How Bankers View Bert

Most condemn him, but they fear reform more

For weeks the American Bankers Association in Washington has been swamped with irate letters and phone calls from members. Their gripe: Bert Lance's flamboyant ways have given the business a black eye, and could subject it to far more intense Government scrutiny than now exists. Said ABA Spokesman Edward Smith: "The practices Lance is supposed to have followed cannot be considered normal or widespread. They just aren't tolerated in most banks."

Nonetheless, when officials at one of New York City's biggest banks tried to write an internal memo explaining to their employees exactly what Lance had done and why it was wrong, they finally gave up. Reason: they could not decide, on the basis of the facts available, whether many of Lance's freewheeling practices should be regarded as illegal, unethical, stupid--or none of these.

This murky area of what is proper and improper is at the heart of the banking industry's worries about the Lance affair. As Comptroller of the Currency John Heimann declared in his report last month, the OMB director's finances raised "unresolved questions as to what constitutes acceptable banking practice." Bankers fear that congressional reformers will seize on the nationwide hue and cry over Lance to resolve those questions by further tightening of federal banking laws.

Last week Democratic Representative Fernand St Germain, chairman of a House banking subcommittee, sounded a battle cry for the reformers as he opened hearings on bank law enforcement, including the Lance case. St Germain called for "a serious and vigorous effort to improve the nation's banking codes," particularly in such back-scratching areas as "insider lending, tie-ins among banking institutions and the ease with which changes in bank control are financed." Said he: "The evidence I have seen to date leads me to believe that Bert Lance, his family and friends regarded the Calhoun First National Bank as their playpen--to be used as they pleased." Another hearing on bank regulation starts this week before the Senate Banking Committee, chaired by Wisconsin Democrat William Proxmire.

Bankers are worried that the hearings will lead to more red tape in a business that they feel already has too much of it. The nation's nearly 14,700 commercial banks and their 250,000 employees are overseen by state or federal agencies--the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation--which over the years have issued hundreds of regulations. Complained an official of the Federal Reserve: "We've got so many goddam rules now, there aren't enough hours in the day to keep them alphabetized, much less working." The regulations tightly limit the way in which banks can do business--for instance, by setting a 5% ceiling on the savings-account interest that they can pay and prohibiting them from refusing loans because of a prospective borrower's race, color or sex. Other provisions govern bankers' personal business affairs. An example: they must share details of large debts with their banks' directors.

Still, most of what constitutes good banking practice has been left to the bankers' own judgment. Two of their private groups--the ABA and the Bank Administration Institute--have written detailed codes of conduct for bankers, but neither has been accepted throughout the industry. Standards vary from region to region and from city to small town.

Several big-city bankers maintained that Lance's go-getting ways would have got him into immediate trouble almost everywhere except in those parts of the South and the Midwest where branch banks are severely limited or prohibited altogether. In such areas, sniffed a Los Angeles banker, "you have a lot of family-run banks, entrepreneurial thinking and sometimes disdain for the rules of the game." Not so, insisted a major shareholder of a small Florida bank: "The country banks--those with less than $50 million in deposits--are tougher than the big banks." Still, cookie-jar shenanigans are more likely to happen at small banks, which are less conspicuous on the financial scene than big urban institutions.

Actually, most banks--large or small, rural or urban--have strict safeguards against abuses by officers and employees. A case in point is the huge United California Bank in Los Angeles, which makes no loans to senior officers. An employee who overdraws his checking account more than once may face dismissal. The First City Bank of Gainesville, Fla., even requires employees to do their banking elsewhere. Yet a well-known banker in a large metropolitan area is not likely to encounter trouble in getting a personal loan.

Bankers interviewed by TIME correspondents generally agreed with a New Yorker that if the allegations are true, Lance had violated banking ethics "by a long shot." Their assessments:

Overdrafts The bankers all condemned the overdrafts that Lance and his family ran up at the Calhoun bank while he was a top official there. Last week Comptroller Heimann reported that Lance's account was overdrawn by about $50,000 more than two dozen times between 1972 and 1975. The comptroller said he considered the overdrafts to be "quite serious, terribly serious." As previously disclosed Lance's wife LaBelle overdrew her account by up to $110,000 in late 1974. Between September 1974 and April 1975, nine Lance relatives were responsible for up to $450,000 in overdrafts. "That was the crudest of violations," said Clarence Barksdale, chairman of the First National Bank in St. Louis. "It amounted to an interest-free loan."

Overdrafts are a common occurrence, of course. Small customers who write checks without enough funds to cover them usually have their checks bounced and are hit with small fines by their banks. Large customers, like corporations whose accounts are so active that overdrafts may often be made unintentionally, work out agreements with their banks to treat the overdrafts as interest-bearing loans.*

Some bankers suggest that Lance's overdrafts violated the Federal Reserve Board's Regulation O, which limits borrowing by officers from their own banks to maximums of $30,000 for a home mortgage, $10,000 for educational expenses and $5,000 for other purposes. Even if legal, declared a Wall Street banker, the overdrafts were "a misuse of a portion of corporate assets because they were diverted to a purpose that serves the personal interests of an officer of the bank, rather than the depositors and stockholders."

Loans Few bankers thought Lance was wrong to seek personal loans from correspondent banks, which provided services for the banks he ran in exchange for interest-free accounts. Said one Florida banker: "He's going to go to a bank where he does business. It's as simple as that." In fact, an ABA 1976 survey found that about 93% of the bankers replying routinely offered personal loans to corresponding banking partners like Lance.

But some bankers criticized Lance for so obviously shifting his bank's correspondent business along with his personal loans. Lance has denied that he made the switches in order to get loans for himself which would be illegal. Still, said a Los Angeles bank officer, "no serious banker could look at the pattern of his bank's opening up correspondent accounts and Lance's getting personal loans and believe the sequence was coincidental." Added a New York banker: "The use of compensating balances to buy favors for yourself is a rotten practice but very common"--and one that is frequently employed by businessmen as well as bankers. In a typical case, a New York bank lent $125,000 to a company's treasurer, accepting stock worth almost $70 a share as collateral.

The stock's price later dropped to below $10 a share, but the bank did not demand more collateral or repayment of the loan because the borrower kept a lot of his firm's money on deposit at the bank.

Collateral Bankers are undisturbed that banks granted Lance loans for little or no collateral. Said a banker in Atlanta: "Bert was known and highly regarded. Collateral is important, but reputation and character are just as important." Yet some bankers noted that Lance's lenders were concerned that his collateral--mostly shares in Atlanta's National Bank of Georgia--was insufficient. Manufacturers Hanover Trust Co., for example, which loaned Lance $2.6 million in 1975, sent him eight letters seeking verification of the collateral and once demanded that he increase it. Bankers were aghast that on one occasion Lance used the same collateral for two different loans. Said a California banker: "That is definitely against the rules."

To end such abuses, Congressman St Germain would make it illegal for a banker to borrow from a correspondent bank under any circumstances. Bankers disagree vehemently on this point. Complained the ABA's Smith: "That may look good on the page of an economics textbook. But it would be disastrous for good, competitive banking. After all, bankers need full and speedy access to credit too."

Instead of new laws, the bankers naturally call for better enforcement of existing ones. They support Proxmire's bill to give federal bank examiners the authority to fine or force the firing of wayward bankers. At present, the examiners must choose between issuing wrist-slapping reports or shutting down the errant banks completely. But the bankers oppose another Proxmire bill that would consolidate bank regulation in a single federal agency. In a seeming contradiction, the bankers argue that overlap and competition among agencies can make for better supervision--even though this has not been the case in the past.

* At a press conference last month, President Carter rather cryptically admitted that he and his wife have occasionally overdrawn their bank accounts, "not deliberately but because of an error or because of higher priorities that were assigned to other responsibilities that I had at the time."

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