Mellon Muscle

"We still face profitability challenges," Mellon Bank Chairman J. David Barnes warned shareholders a year ago in the Pittsburgh-based institution's annual report. It was an accurate prophecy. The nation's twelfth largest bank holding company (current assets: $34.4 billion) earlier this month reported a quarterly loss of nearly $60 million -- the first in its 118-year history -- and watched shares plummet in just nine days from nearly 51 to around 38. Last week Barnes, 57, faced a new challenge: finding a job. One of the nation's best-known families of financiers and philanthropists had taken charge again of the bank bearing its name, ousting the chairman in the process.

Barnes' tenure was relatively brief but superheated. After becoming chairman in 1981, the Harvard-educated lawyer pumped Mellon loans to energy companies in the Southwest and beefed up its real estate portfolio in Dallas and other oil towns. The lending and real estate business foundered along with OPEC: energy-related loans now account for more than half of Mellon's $1.45 billion in write-offs and nonperforming assets. Mellon also has $178 million in repossessed properties, a sixfold increase from what it owned in late 1984. Bad loans to Mexico and Brazil further crimped the bank's strained resources. To make matters worse, Barnes soured relations in 1984 with a longtime local client, Gulf, by deciding to lend $150 million to Corporate Raider T. Boone Pickens, who had previously tried to take over Gulf.

All this was finally too much for the heirs of both Founder Thomas Mellon and his son Andrew, who was Treasury Secretary to Presidents Harding, Coolidge and Hoover. Only one direct descendant, Seward Prosser Mellon, 44, still serves on the board, but family members together hold 15% of the bank's stock, providing effective control. They picked as Barnes' acting replacement Nathan Pearson, 75, a longtime financial adviser to Philanthropist Paul Mellon, who holds 9% of the bank's shares. Heading the search committee that begins meeting this week to find Barnes' successor is Andrew Mathieson, who advises the heirs of Andrew Mellon's nephew, Richard King Mellon. Two names are believed to have the committee's interest: David Nordby, 47, executive vice president of Chicago's Continental Illinois Bank; and Silas Keehn, 56, president of the Federal Reserve Bank of Chicago. Both were promising Mellon executives who moved on after Barnes became chairman. One factor that could favor Nordby: colleagues say he is an expert at dealing with bad loans.