Finishing a Poor Third

In the race for supremacy between the nation's three leading banks, one is lagging badly. Last month, while the Bank of America and Citibank reported nearly 12% increases in earnings for the second quarter of the year as compared with the year-ago period, the Chase Manhattan reported a dismal 44.7% decrease in profits, to $30.1 million, v. $54.5 million for the second quarter of 1975. The Chase remains a powerful financial institution, with $43.9 billion in assets. But clearly it has lost its front-running momentum.

Wall Street analysts had predicted that the Chase would show a decline. But the worse-than-expected results gave new life to a major topic of debate on the Street: What is wrong with the Chase? To which a top analyst replies archly: "Two things: David Rockefeller."

Name Trouble. The situation is more complex than that. When he first took over as president in the early '60s, Rockefeller greatly enhanced the bank's image and developed into one of the world's most respected financial statesmen. He was a vigorous force in expanding the bank's retail and commercial business. But now his name seems to magnify the Chase's problems. A Rockefeller somehow should not be beset with the financial problems that affect ordinary bankers. Yet David Rockefeller is at least partly to blame for the bank's problems. Since the bank has historically been known as the Rockefellers', David was destined for the top job ever since he joined the bank's foreign department in 1946.

His clear shot at the top had the effect of discouraging the kind of compulsive overachievers who were attracted to its rival Citibank. Under the leadership of the aggressive Walter Wriston, Citibank overtook the Chase in 1968 and is now challenging the Bank of America for the No. 1 spot. While Wriston has vigorously recruited executives from far afield to put new zip into banking, Rockefeller has fostered a clubby--his critics say complacent--atmosphere in the Chase's upper echelons.

When Rockefeller took over as chairman from George Champion in 1969, he inherited one big mistake--the Chase's failure to expand into foreign markets, where the Bank of America and Citibank were making major and highly profitable inroads. Rockefeller belatedly corrected that failing. But under his leadership, the Chase made other errors. Citibank set up a special data-processing operation with a team of industrial engineers to cope with the growing volume of checks and other paper. Chase, though it has computerized its operations, still has not completely solved its paperwork problems.

Most important, the bank took financial risks that resulted in a higher percentage of bad loans than its competitors. Critics contend that the losses stemmed from more lenient lending standards than those of other banks. One consequence: the Chase has written off $136.8 million in actual bad loans so far this year. That is a greater loss proportionately in relation to Chase's outstanding loans than those suffered by its two big competitors. Last winter the Federal Reserve reportedly placed Chase on its "problem" list (TIME, Jan. 26) and criticized the bank's loan operation as suffering from "poor communication between lending and support staff, poor credit files and lack of knowledge of the borrowers' current status."

A large part of the bank's liabilities stems from Rockefeller's high-minded conviction that the Chase should be a good corporate citizen. To help bail out New York City, the Chase bought more of the city's notes and bonds than any other bank did--$408 million, at last count. The city's dire financial condition makes these investments unattractive. The bank has also spent $731 million in REITs (for real estate investment trusts). Since real estate was particularly hard hit by the recession, nearly three-quarters of the Chase's REITs are either producing no interest income or less than they were designed to.

Last year Rockefeller and his management staff set up a profitability analysis project to halt the bank's downward slide. Consequently, the Chase has been moving faster into the merchant banking field abroad. Loan standards have been tightened. The Chase has closed six of its 265 branches because they were unprofitable, and as many as 30 more might be shut down. In an effort to trim its paperwork problems, the bank has sold off its payroll processing and stock-transfer departments to smaller data-processing firms. As a result, in a move that one veteran officer describes as "not in the Chase tradition," 300 employees will be fired.

On Schedule. There are rumors that Rockefeller's job is at stake. Supposedly, a few disenchanted Chase directors have sounded out potential candidates for the chairmanship. Two of the leading possible replacements: Donald Regan, chairman of Merrill Lynch, the nation's largest brokerage house, and Thomas Wilcox, chairman of Crocker National Bank (national ranking: 15th). Publicly, however, the directors join ranks behind Rockefeller. For his part, Rockefeller insists that he has no intention of stepping down until he reaches the mandatory retirement age of 65 in four more years. "We've gone through some difficult times," he concedes, "but I think we've dealt with our problems systematically and are correcting them on schedule."

Wall Street analysts have their doubts. They feel they have been misled in the past by the Chase's overly optimistic forecasts and are watching for a solid indicator. That indicator will come, they believe, when the Chase begins to make lower provisions in its income statement for bad loans; total loss estimates could reach $300 million for 1976. Until the bank starts to put more faith in its chances for repayment and starts actually collecting on its questionable loans, Wall Streeters are likely to remain skeptical about talk of a turnabout.

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