Bankers Blame the Government For Gumming Up Loan Workouts
For Charles Quattrochi, a former Bankers Trust Co. official, negotiating with the Resolution Trust Corp. was a nightmare - and one he won't soon forget.
"That was one of the worst monthlong periods of my life," said Mr. Quattrochi, recalling his experience last year as an adviser to Morningstar Inc., a Dallas dairy company that was trying to avoid bankruptcy by renegotiating loan terms with a dozen lenders.
Blocked at Every Turn
The problem: Two of the banks involved had been taken over by the RTC, and their negotiators were blocking Mr. Quattrochi's every move.
"Every morning we'd have a vote, and it would always be 10 to 2, them against the banks. No matter what we put in front of them, they were going to vote no," said Mr. Quattrochi, who is now an executive with Fieldstone Private Capital, an investment banking firm in New York.
With the Federal Deposit Insurance Corp. and the RTC increasingly emerging as participants in failed loans, bankers are complaining about what they call the twin terrors of working with the government: endless delays in reaching decisions and a frustrating unwillingness to renegotiate loan terms.
"When you're dealing with the government, you're dealing with a level of dealy and bureaucracy which is incalculable," said Roger Widmann, managing director in charge of corporate finance at Chemical Bank. "And you are dealing with a party that has a totally different views of values."
No figures exist for the total amount of government-owned loans currently in negotiation. But the FDIC's liquidation division alone presides over about 150,000 accounts with a book value of about $30 billion. The total includes a crazy-quilt of commercial loans, real estate mortgages, and installment loans, many of them in trouble. The total also includes huge amounts of foreclosed real estate.
Little Room to Maneuver
Bankers, borrowers, and their advisers complain that the government is often intractable when it comes to providing new money or amending existing loan requirements.
"The government lawyers seem to believe they have a single charge - either get paid or go to court," said Stanley Ross, a managing partner in the Los Angeles office of Kenneth Leventhal & Co., an accounting and consulting firm that specializes in real estate. "They've been reluctant to be pressured into a deal."
Where does that leave other lenders involved in troubled deals or loan syndicates? Often they must either buy out the government's position at little or no discount - a precedent that violates all rules of workout - or let the borrower fail.
"The FDIC refuses to enter into any accommodation; it has adopted a policy of liquidation and collection of all assets," said Neal D. Colton, an attorney at Dechert Price & Rhoads in Philadelphia.
A Different Agenda
In their defense, government officials point out that their agenda differs from those of banks. "We have different goals - they want to grow and I want to shrink," said Arthur Lorentzen Jr., associate director for credit of the FDIC's division of liquidation. "Our goal is to turn the assets into cash."
Added Ira H. Parker, assistant general counsel in charge of closed-bank litigation at the FDIC: "They are correct that our bottom line is not a bank relationship. A bank might want to work with the customer and develop the relationship."
Government officials also deny that they are either obstructionist or inefficient. Steven Seelig, director of the liquidation division, said: "We've gone along with workouts, but if they are based on pie-in-the-sky assumptions about things getting better, we typically have problems with that."
But bankers argue that the government would do better financially if it helped rehabilitate a borrower with a view to collecting fuller value on loans in the future.
A Higher Authority
Then there's the stalling. Bankers and investors say that government-appointed negotiators at the table in loan workouts often claim to have no direct authority to renegotiate terms of a loan.
"Today, you can't even find the guy who admits to making the decision," complained investor Samuel Zell at a recent conference on workouts sponsored by the University of Michigan's School of Business Administration. "It's the committee. You think they sit along with St. Peter and God in deciding things."
The government concedes that its bureaucratic approval process can slow down negotiations, but officials say it also makes for a greater degree of safety. "When we're involved, you won't have to worry about an account officer cutting a deal because his brother is on the other side," said Mr. Parker, the FDIC litigator.
Of course, bankers who complain about government negotiators don't always have the purest of motives, said Mr. Lorentzen. "Banks on occasion are concerned with not recognizing on their books any additional loss. There's an inherent conflict between that objective and our goal of collecting as much present value as possible."
FDIC Easing Controls
The FDIC says it is loosening its reins, giving its representatives more autonomy to make decisions without direct review and approval from Washington.
Example: On behalf of the government, NCNB Corp. negotiators are managing the failed assets of FirstRepublic Bancorp, and they have authority to make decisions on any loans under $10 million, said Mr. Seelig.
Even so, the government lacks savvy negotiators, bankers say. "The guys that run the bad banks are typically from supervision and examination," said a money-center banker who spoke on condition of anonymity. "They have no contact with business realities."
Said a veteran New England workout banker, who insisted on anonymity, "I think the RTC and FDIC are probably O.K. liquidators. But there is a difference between liquidation and problem loan management."
Mr. Seelig, for his part, cites incidents where the government has shown greater flexibility than a lender. In one case, Bank of New England was about to foreclose on a $10 million loan to a hotel in Salem, Mass., just before the bank failed. "The borrower called and said it had cash flow, but not enough to pay debt," Mr. Seelig recalled. "I said it's a candidate for restructuring, not foreclosure."
Forbearance Called Rare
Such forbearance by the government, many bankers and workout experts contend, is rare.
"It's an oxymoron to use the words workout, asset disposition, or management with the FDIC," said Robert Eisenberg, the president of Broadwater Financial Inc., a Boston-based consulting and asset management firm. "In business, the two watchwords are the ability to make a decision and flexibility. Neither of those two is attributable to the FDIC."
Clearly, government officials face heavy pressure to be tough with troubled borrowers, and that means change may be slow in coming. "Whining about the FDIC is frankly pretty silly," said Ralph Carestio, a real estate expert who is managing the collection bank at KeyCorp and previously was on the board of directors of NCNB Texas' asset management bank. "Once you understand the routine, it's generally not a bad situation at all."
Mr. Carestio said most of the complaints he hears come from bankers, lawyers, and others with close ties to the real estate industry.
Despite all the complaining, bankers are doing little to push for a change in the government stance. Mr. Seelig, who has headed the division of liquidation for almost three years, said he has never received a complaint.
But that may change. One lawyer said he has seen a draft of a letter to the FDIC from a big bank that pulls no punches.
"There is a sense of |fair dealing' that even the FDIC should consider part of its level of responsibility," he said, paraphrasing the letter. "The FDIC's charter to liquidate and collect does not mean there ought to be an open avenue for reckless destruction of a borrower that needs accommodation."