Rich executives once courted by Bank of America Corp. are proving to be a big headache.
In the last year, the bank has run into problems with loans made to executives such as Bernard Ebbers, Samuel Waksal and the Rigas family. Now, it appears a loan to another wealthy executive has resulted in a big financial hit.
In the second and third quarters, Bank of America's private bank charged off $261 million in loans to a family investment firm controlled by Oklahoma telecommunications executive Everett Dobson, essentially declaring the loans uncollectible.
Mr. Dobson was once a valued Bank of America client. As chairman and chief executive of Dobson Communications Corp., he posed in Bank of America's 2000 annual report, wrapped in a dark coat and white scarf against a slate sky. "Bank of America has helped us seize opportunities by providing us with excellent advice, industry expertise, and capital strength," he said in the adjoining text.
Now, Bank of America won't talk about Mr. Dobson or other high-profile customers who have recently run into trouble. The identification of the charge-off of the loan to the Dobsons was first reported by a bank analyst at Goldman Sachs and confirmed by an individual familiar with the bank. Through a spokesman, Mr. Dobson declined to comment.
Banks are not required to disclose the identity of corporate or individual borrowers. So when a bank reports an increase in bad loans, it sets off a guessing game for investors and analysts to identify the borrower. Bank of America, in identifying the charge-off as a private bank client in securities filings and in an earnings call with investors, actually provided more information than is required.
The sudden rise in charged-off loans at Bank of America's private bank highlights a potentially costly pattern of lending money to executives whose companies and personal fortunes have declined.
The bank has made a concerted effort to make its private bank, which oversees some $150 billion in assets, more competitive with established private banks at J.P. Morgan Chase & Co. and Citigroup Inc. That has included hiring away veterans from other firms. In 2001, for example, the head of the private bank, Alan Rappaport, was hired away from J.P. Morgan.
For Bank of America's asset-management arm, which includes the private bank, the $261 million in Dobson-related charge-offs were unusually high. In the prior three quarters, for instance, the asset-management arm charged off an average of $25 million.
The concept of providing loans backed by stock has been around for some time. But as executive compensation, including stock awards, skyrocketed in recent years, so did the practice of banks offering loans to court wealthy executives.
"What we're seeing is the fallout of chasing big money and big business," said Judith Fischer, managing director at Executive Compensation Advisory Services, an Alexandria, Va., consulting firm.
So far, there are no signs that the souring loans have dented the financial well-being of the Charlotte, N.C., bank, one of the nation's largest. While the stock prices of J.P. Morgan and Citigroup have fallen this year under the weight of problem loans and investigations, Bank of America shares have risen, a sign that analysts and investors believe the bank has its problem loans under control. For the bank as a whole, total charge-offs in the third quarter were $804 million, compared with $1.5 billion in the same period a year ago.
"Bank of America has strong lending standards and a rigorous risk-management process in place," a spokesperson for the bank said. The spokesperson added that completely separate credit managers review loans for the private bank and the corporate- and investment-banking side of the bank. The bank wouldn't comment on specific client relationships, the spokesperson said.
It isn't clear from details in securities filings and other government records whether the bank was able to collect every dollar it loaned Messrs. Waksal, Ebbers and the Rigas family. But each loan clearly proved troublesome.
Last month, for example, Mr. Waksal, the former chief executive at ImClone Systems Inc. now at the center of an insider-trading scandal, pleaded guilty to pledging securities he didn't own to obtain a $44 million loan from Bank of America. Some efforts to collect, however, were successful. In January, the bank issued a margin call after ImClone's stock fell. The bank sold 2.6 million shares that Mr. Waksal had provided as collateral, according to securities filings.
Bank of America also sought back the money it had loaned to an entity controlled by the Rigas family of Adelphia Communications Corp., though again it's not known whether every dollar was collected. The family faces charges that they illegally used company money, defrauded shareholders and misled regulators. As Adelphia's stock fell from the summer of 2000 through May 2002, the bank made approximately six margin calls to the entity to recoup $52.1 million, according to an indictment against the Rigas family in September. A spokesperson for the Rigases said attorneys representing the family declined to comment.
Bank of America's relationship with WorldCom's former CEO Mr. Ebbers extends to WorldCom's heady days in the mid-1990s when the bank helped provide a $3.4 billion loan commitment for an acquisition. The bank also provided Mr. Ebbers a loan backed by WorldCom stock. The company's stock fell, triggering a margin call to Mr. Ebbers. In the end, WorldCom agreed to pay the $198.7 million loan -- details of which have spilled into public view after WorldCom disclosed a massive accounting fraud and filed for bankruptcy protection in July.
Meanwhile, in the case of the Dobson loan, the bank decided to charge off the loan it made to the investment vehicle controlled by the Dobson family, according to the Goldman Sachs report and the person familiar with the bank. Lori Appelbaum, the Goldman Sachs analyst, says a securities filing shows that a Dobson family investment vehicle pledged its own stock as collateral for a $270 million loan from Bank of America. The vehicle is led by Mr. Dobson.
Bank of America had a close relationship with Mr. Dobson, whose grandfather founded the company in 1936 as a telephone company serving rural Oklahoma. Bank of America helped Dobson grow. According to securities filings, the bank led several loan commitments for Dobson and was one of six banks that took Dobson public in early 2000 at $22 a share.
For the Dobson family, the problems have been twofold. The company they ran, after latching on to the boom in wireless telecommunications, suffered from subscriber turnover and disappointing financial results. But aside from that, the family investment vehicle that borrowed from Bank of America backed a separate telecommunications company that ended up filing for bankruptcy protection. Its stock tumbled 79% over the past year. By fall 2001, with a struggling stock and unclear future, Dobson decided to pursue a sale of the company.
For help, the company once again tapped Bank of America, along with Lehman Brothers. The search for a buyer ended two months later, as the market continued to languish and no suitable buyer could be found.
As for the loan to the Dobson family partnership, the bank has granted a reprieve even as it charged off the loan, an SEC filing shows. The bank agreed to extend the maturity of the loan by a year, to March 2003. If Mr. Dobson's firm can make a $75 million principal and interest payment on the loan before then, the loan will be extended to March 2004.
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