Another Jolt from the Bankers

By Stephen Koepp. Reported by J. Madeleine Nash/Chicago and Raji Samghabadi/New York

Continental's rival First Chicago, discloses a huge loss

When Chicago's Continental Illinois collapsed last July into the arms of federal rescuers, moneymen across the country began nervously worrying about problem loans at other big banks. But they at least could take heart in the fitness of banks like Continental's archrival, First Chicago (assets: $40.5 billion). Located just three blocks from Continental in the downtown financial district, First Chicago seemed like a monument of strength. While many other big banks were posting shaky profits, it announced in July a second-quarter earnings gain of 23% over 1983. Last week, however, First Chicago made a stunning disclosure that stirred new concerns about the soundness of the U.S. banking industry. Chairman Barry Sullivan stated that First Chicago will write off $279 million in bad loans during the third quarter for an overall loss of up to $74 million.

Sullivan defended the huge write-off as a "onetime event" to cleanse its books, and there was little evidence that the bank's losses would continue. Said New York City Analyst Raphael Soifer, a member of the Brown Brothers Harriman banking firm: "There is no reason for panic. First Chicago has a problem, but it's solvable." Still, investors and depositors could not help being startled. Experts had assumed that the economic recovery would already have eased the problem of bad loans. But First Chicago's setback from lending in energy and agriculture demonstrates that some industries lag behind. Said a Chicago financial-industry analyst: "This shows how fragile the banking situation is." First Chicago took its write-off at the urging of examiners from the Comptroller of the Currency's office. The federal regulators who monitor banks and thrifts are under increasing pressure from congressional legislators who believe the watchdogs have been sleeping on the job. In August, the country's largest savings and loan company, Financial Corp. of America, required emergency federal loans after it was weakened by an unfettered growth program.

Critics in Congress continue to question the regulators' handling of the Continental bailout. Last week Rhode Island Democrat Fernand St. Germain, chairman of the House Banking Committee, charged that federal regulators had drummed up support for the bailout by exaggerating the number of banks that would have fallen in a domino effect if Continental had been allowed to fail. As a result of congressional pressure to avoid such rescues, bankers believe First Chicago, because of its fundamental soundness, presented an opportunity for the Comptroller to clamp down without causing a widespread scare.

First Chicago officers pointed out that in order to avoid dragging out the problems, they wrote off even more loans than regulators had suggested. William Isaac, chairman of the Federal Deposit Insurance Corp., praised First Chicago's action. "The bank's bitten the bullet," he said, "and they should be commended."

On the day of First Chicago's announcement, Sullivan launched a campaign to forestall any potential crisis of confidence. He and Bank President Richard Thomas phoned officers of the country's 20 biggest banks to give them advance warning of the decision. Then the chairman flew to New York City, where he answered questions from a group of securities analysts. Said he: "There is no time bomb ticking away in First Chicago. We have nothing to hide." No one in attendance, however, could keep from wondering where the next bank with shaky loans will surface.

With reporting by J. Madeleine Nash/Chicago and Raji Samghabadi/New York