SAN FRANCISCO -- Carl E. Reichardt, the hardboiled chairman and chief executive of Wells Fargo & Co., was perhaps the most lionized bank executive of the 1980s. His institution set standards for efficiency, profitability and acquisition strategy.

But as the decade turned and California's economy skidded, some began to question Mr. Reichardt's leadership. Wells Fargo, the critics said, was not diversified enough to control risk: it was too heavily concentrated in commercial real estate and it had not expanded its banking network outside the Golden State.

A slumping economy sharply depressed Wells' earnings. And the proud Mr. Reichardt, who had always stressed his dedication to his shareholders, fell out of favor.

Today the critics are silent. Problem loans are down sharply and Wells Fargo's profits are again at record levels. Mr. Reichardt has chosen this moment to make a graceful exit, his retirement scheduled for the end of the year.

Throughout Wells' struggle to regain its balance, Mr. Reichardt kept a low profile and avoided public comment. But as he prepares to step down, the 63-year-old Texas native is speaking out again.

Recently Mr. Reichardt sat down for a wide-ranging interview in his office on the 12th floor of Wells' headquarters in San Francisco's financial district, a room filled with cowboy mementos in keeping with the bank's stagecoach image.

The ruddy-cheeked, black-haired Mr. Reichardt is given to plain speaking, which is evident in his comments on bank regulation, acquisitions, and his battle to regain respect.

Q.: Is your retirement announcement a signal that Wells Fargo is now completely recovered from its credit and earnings problems of the last few years?

REICHARDT: If you look at the size of our reserves and our mix of businesses, the company is in very good shape to make money. The fact that the stock of the company is selling at 230% of book -- that's the bottom line.

Q.: Just how severe were Wells Fargo's credit problems in the early 1990s?

REICHARDT: Just because someone calls a loan nonperforming, it may or may not indicate something.

The barometer of health is cash flow. The nonperforming loan portfolio is now yielding 8.7% in cash.

In terms of commercial real estate, we are going to have a loss content for the period of about 7%.

Standard & Poor's did a study of the Texas and Northeastern banks and their commercial real estate portfolios. The comparable figure was 25%.

Q.: Were you surprised by the depth of the recession in California?

REICHARDT: I had not anticipated the severity of the downturn as it related to commercial real estate. I knew that we were overbuilt, but I didn't think we would see vacancy rates of 25%-30% in commercial properties. What turned out the way I expected was the resiliency of this economy. We never had a 'California economy.' We always had Northern California, Southern California, and the Central Valley.

Q.: How did you manage to get through the real estate downturn with relatively modest losses?

REICHARDT: We were dealing with the best developers. Their liquidity allowed them to carry these properties which in turn allowed us to carry the loans and not have to wholesale them.

We had remarginings, that is, putting up additional cash during that period, of over $1 billion.

If we had not been able to do that we would have probably had to wholesale properties, which I felt was a terrible mistake.

Q.: Nevertheless you classified those loans and put up additional reserves?

REICHARDT: Unfortunately, the regulators were giving little credence to the financial statements of the borrowers.

In fairness to the regulators, with the experiences they had had in Texas and the Northeast, they discovered that even the best of the borrowers didn't survive.

Q.: Didn't you have some fierce disagreements with your examiners?

REICHARDT: The regulatory process was not unfair. Operating with the information and experiences they had, I wouldn't be highly critical of the regulators. You were dealing with insured deposits. The FDIC fund had to be protected.

But the underpinning to the regulatory climate was the savings and loan debacle.

Look at real estate loans that banks make and look at real estate loans that savings and loans make. You could say it looks like a duck, it quacks and it has got webbed feet and therefore they are the same.

But in many cases, people in savings and loans were involved in nefarious self-dealing.

Bankers aren't smart, but most of us are honest. We were confusing the S&L industry that was rife with mismanagement with the banking industry that in the main was run by decent, honorable people.

Q.: What would have been the correct regulatory response to the real estate crash?

REICHARDT: The thing that we should learn is not to overreact. This doesn't mean that the regulatory environment should be lax, but it should acknowledge what is happening in a regional economy.

Time can cure a lot of ills if you are dealing with honest people and if you are dealing with real assets.

Q.: Still, wouldn't you admit that pressure from regulators made you act earlier and more aggressively to address your real estate problems?

REICHARDT: Obviously the regulatory concern about that real estate portfolio made us focus laser-like on what was in there. But what was in there had been put in there and couldn't be changed.

There was no alchemy we could have done there, if those things hadn't been properly underwritten with guarantees from the proper parties.

Certainly we focused a lot of our people, we forced early payoffs that we might not otherwise have, we lowered our concentration.

All those things were the right thing to do from a regulatory standpoint and from a cosmetic standpoint.

Q.: Are you suggesting that your problems were mainly cosmetic?

REICHARDT: Cosmetics can be deadly. Perception is more important than reality if you don't have time to get to reality.

The perception was that we were overconcentrated in commercial real estate.

That is one reason that we decided to show the vacancy levels and the cash flow from our properties so that people could track it and could see whether it was deteriorating or whether it was improving.

Q.: Why didn't you sell in bulk some of your problem real estate loans?

REICHARDT: The best business in town was buying bank loans. If I hadn't felt I had a responsibility to run this company I would have been buying loans from banks. They were doing some superdumb things.

Sometimes you don't have a choice. You are.dealing with capital constraints and it is a question of survival.

I could certainly understand why a bank has to do it. It's less clear to me, if their loans are underwritten properly, why they would want to do it.

Q.: You did, however, sell some highly leveraged commercial credits.

REICHARDT: In my judgment, that was a mistake. We've gone back and looked at what happened to us in the HLT portfolio, including the ones we sold on the secondary market.

With a 10% capital allocation, we had a 14.5% return. Those loans, in the main, proved to be good assets. HLTs were a figment of analysts' imagination.

Q.: Was it really necessary to cut your dividend in half in 19927

REICHARDT: It was a very tough decision, but if I had to, I would do it again. Obviously, we restored it as fast as we could.

Capital definitely was an issue. The future was an issue in terms of how severe the recession was going to be.

It was difficult to have a $4 payout when the future wasn't clear. The Cassandras of doom were being proved right day after day.

Q.: Are you worried about credit standards eroding now that the industry is trying to boost loan volume again?

REICHARDT: Everybody has a lot of capital and a lot of liquidity. Your lending officers tell you that pricing is deteriorating and loan covenants are becoming weaker. But you hear this every time you go through a period like this.

I would argue that the secret is to price for risk. That's where I would fault us. Taking risk -- that's our business. But the risk/reward ratios that banks deal with at times don't make a lot of sense.

Q.: How have you managed to keep your rates of return high as you reduced your concentration in high-margin real estate lending?

REICHARDT: Commercial real estate wasn't yielding that much because we were only dealing with the best customers. We were willing to cut the prices to deal with the best. We have had huge runoffs from our real estate investment trusts. In one case, we had a $200 [million] or $300 million shopping center paid off.

But it was priced at about 85 basis points above LIBOR.

Q.: With what have you replaced those credits?

REICHARDT: We have a big credit card portfolio which was not growing until last quarter. Then there is small business. We are up to $1.9 billion. We started with nothing.

If you get your costs down and centralize it, you can process it very well.

And the yields are quite high. And although there are no compensating balances required, we are running 30% demand deposits from this business.

Q.: Why hasn't Wells been more active in the acquisitions market now that the bank is healthy again?

REICHARDT: I read somewhere that 85% of the acquisitions made by publicly held companies were successful from the acquired company's standpoint. Acquisitions are a tricky business. You get caught up in the fervor.

Some years ago, we were involved in a bidding war. We had one of those investment bankers with his suspenders and greased-back hair, Rolex, Hermes tie. He said, 'We can get it if we go $1 more per share.' I said, 'No, we aren't going to go $1 more per share. We are not going to go 25 cents. This is it.'

Q.: Still, as the industry consolidates, shouldn't Wells be a participant rather than a bystander?

REICHARDT: If one has a criterion that says an acquisition should be accretive within a year, that is fairly simple.

As far as banks are concerned, there is nothing big left in-market, except for First Interstate.

Apart from banks, we would be interested in buying discrete businesses or business units, certainly credit card portfolios, certainly mortgage servicing.

We bid on mortgage servicing portfolios all the time. We might be interested in a commercial finance operation.

We are actively buying real estate portfolios now. I wish we could have done it two years ago.

I have a very difficult time justifying buying thrifts at some of the premiums that are being paid. Typical thrifts do not have a deposit structure, do not have the customer base that a commercial bank has. Obviously, they don't have the assets.

Q.: But aren't you missing the boat as nationwide banking takes shape?

REICHARDT: I am more concerned with our ability to do business in the Pacific Basin and in the newly emerging countries down south.

I'm talking about making money, not whether we are in Utah or Maine or any of those places.

Q.: Wells is big in the money management business. What do you think of the bank investment product boom of recent years?

REICHARDT: That is a business associated with so much hype.

When I look at some banker in a rural southern State who has suddenly discovered mutual funds and he has hired some guy from Beverly Hills to run it for him and all of a sudden he is going to get all this great fee income -- that's silly.

The business is going to grow slowly in terms of profits and there are a lot of upfront costs. Performance doesn't seem to be important.

Marketing seems to be more important. But over time I have to believe that performance will be.

Q.: Why did you explore switching to a thrift charter?

REICHARDT: The savings and loan charier has some advantages as it relates to geographic expansion, insurance and investment products. It also has the advantage that a savings and loan can be acquired by an industrial company.

The major disadvantage is you can only have 15% of your assets in commercial loans. Then you have got the whole regulatory process. A switch may or may not have made the regulators happy.

Q.: Is the bank branch still an effective delivery unit?

REICHARDT: Twenty years ago I said it was obsolete. I obviously was wrong.

But I think the foot race is getting closer. The question is at what point does obsolescence occur. I think it is going to occur a lot sooner in California than it does in the Middle West.

That's the most interesting problem facing a retail bank: knowing that alternative technology is available, being able to weigh that against customers still liking to do business in branches.

But that customer base is changing. The problem is to make that transition gracefully and do it in a way that doesn't cost the shareholders a bunch of money.

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