The Biggest Rescue

Brash, bright and bent on getting ahead, Donald H. Parsons gave up practicing law and went into banking when he was scarcely 30 years old. In the 1960s, with astonishing speed, he put together a financial empire with $3 billion in assets that centered on a string of 19 banks, most of them in Michigan. But the Parsons Group foundered during the 1970 recession. Parsons was all but wiped out and forced out of banking. Even under new management, the flagship of his operation, Detroit's Bank of the Commonwealth (B.O.C.), continued to sink into deeper trouble. Last week the Federal Deposit Insurance Corporation felt obliged to start a $60 million rescue operation--only the second and by far the larger such lending effort in the agency's 38-year history.

The rescue marks an inglorious end to a flamboyant experiment. Starting in 1960 with an inheritance and money borrowed from friends, Parsons put together $650,000 and founded the Birmingham-Bloomfield Bank. With money borrowed from Chase Manhattan, Chicago's Continental Illinois National and other major banks, Parsons began buying up other small banks. In 1964 he acquired B.O.C.

As he did with all his banks, Parsons invested B.O.C.'s funds heavily in low-grade 20-year municipal securities. Though they then paid high yields and bolstered bank earnings, they were far tougher to sell than the lower-paying short-term Treasury notes that most banks buy. To attract more money, B.O.C. made what other bankers considered risky loans to oil prospectors, restaurants and black self-help groups. Still, during the first five years of Parsons' management, B.O.C. assets tripled to $1.5 billion and its earnings quintupled to $11 million.

Nickel Stock. All that changed with the onset of tight money in 1969. Interest rates rose and deposits dwindled as customers sought a higher return elsewhere on their investments. Loan losses piled up, and B.O.C. became strapped for cash to pay back its borrowings from larger banks. Worst of all, the bank could not cash in its huge investments in state and municipal bonds without taking severe losses; rising money costs had sharply depressed the municipals' market value. In desperate need of funds, Parsons turned to the Federal Reserve Board for aid. Under Government pressure, the Parsons Group divested itself of all its banks, and in 1970 Parsons left.

The B.O.C. has been operated since last January by David Rockefeller's Chase Manhattan Bank, which took over after foreclosing on $21 million in loans. B.O.C., with assets of $1.3 billion, showed operating losses of $6.6 million in 1970 and $4,000,000 last year. To keep the bank from failing, the Federal Deposit Insurance Corporation moved in. Rather than close down the bank and pay off its depositors--which would take a big chunk ($750 million) out of FCIC's $4.7 billion in assets--the agency will make available $60 million over the next five years to keep the bank running while the Chase management restructures its investments.

The rescue will have to be approved by the bank's stockholders, who stand to lose the most. The FDIC plan calls for holders of common stock to vote a reduction of the par value of their securities from $3.29 a share all the way down to 50. Preferred stock would be diminished from $100 to $25. Through a complex bookkeeping device, this will give the bank $38 million. Most of this money would go to cover losses resulting from the sale of B.O.C.'s top-heavy portfolio of depressed municipal securities. The book value of those municipals totaled $246 million at year's end, but they were really worth $29 million less than that on the market.

As for Donald Parsons, now 41 and the target of many lawsuits, he is involved in a new venture: a firm that specializes in tax and financial consulting.

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