WASHINGTON - The Federal Reserve Board last week rejected a bid by Berens Corp. to acquire the $17 million-asset First National Bank of Dayton, Tex., effectively ending the company's 10-month quest to expand into banking.

The Fed said the company was bankrupt, lacked capital, and refused to provide necessary documents to the staff.

The order was unusual because most companies withdraw their applications rather than face a Fed rebuff. But Marc Berens, president of Berens Corp., was unable to withdraw because of his firm's pending bankruptcy case. He said the situation shows how destructive the Fed's application process can be.

Mr. Berens saw First National as a natural target for the Houston-based financing company he founded in 1991. He was providing credit to doctors and medical facilities to buy equipment, and he wanted to offer this market credit cards and banking services.

So he worked out a deal to acquire First National, then rounded up investors and applied in February 1995 for the Fed's permission.

Ten months later, his investors bailed out, his company landed in bankruptcy, and he lost $300,000. Mr. Berens expects his firm to continue doing business once it emerges from Chapter 11 bankruptcy, but he blamed the Fed for the financial troubles, saying the exhaustive approval process drained his company's resources.

"In my opinion this was a total debacle," Mr. Berens said. "A transaction that normally would have taken anywhere from three months to six months took nearly a year. They procrastinated intensely."

Fed observers said Mr. Berens's situation is not unusual. Although the Fed has only 91 days to rule on an application, it often takes substantially longer.

"They try to work with the applicant," said Gil Schwartz, a partner at Schwartz & Ballen. "They say, 'Show us why we should approve it.' They are not quick to turn it down."

But Carla Brooks, a senior manager at KPMG Peat Marwick in Dallas who worked with Mr. Berens, said the Fed uses a loophole to delay applications indefinitely and legally.

The Bank Holding Company Act requires the reserve bank receiving an application to respond within 10 days. It can raise questions with the filings, requiring the applicants to respond within eight days. The reserve bank then must send the application to the Fed in Washington within five days.

There is an escape clause. The reserve bank can decide that the answers are incomplete and return the application. That starts the 10-day cycle all over again, Ms. Brooks said.

Mr. Berens learned that firsthand, cycling through this process from February to August when the reserve bank finally sent the application to Washington.

Once here, the Fed has 91 days to act. But, the clock doesn't run until the application is complete. In Mr. Berens' case, the Fed kept asking more questions. That allowed the application to remain pending for five months.

Observers said this process may appear frustrating. But they said the industry benefits because the central bank weeds out unqualified owners. That helps reduce bank failures and ensures deposit insurance premiums will remain low.

Mike Greenspan, a partner at Thompson & Mitchell, said some bank applications do get sidetracked. This occurs when the staff is unable to process the documents within 60 days, an internal time limit.

"Once that 60-day schedule has passed, there is less pressure on the staff to act in a timely manner," he said.

Still, he said he's never seen the staff purposely delay an application.

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