Tough New Rules Scuttled Bank of New England

I recognize that in a situation as devastating as the Bank of New England's failure, there is a natural tendency for everyone to try to justify their part. I will not try to do that.

I was at the helm, [as] chairman and CEO, during most of the period prior to the failure. I set the strategy and policies that launched the Bank of New England, and I accept responsibility for my judgments that failed.

I will be as objective as I can and restrict my comments to the facts as I saw them, because, while there is blame enough for everyone connected with the BNE debacle, I realize your purpose is to gather all the intelligence you can as you consider legislation for an American banking system at severe risk.

A Relatively Young Bank

First, let me state that the Bank of New England was created specifically in 1985 in response to the changes overtaking the American banking industry.

It was the first superregional bank, created by the merging of two leading banks in Connecticut and Massachusetts that traced their roots to colonial times; and it was run by an experienced group of bankers who shared the bedrock populist belief that the region would be best served if the decisions about its credit were made close to home: a New England Bank for New Englanders, positioned to survive in an increasingly hazardous environment.

We moved quickly to combine operations, modernize systems, expand our activities, and improve customer service. We became leaders in New England in community reinvestment activities and equal-opportunity employment programs.

We established the BNE charitable foundation, which distributed $6 million a year to deserving charities in our communities.

Agreement with Comptroller

As always, there were some surprises along the way. For example, in August 1989, our Boston bank had signed an agreement with the Comptroller's office aimed at tightening our real estate loan administration procedures.

We believed we knew what the problems were, we were cooperating fully with the Comptroller's office, and we thought we were on the way to fixing them.

Our management and staff believed we were building a great institution. Many of us were investing heavily in the company's stock. Through the third quarter of 1989, Bank of New England was a profitable company, first in providing banking services in New England and also owning arguably the best banking franchise in the region.

The Leading Bank

We were serving the financial needs of more consumers and businesses in New England than anyone else.

At the same time, it was becoming increasingly clear that the real estate market in New England was softening and the overall New England economy was slowing down. We were expecting a healthy correction, and, while we knew there would be troublesome times ahead, we felt we could handle them.

Through most of 1989, the general view at the Bank of New England, and among most informed observers, was that economic growth and commercial real estate in the region would soften but not collapse.

This was the setting for the Bank of New England in October 1989. We were completely unprepared for what followed in the next two months.

Changing the Rules

The . . . enormity of the emergent real estate problems surprised everyone. Officials of the Comptroller's office reacted to this by changing abruptly the rules that govern the conduct of our business.

It has been suggested that they were stung by criticism about their handling of bank problems in Texas and determined to avoid the kind of criticism that the thrift regulators received from Congress. They also were utilizing new legislative enforcement powers.

Whatever the case, the result was that 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 that contradicted the views of the company's independent auditors, and that we all thought were unrealistic.

Under these circumstances, we never were able to reach agreement with the Comptroller's office on the adequacy of our reserves.

Customers Suffered

We were stunned. How could anything so unrealistic be applied to properties in our communities and loans to people we knew well?

If our customers were honest and we judged that their problems could ultimately be worked out, as bankers we believed it was our job to work with them -- in the bad times as well as the good.

Instead, the Comptroller's formula forced us to throw our customers over the side. By way of comparison, if similar criteria had been applied in the past to the foreign loans of some of our international banks, the banking landscape would look a lot different today.

Overnight, we were forced to revalue our entire real estate portfolio, to write off hundreds of millions in loans, and to stare at the specter of a decimated loan portfolio, a new set of rules, and a sea of red ink.

Loss of Confidence

The organization -- officers and directors -- was traumatized by these blows. Sensational media coverage spawned internal divisiveness, back-biting, and a general loss of public confidence in the bank.

The Comptroller's office then insisted that the directors replace top management, and began what was by then the almost impossible job of saving the bank.

Ultimately, we were not alone -- although that is little comfort. We were the first, to be sure, but the regulatory clampdown soon affected nearly every bank in the region. This precipitated, or was followed by, or accompanied (depending on one's point of view) a sharp decline in real estate values, contraction in economic activity, and an almost instant drying up of credit.

A Personal Perspective

I hope you understand that this overview is presented from my perspective. I have no intention of avoiding responsibility, and I do not quarrel with anyone's right to hold or express a different view.

I know that your intent is to get as much information as possible, and your objective is to strengthen the banking system and the way it is regulated. As a person who has devoted 30 years to banking, I share your objective.

Clearly, now is the time to move forward, to learn from our experience, and to do what we can to prevent another Bank of New England debacle.

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