BUSINESS AN MPERFECT WORLD

When successful, serious, and well-intentioned people fail disastrously, it behooves us to take notice, MCorp, once Texas’s largest bank holding company, is in bankruptcy. The FDIC is in bitter legal proceedings with MCorp’s management. Twenty of twenty-five MCorp banks that had been seized by the FDIC have been sold to Banc One, an Ohio bank holding company. The rescue of these twenty banks will cost the FDIC $2 billion.

The novelty of these proceedings, the mechanics of the seizures of the twenty banks, and the passion of MCorp’s arguments are all of interest to local business buffs. My interest is personal. The chief financial officer at MCorp has been a close personal friend for twenty years. I have known and liked all of MCorp’s senior people. As a security analyst, I recommended MCorp as an investment for years. George Clark, the chairman and CEO of MCorp’s lead bank until he died in a plane crash two years ago, was as fine a man as I’ve ever known.

The chief architect of the bank holding company is its longtime chief executive officer Gene H. Bishop. During the glory years, Bishop, fifty-nine, was held up as the epitome of what a bank holding company manager ought to be. Without spending too much time going through Bishop’s biography, a few items are key.

Bishop established his reputation as a banker at the old First National working for Robert H. Stewart III, who for many years was himself a hero of Texas banking. In a tale now taller than Spindletop, Stewart gets credit for making the fast, aggressive decisions that lured H.L. Hunt to move his business from Mercantile Bank (the predecessor of MCorp) to First National (the predecessor of InterFirst). Thus, indelibly etched in the consciousness of all Texas bankers is the idea that if you dawdle with big customers, you face losing them. And losing a big customer is somehow more shameful than making a bad loan.

In 1969, Bishop left First National to serve as president of Lomas & Nettleton, whose CEO was and is Jess Hay, a prominent Texas Democrat. In 1974, Bishop left Lomas & Nettleton, a mortgage and real estate company, to become CEO of Mercantile, of which Jess Hay was a director. At Lomas, Bishop became fully steeped in the real estate business and perhaps acquired a taste for lavish offices. Until MCorp finished its world headquarters, Momentum Place, two years ago, Lomas had the most opulent offices in town.

When Bishop took over Mercantile in 1975, 45 percent of its loan portfolio was real estate related. Besides Bishop’s old boss, a number of other directors were also prominent real estate operators. Mercantile had a reputation as the real estate developers’ bank, while First National, Republic, and Texas Commerce dominated energy and industrial lending. Bishop is quick to point out that his bank’s real estate loans as a percentage of total loans have declined from 45 percent to 35 percent during the fifteen years he has been in charge. But he also points out that if, for some reason, he had ever decided to get out of real estate lending, the bank’s board of directors would have assumed, prior to firing him, that he had lost his mind. After all, real estate lending had demonstrated its profitability for more than forty years. Values always bounced back.

A Texas banker too old to have participated in this real estate debacle likes to explain the dynamics of real estate lending: “Jones is an experienced real estate developer. He brings a deal to Smith, an experienced real estate lender. Smith thinks to himself, ’Nobody knows this market any better than Jones. If Jones wants to do this deal, it has to be a good deal and I better loan him the money.’ At the same time Jones is thinking: ’Smith looks at hundreds of deals. If he will loan me money for my deal, then I must have a good concept.’ And so it goes.”

From 1975 to 1984, Bishop put together a record of earnings growth unequaled by any significant bank holding company in the country. Earnings compounded at more than 20 percent. And real estate lending played a part in this growth.

Then things began to unravel. Energy collapsed first, then real estate. Since MCorp was light in energy and heavy with “established” real estate tycoons, MCorp outlasted a number of other Texas bank holding companies.

For at least the past two years, however, MCorp’s management and the FDIC have known that MCorp wouldn’t make it. MCorp worked hard to raise outside capital, and its management publicly stated its belief that MCorp should remain locally owned and operated. Many of the organization’s problems were concentrated at MBank Dallas, its lead bank. MCorp itself actually retained significant assets ($500 million) at the holding company level.

At the heart of the battle between MCorp and the FDIC is the feet that when push came to shove, the FDIC insisted that MCorp use its capital to shore up its subsidiary banks. Bishop balked.

Remember that MCorp is a holding company. It holds stock in its subsidiary banks. It has an implied obligation to help out its subsidiaries but not a legal one. Bishop believed that his highest obligation lay with the employees and creditors of the holding company.

By mid-March of this year, the situation was at a total impasse. MCorp stopped paying interest on its sizable debt ($470 million) and was forced into bankruptcy. At the same time, the Federal Reserve, at the insistence of the FDIC, demanded that MBank Dallas repay its Fed borrowings, knowing that was impossible. When MBank could not pay, the Federal Reserve informed the Office of the Comptroller of the Currency that MBank Dallas was insolvent and asked that the bank be seized and turned over to the FDIC. Another bone of contention: the FDIC made good on all of the claims against MBank Dallas except those of MCorp’s subsidiary banks that had left deposits in MBank Dallas.

In honoring the claims of all creditors except MCorp’s subsidiary banks, the FDIC was perhaps setting an example and making a statement: “All of you subsidiary bank managements beware-your first priority is the soundness of your own bank, not the well-being of the holding company.”

It is this fact that enraged the holding company management. MCorp claims that the decision was capricious, unprecedented, and discriminatory. Bishop says that because of this decision, twenty banks were caused to be insolvent instead of eight. MCorp has sued the FDIC, and Bishop feels that the litigation might make it “all the way to the Supreme Court.”

Meanwhile, MCorp management is on an aggressive course to downsize its operation and is looking at selling any and all remaining assets. That may remove one of the prickliest thorns in the sides of former MBank customers, who have complained loudly about the fact that for some months MCorp management continued to be paid. By the time this is printed, according to a source close to the MCorp board. Gene Bishop will have either stepped aside or drastically reduced his involvement. The source says the move was entirely Bishop’s idea, and that Bishop’s relationship with the board is as close as ever.

So who does MCorp blame? “I don’t think there’s any question,” says my friend. CFO Peter Bartholow. “that 80 percent of the blame belongs to the government. Look, we were on the record as early as 1983 saying that the S&Ls were out of control. If they had been properly regulated, they wouldn’t have ruined the real estate market. They built so many buildings that good people had their investments ruined. Appraised values went down 40 to 60 percent. Nobody can survive that.”

So there we have it. The FDIC blames the imprudence of Texas bankers. The bankers blame the negligence of the Federal Home Loan Bank, and all of the busted real estate developers blame the bankers. “Damn whores, that’s what bankers are. To hell with them. They cut my legs right out from under me,” says one embittered real estate developer. This whole business of finding fault for the real estate mess is always good for heated, futile arguments.



In the meantime, Gene Bishop and MCorp management have moved out of their palatial offices on the fifth floor of Momentum Place to somewhat more austere quarters on the twentieth floor. There, they continue efforts to restructure, including talks with Banc One and others over acquiring the company’s five remaining solvent banks. MTrust, the company’s trust investment arm, worth in excess of $100 million, is on the block. Says Bishop, “It’s awfully difficult to manage a trust business when the parent is in bankruptcy.”

MCorp’s discrimination suit against the FDIC will drag on for a long time. If it weren’t for the FDIC, MCorp believes it could settle with its creditors, reorganize, and start growing again, maybe acquire troubled banks, or, in Peter Bartholow’s words, “sell cookies.”

So where does that leave you and me? Sitting on the sidelines knowing that as investors and taxpayers, it’s our money that the high-priced lawyers are frittering away in endless maneuvers; knowing that the rules are going to have to be changed if we ever want to get out from under these unsightly and expensive spectacles.

The shareholders of MCorp have been wiped out. Ultimately, all of us will pay the $2 billion the FDIC has committed to the rescue of the twenty banks that failed. Dozens of lawyers are shuffling papers. The meter is still running and there is no relief in sight.