FDIC Bails Out Texas Bank in $1-Billion Loan

WASHINGTON — Striving to prevent the collapse of the biggest bank in Texas, federal regulators Thursday gave an emergency $1-billion loan to First RepublicBank Corp. of Dallas and pledged that all depositors would be fully protected from any financial losses.

The guarantee will be applied to all deposits, even if they exceed the normal limit of $100,000, said L. William Seidman, chairman of the Federal Deposit Insurance Corp. In addition to depositors, general creditors of the bank will be fully protected, Seidman pledged at a hastily called news conference.

The $1-billion loan from the FDIC, plus additional money from the Federal Reserve System, is being pumped into the First RepublicBank system to restore confidence and replace funds that have poured out amid nervous speculation about the bank’s fate.

Seidman and Federal Reserve Board Vice Chairman Manuel H. Johnson said additional cash would be supplied as needed. They refused to predict how much money might be required in all, but congressional sources indicated that as much as $5 billion could be available.

The nation’s biggest bank bailout was the $4.5-billion rescue of Continental Illinois in 1984, according to FDIC officials.

“We determined that $1 billion was necessary to stabilize the system at this point,” Seidman said. The FDIC is supplying the money in a six-month note, with an interest rate set at one-half of 1% above the rate on six-month Treasury bills.

Collateral for the loan is stock in 29 of the 73 banks controlled by First RepublicBank, a holding company. If the loan cannot be repaid, the FDIC could eventually become the owner of the banks, which account for more than 80% of the First RepublicBank system’s total deposits.

Aims at Calming Customers

Seidman repeatedly emphasized the themes of protection and reassurance, sending a message clearly aimed at calming agitated bank customers.

While seeking a long-term solution--whether the infusion of money from new investors or a merger of First RepublicBank with another bank--the FDIC “assures that all depositors and other general creditors of First Republic’s banks will be fully protected and service to the banks’ customers will not be interrupted,” Seidman said.

For now, Johnson said, the Federal Reserve is supplying funds to First Republic and other Texas banks in financial difficulty. He refused to disclose how much money is being made available but said the Fed is prepared to go “substantially higher if need be.” As collateral, he said, “we take all the unencumbered, good loans and securities.”

The FDIC action was announced just a day after the bank disclosed that it was seeking help from the federal regulators. Nervous investors had withdrawn $600 million during a brief period at the end of last month, and deposits were continuing to drain out of the system.

Says Withdrawals Have Stopped

Joseph C. Bowles, senior vice president and chief spokesman for First RepublicBank Corp., said that the withdrawals that had jeopardized the banking company Tuesday and Wednesday stopped early Thursday after the FDIC announced the $1-billion loan. He declined to say how much money had flowed out of the banks this week.

“The $1 billion has stabilized the environment for our customers and now insures our ability to continue to meet their needs without disruption,” he said. “The important thing is that the FDIC did fully protect our depositors and end any concerns that our customers had.”

Bowles said the withdrawals had come primarily from major corporate customers and other banks, rather than individual depositors. “It was not in the lobbies,” he said. “It was in the wire transfer rooms.”

Bowles said that the bank expects to present the FDIC with a plan for restructuring and raising new money within the next two to three weeks.

Describes Policy Reversal

Rep. Henry B. Gonzalez (D-Tex.) said Fed willingness to supply funds to the beleaguered banks represented a distinct policy reversal from the stand taken Wednesday, when the loan window seemed to be shut to the First Republic system.

“I was concerned with making sure we reversed that,” said Gonzalez, who recruited Texas bankers in his efforts.

“There were other people who had more clout and pretty good contacts with the Administration,” said Gonzalez, a member of the House Banking Committee. The bankers called Washington, he said, and “I’m pretty sure (Treasury) Secretary (James A.) Baker intervened.”

Baker and Fed officials disputed Gonzalez’s account. “I don’t think that’s an accurate statement,” the Treasury secretary said. “I’ve never known an instance where the Federal Reserve arbitrarily closed their discount window.”

Similarly, a Fed spokesman said: “The discount window was not closed.”

$33.2 Billion in Assets

First RepublicBank is the nation’s 13th largest bank, with $33.2 billion in assets among its 73 subsidiary banks. The parent company suffered a loss of $656 million last year, primarily because of the depressed real estate market in Texas. Many of the banks are burdened with loans that went bad when builders and developers ran into hard times.

“We are in the backwash of a tidal wave that hit the Texas economy two years ago,” said Sen. Phil Gramm (R-Tex.), who attended the FDIC news conference. “We are confident (that) with this assistance we can stabilize the situation. We’re grateful for this help.”

In Dallas, First RepublicBank Chairman Gerald W. Fronterhouse said: “This effective action by the FDIC will provide a stable environment for our customers and will ensure our ability to continue to meet customer needs without any disruption.”

Umbrella Has Limits

Seidman noted that the FDIC protective umbrella covers depositors and creditors of the 73 individual banks but does nothing for the shareholders or creditors of the parent company itself, First RepublicBank.

The huge institution was formed last year from the merger of Interfirst Corp. and RepublicBank, both of which were suffering financial problems because of loans in the slumping real estate market.

First RepublicBank would be “an attractive target for out-of-state banks,” said Rep. Doug Barnard Jr. (D-Ga.), chairman of the monetary affairs subcommittee of the House Commerce Committee. However, Gonzalez predicted that the bank’s management would “go the limit” before allowing the bank to be purchased by non-Texans.