Here Comes the Cavalry

By Gordon Bock

The mood seemed remarkably upbeat for the headquarters of a company that has been hemorrhaging money for two years. Workers danced in the hallways. A manager who had submitted his resignation five days earlier changed his mind. All in all, an air of elation last week permeated the Houston offices of First City, Texas' fourth largest banking firm. And with good reason: word had just come from Washington that the Federal Deposit Insurance Corporation had agreed to save the failing institution by pumping in $970 million worth of assistance. The cavalry-like rescue was the second largest in banking history, eclipsed only by the FDIC's $4.5 billion bailout of Continental Illinois in 1984.

The agency's plan calls for a dramatic return to the banking business by A. Robert Abboud, former chairman of First Chicago and ex-president of Occidental Petroleum. Abboud, 58, known during a stormy 29-year career as an exacting boss, is spearheading a campaign to raise $500 million and gain control of First City, a holding company that operates 61 banks in Texas and one in South Dakota. Abboud, who will become chairman, is kicking in $5 million of his personal funds. His group, which had been conducting secret negotiations with the FDIC since November, beat out at least three rival bidders.

First City needs all the cash it can get. Its loan portfolio includes $1.8 billion in debt on which interest is no longer being paid. The company's losses last year totaled $402 million, and are likely to surpass $300 million this year. Shares, valued at 41 in 1981, have fallen below 2. Because many wary customers have taken their funds elsewhere, total deposits have dropped 27%, to $9.9 billion, since 1983.

How it all happened is a typical tale of oil-patch woe. When petroleum prices were high in the late 1970s, First City lent extensively to oil-rig builders and small supply firms. When prices later plunged, loan defaults skyrocketed. First City then boosted its presence in real estate loans -- and that market softened. As foreclosures mounted, First City's management offered Arabian horses, Porsches or 40-ft. yachts to new customers who maintained accounts of $100,000 and up. The gimmicks did not lure enough high rollers to stanch First City's losses, and talk of a takeover, bailout or shutdown mounted.

In rode the FDIC and Abboud, who will assume management of the company from Houston's powerful Elkins family. The current shareholders will end up with less than a 3% stake in First City. The FDIC intervention, financed by annual premiums that U.S. banks pay to the federal agency, kept the Government from having to pay depositors an estimated $1.8 billion if the bank had gone out of business. But "this is no bailout," asserts FDIC Chairman L. William Seidman. "In terms of the stockholders and management, the bank has failed."

Abboud is no stranger to failures, bailouts or controversy. At First Chicago in the late 1970s, he helped the bank recover from a string of bad real estate loans. But associates complained that Abboud was autocratic and contributed to flagging morale. In 1980 the bank's board ousted him. Abboud soon became president of Occidental, only to resign in 1984 after policy clashes with Chairman Armand Hammer. Since then, Abboud has run his own investment firm near his home in the posh Chicago suburb of Barrington. His reputation for toughness lingers, however, and Abboud seems to revel in it. "People think the A in A. Robert Abboud stands for abrasive," he has said. (Actually, it stands for Alfred.)

Of course, a hard-edged manager may be just what First City needs. Despite a partial recovery in petroleum prices this year, the Texas economy is still stagnant and oil-patch lending remains a risky business. The FDIC has already rescued eleven Texas banks, while 38 others went belly up. Last week, as Abboud set up temporary quarters in a First City Tower conference room, he said he will aggressively seek new business, and predicted that First City will be profitable "very shortly" after the influx of FDIC and private funds. "As this bank emerges, it's going to be formidable," Abboud vowed. "We're starting clean."

With reporting by Richard Hornik/Washington and Richard Woodbury/Houston