Painful Legacy

He had raced upward through the ranks, never remaining in one job for more than two years. Then, in 1980, at the age of 41, Samuel Armacost was named chief executive of BankAmerica. "My first inclination was to jump and scream," he later recalled. No wonder: Armacost was about to begin managing the world's largest and most profitable financial firm.

Five years later, Armacost has lost some of that youthful exuberance. BankAmerica's earnings have steadily declined since he took charge, and last week the San Francisco-based financial giant (assets: $118.5 billion) said that it lost $337 million last year, its first annual deficit since 1932. The bank, now second in size to Citicorp (assets: $175.6 billion), also disclosed that it was suspending payment of stock dividends. <

In a separate and equally sobering development, the Treasury Department announced that Bank of America, the main division of the company, had agreed to pay a record $4.75 million civil penalty for failing to report cash deposits or transfers, each worth $10,000 or more, between 1980 and 1985. The Treasury has imposed similar penalties on twelve other banks in the past eleven months as part of an effort to crack down on money laundering--the diversion of cash earned in illegal activities into legitimate channels. The Government, however, did not accuse Bank of America of dealing with organized crime.

BankAmerica is losing money because it is saddled with many shaky loans. Most of them were extended by Armacost's predecessor, A.W. Clausen, who now heads the World Bank. Like other big banks, BankAmerica made risky loans to developing countries and to real estate and shipping firms. But it also became the world's largest commercial lender to farmers, who are now under severe financial pressure. Concedes Stephen McLin, a BankAmerica senior vice president: "Our credit standards were not the greatest." The bank wrote off $1.6 billion worth of loans last year. Other low-grade credits are still on the books, forcing the bank to set aside an additional $591 million as a loan- loss reserve.

Armacost has taken steps to bolster BankAmerica. Easing a capital shortage, he last year sold the headquarters building for $660 million and the bank's consumer-loan subsidiary for $405 million.

Wall Street expects BankAmerica to make money again soon. If it does not, the bank's board of directors, which has supported Armacost, may grow impatient with his failure to overcome the troubles he inherited.