Shaken to the Bottom Line

By Stephen Koepp

Banks and Big Steel. It takes a lot of turmoil to shake these once sturdy pillars of U.S. business. But in the past few years, plenty of trouble has come along to torment some of the most rock-solid names in each of those industries. Economic upheavals ranging from the oil-price slump to the glut of imported steel have forced giant banking and steel corporations to make dramatic adjustments to survive. Unfortunately, not all of them are going to make it. That became painfully clear last week, when the strains of economic change finally caught up with several companies and produced a chilling succession of financial calamities. The shocks came one right after another, starting on Monday, when the First National Bank & Trust of Oklahoma City (assets: $1.6 billion) collapsed from the weight of bad energy loans. It was the second-largest bank failure in U.S. history (after the 1974 fall of the New York-based Franklin National Bank) and a likely portent of another round of financial trauma in the oil patch. Just two days later, BankAmerica (assets: $117 billion), the No. 2 banking company in the U.S. after Citicorp, announced a second-quarter loss of $640 million, the second-biggest on record for a financial institution. That brought the troubled bank's total deficits in the past 15 months to $914 million and raised questions about its ability to survive as an independent institution. But the week's most stunning news came the very next day. Dallas-based LTV, the No. 2 U.S. steelmaker and a major defense contractor, filed for Chapter 11 bankruptcy to keep creditors at bay while it tries to make a financial comeback. In terms of its revenues, which reached $8.2 billion last year, LTV is the largest U.S. company ever to declare bankruptcy.

Though largely unrelated in their specific causes, the disasters last week were all accelerated by the 60% drop in the price of oil since the beginning of the year. By causing energy loans to go sour and depressing the whole Southwest, cheap oil pushed the Oklahoma City bank over the brink and aggravated BankAmerica's huge losses. The petroleum slide helped drag down LTV too, because the company is a major supplier of oil-drilling and pumping gear, which almost no one wants to buy right now. Last week the number of oil rigs operating in the U.S. reached a postwar record low of 663, compared with a peak of 4,530 at the end of 1981.

LTV, a go-go conglomerate in the 1960s, has been in an agonizing decline since 1981, the last year it made a profit. Now desperately short of cash after losing more than $1.5 billion, the company chose bankruptcy because it saw no prospect for a fast turnaround in the U.S. steel industry's epic slump. The company will operate in Chapter 11 for an estimated 1 1/2 to four years, shielded from creditors to whom it owes more than $4 billion, while it tries to overhaul its steel operations. Declared Chairman Raymond Hay: "We are fully confident that we will emerge from Chapter 11 as a strong, viable company." Indeed, bankruptcy in recent years has become much less final than it sounds. Last year the Wickes retailing and building-supply company and Continental Air both emerged from Chapter 11 in robust condition.

LTV was formed in 1961 when Texan James Ling, a former electrician, merged his Ling-Temco Electronics with Chance Vought Aircraft and named the company Ling-Temco-Vought. He caught the acquisition fever of the 1960s and built LTV into a thriving conglomerate. But the company made a fateful decision to enter the steel industry in 1968 by buying control of Pittsburgh's Jones & Laughlin. LTV's chief during the 1970s, Paul Thayer, who left the company for a Defense Department post in 1982 and went to prison last year after being convicted in an insider stock-trading case, pushed the firm further into the steel business with more acquisitions.

When cheap imports from Europe and Asia began pounding the industry in the early 1980s, the new chairman, Hay, decided to gamble double or nothing by increasing the company's stake in steel. So LTV paid $770 million in 1984 to acquire Republic Steel, with the hope of becoming a larger, more efficient operation. But the onslaught of imports kept coming, steel prices fell, and the merger failed to produce significant savings.

The bankruptcy will no doubt bring sharp austerity to LTV, a traditionally high-rolling company with a corporate staff that occupies a sleek 50-story headquarters tower in Dallas. Chapter 11 will entitle the company to break off many of its money-losing contracts in the steel and oil- equipment business. The company will probably close some of its two dozen steel plants, lay off many of its 56,000 employees and seek new concessions from its unions.

While the bankruptcy step may prolong LTV's existence, it could force a change in strategy for the rest of the U.S. steel industry. LTV's move into Chapter 11 will create much greater anxiety among steel-industry creditors and investors, who could conceivably push other firms into bankruptcy by clamoring for their money. A potential candidate for the next bankruptcy: Bethlehem Steel, the country's No. 3 producer, which has lost $2 billion since 1982.

The pitiful condition of Big Steel is matched or even exceeded by the energy- belt banks in the Southwest and West. Oklahoma's banking woes have managed to shake the entire U.S. financial community. When Oklahoma City's Penn Square Bank collapsed in 1982, it left institutions all over the country stuck with huge packages of the dubious energy loans it had peddled. Chicago's Continental Illinois, saddled with a $1 billion pile of those loans, nearly collapsed in 1984 and forced the Federal Deposit Insurance Corporation to stage the largest bank bailout in history. Since Penn Square's fall in 1982, 27 other Oklahoma banks have failed.

First National of Oklahoma City embarked on a bid to become a regional banking power during the 1970s oil boom. When prices fell, however, the bank's long-shot energy loans began to misfire. The bank slipped in position from the state's No. 1 institution to third-largest and during the past four years lost more than $200 million. Last September federal banking regulators forced the resignation of First National's chairman and largest stockholder, Charles A. Vose Sr., 85, who had led the bank since 1945. But the new chairman, J.G. Cairns Jr., found the institution in disarray, its books a mess and its staff slashed from 2,400 to 650. First National's decline proved so irreversible that on July 11 the FDIC foresaw an imminent collapse and put out a call for bids from other financial institutions to acquire the bank.

About 130 investigators from the FDIC arrived at First National early last week to close it down, claim its books and transfer its accounts to the new owner, Los Angeles-based First Interstate (assets: $50 billion). First Interstate reopened the bank the next day, so the institution's 33,000 account holders never had an opportunity to panic over their money. The FDIC will pay First Interstate $72 million to take over the accounts and assume $1.2 billion in First National loans. The deal should turn out to be a profitable plum for First Interstate's expansionist chairman, Joseph J. Pinola, whose company already owns 22 banks in twelve Western states.

Smooth though it was, the takeover reminded the rest of the U.S. financial community of the high potential for bank collapses in the Southwest. Conditions for those institutions keep getting worse as the decline of the oil industry spreads to real estate and other investments, creating a cascade of bad loans. Says James McDermott, who studies the region's banks for the investment firm of Keefe, Bruyette and Woods: "The situation is deteriorating, and there is no end in sight to the crisis. Recovery is three to five years away." Indeed, the only gushers in Texas are spouting red ink. Last week Dallas-based InterFirst (assets: $19.2 billion), the state's third- largest banking company, posted a second-quarter loss of $281.1 million.

The loss posted at San Francisco's BankAmerica last week is the third time in a year that the company has registered a quarterly deficit. The others: a $338 million loss in the second quarter of 1985 and $178 million in the fourth quarter. The company is staggering under some $4.5 billion in bad loans to a rogues' gallery of shaky borrowers: the Third World, energy companies, farmers and real estate ventures. The deficits have cropped up as the bank sets aside reserves to cover potential losses on those loans.

Despite its huge size, Bank America can lose money for only so long before needing an injection of outside investment. Many experts think the bank will struggle along without needing any bailout from the FDIC. A more likely possibility would be a merger with another bank, perhaps even with one of the Japanese institutions that have gained a foothold in California in recent years. "Stranger things have happened," says Chairman Leland Prussia. "If someone comes up with a good proposal, we would consider it seriously." Time could be running out for the bank's president and chief executive, Samuel | Armacost, who may be ousted if he fails to engineer a turnaround in the next year.

For all the strain on BankAmerica and banks in the Southwest, experts see no significant threat of failures that would overwhelm the FDIC. The agency's bailout fund, now more than $18 billion, has grown every year recently despite a surge in bank failures. Profits in the overall banking industry are growing at an estimated 10% or better annually, and last week four of the major New York City institutions reported robust quarterly earnings. Along with the painful contraction taking place in the steel industry, the regional banking woes are the natural result of the ebb and flow of economic tides. While some players may founder, the system shows no signs of sinking.

With reporting by Barbara Dolan/Oklahoma City and B. Russell Leavitt/Dallas