Former BNE Chief Rips Comptroller
WASHINGTON - Bank of New England failed partly because of overly harsh lending rules suddenly imposed by regulators in 1989, Walter J. Connolly, the bank's ousted chairman, told an unsympathetic congressional panel Thursday.
In a rare public appearance, Mr. Connolly said examiners from the Office of the Comptroller of the Currency forced the bank "overnight" to revalue its entire real estate portfolio in 1989, requiring huge writeoffs. That sapped the capital of Bank of New England Corp.'s three subsidiary banks and led to their seizure on Jan. 6, he said.
"The Comptroller's office imposed standards for valuing real estate loan collateral and loan collectibility that I had never seen in 30 years of banking," Mr. Connolly said. "We were stunned."
But when asked directly if the crackdown caused the failure, Mr. Connolly replied: "I think I'd have to stop short of saying it wouldn't have happened if they hadn't changed the rules."
Greeted with Skepticism
Most members of the House Banking Committee reacted skeptically to Mr. Connolly's remarks, and the regulators present denied they had changed rules governing real estate lending.
The hearing presented an ironic twist for the Comptroller. Mr. Connolly's complaints that regulators had been overzealous were made to a panel that has criticized the regulatory agency for not acting quickly or forcefully enough on Bank of New England.
The Comptroller's crackdown led Bank of New England's nonperforming assets to soar to $2.2 billion at the end of 1989, from $400 million a year earlier. Loan-loss reserves soared to $1.5 billion in 1989 from $325 million in 1988.
"We do not feel like the rules changed," James Barton, a deputy director in the Comptroller's office who supervised Bank of New England beginning in the fall of 1989, told the committee.
Joseph Hooks, an examiner sent to New England from the Comptroller's southwest region, said: "We use the same standards wherever we go."
The regulators did admit the Comptroller replaced its top examiners in the Northeast because they were not doing a good job.
Rep. Joseph Kennedy, a Massachusetts Democrat, was the only lawmaker who appeared sympathetic to Mr. Connolly, although he said he was not "buying into" his argument. The legislator said he was worried that dozens of other weak financial institutions may be pushed over the edge by "overly pessimistic" regulators.
Rep. Barney Frank, another Democrat from Massachusetts, bluntly told Mr. Connolly that he should have listened to regulatory warnings sooner.
"Do they have to bang on your desk?" Mr. Frank asked. "It's not their job to yell at you."