First Interstate Bancorp, has offered to buy it.

The obvious question--how much of the blame belongs to Clausen and how much to his successor, Samuel Armacost, who resigned in early October--misses the point. Whatever Armacost's flaws, they also reflect poorly on Clausen. A basic responsibility of any corporate chief executive is to groom a worthy successor and to leave the company capable of coping with the unexpected. Clausen failed on both counts: Armacost was unequal to the job, and he inherited a poor management system.

Only in late 1983 did the bank realize that its loan losses reflected basic weaknesses and weren't merely the result of the severe 1981-82 recession. "They recruited people and sent them out to lend money without sufficiently training them," says David C. Cates, whose Cates Consulting Analysts rates the soundness of banks for large depositors. "There was an insufficiency of loan analysis and credit review." Perhaps half of the bad loans came under Clausen and half under Armacost, Cates thinks. But the basic defects in the credit process dated from Clausen's era.

Poor monitoring systems made matters worse. To accommodate growth, Clausen logically decentralized operations away from San Francisco. Bank executives abroad could make decisions without always checking with California. But different divisions adopted different reporting procedures, and Clausen didn't invest enough in uniform computer information systems. As a result, management has had trouble following its 1,100 global lending officers and has been able to get detailed reports of loan losses only once a quarter. Total losses have repeatedly surprised top executives.

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