A Tale of Two Troubled Banks

Surprises at First Chicago and First Pennsylvania

Conversations in the banking community last week had the strange ring of corporate slapstick: "Who's on First? Which First?" In a stunning move the board of directors of the First National Bank of Chicago fired both its abrasive chairman, Robert Abboud, 50, and its obstinate deputy chairman, Harvey Kapnick, 54, after their short but stormy tenure together and sharp earnings slumps. On the same day, First Pennsylvania Bank announced that it was to receive a mammoth $1.5 billion loan package from the Federal Deposit Insurance Corporation and 25 private banks, the largest rescue package ever put together to save an American financial institution from bankruptcy. In the case of First Penn, though, the executive exit had already taken place. Last July, John Bunting, 54, resigned under pressure as the chief executive officer because of the bank's steadily declining earnings. The colorful chiefs in both banks were victims of turbulent financial conditions and the classic banking mistake at times of soaring interest rates--lending at low long-term rates money that they must later cover by borrowing at higher short-term rates.

At first no one minded Abboud's stormy leadership of First Chicago after he took over the nation's ninth largest bank in 1975. First Chicago had accumulated a backlog of bad loans. With what one bank official termed his "one-man-band" style, Abboud attacked the problems with decisive speed. His aggressive style was seen, for example, when he outmaneuvered the bigger Chase Manhattan Bank to secure the first loan ($8 million) by an American bank to the People's Republic of China in 1979.

Those driving personal habits, however, created problems in the staid banking community. Abboud became infamous for his humiliating chastisements of senior officials in front of their subordinates, and FORTUNE this spring named him one of the ten toughest bosses in the U.S. Some 200 bank executives left First Chicago during Abboud's tenure. One described him as "perverse, willful, abusive, inconsiderate and erratic." After one disgruntled banker resigned, Abboud said to him: "If you are leaving town, I'd like to buy your house."

In the past two years, Abboud moved aggressively to get more clients with fixed-rate loans covered by short-term borrowing. Like many other bankers and economists, he figured that interest rates had peaked. When rates continued up toward 20%, his bank's profits nosedived $14 million in the first quarter. Late last year Abboud brought into the bank Harvey Kapnick, who had left the $499,000-a-year job as chairman of the Arthur Andersen accounting firm after a policy dispute with partners. It was like Frankenstein's monster meeting Dracula. Kapnick had an almost equally truculent style. The two were soon clashing, particularly about who was running banking operations.

First Chicago's board concluded that the executive storm had become a profitless rain dance. The board took just an hour and a half to decide on firing both executives. Says Executive Committee Chairman Ben Heineman, president of Northwest Industries: "It was all clean, simple and painful."

At First Pennsylvania Bank, the 23rd largest in the nation, the troubles were a bit murkier but just as painful. The FDIC put up $325 million in loans, while the 25 private banks, led by New York's Citibank, provided $175 million more --plus a $1 billion stabilizing credit line. In a stormy meeting with stockholders, the bank's new chairman, George Butler, 52, admitted that First Penn would lose $100 million in the current quarter.

First Perm's highflyer had been Bunting, its handsome and articulate chairman. In a wild roller-coaster ride starting in 1968, he tried to move the conservative regional bank into the same class as the major New York institutions with a go-go policy of risky venture-capital loans and high-yielding real estate deals. For a while the strategy worked. In five years First Penn led all banks with a healthy 16.4% return on equity. But the 1974-75 recession caught the bank overextended. Then, between 1976 and 1979, Bunting sank about 20% of the bank's assets into long-term Government securities in the expectation that interest rates would soon peak. By this year the bank was borrowing money at 15% interest while its Government securities were yielding less than 9%.

The fury of last week's stockholders' meeting was directed at the absent Bunting and the Hollywood divorce-like settlement he negotiated on leaving the bank. Though Bunting no longer works for First Penn, he will continue to draw his $222,600 salary through July 1. At that time he will receive $100,000 in severance pay, then $4,833 a month for the rest of his life. Exclaimed angry Stockholder Herbert C. Hannemann: "He's not bunting. He's a home-run hitter."

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