Buddy, Can You Spare a Billion?

In Texas, troubled banks are becoming almost as common as tumbleweed. Last week Dallas-based First RepublicBank, the state's largest bank holding company (assets: $33.2 billion), skidded to the brink of failure and was forced to go, ten-gallon hat in hand, to the U.S. Government. Within two days the Federal Deposit Insurance Corporation advanced $1 billion to keep First RepublicBank's 73-member banks in business. At the same time, Houston's ailing First City Bancorp, the fourth largest banking company in the state, reported that its plan for returning to financial health was in jeopardy. The problems encountered by both companies dramatized once again just how badly the Texas oil and real estate busts have damaged the state's economy and financial system.

The travails at First RepublicBank began last year, when the company, then called RepublicBank, acquired another Dallas firm, InterFirst, which was on the verge of collapse. InterFirst seemed salvageable, but its loan portfolio was in worse shape than RepublicBank assumed. As a result, First RepublicBank last year lost $657 million. Says Paul Horvitz, a professor at the University of Houston: "The merger may turn out to have been the worst business decision ever made." Worried First RepublicBank's depositors have pulled some $2 billion out of their accounts this year. If First Republic were to fail, it could cost the FDIC $5 billion to restore the bank's financial health. That would make the rescue more expensive than the $4.5 billion bailout of Continental Illinois in 1984.

Federal officials are still trying to work out a successful rescue package for First City. Under a plan announced last September, the FDIC said it would pump $970 million into First City, but only if holders of the bank's bonds agreed to sell their securities for up to 45 cents for every $1 of face value. Noteholders were supposed to exchange 90% of the bonds for cash by March 8. But many of them are demanding a better deal, and when a one-week extension passed last week, only 51% of the securities had been redeemed. Stalling, First City has postponed its deadline to March 29. Frank Anderson, an independent banking analyst, likens the maneuvering between First City and its bondholders to "a high-stakes poker game in which neither side is willing to give in."

The only major Texas bank that has not yet shown up at the bailout window is the state's second largest financial institution, Dallas-based M Corp. It lost $258 million last year and, like its competitors, has a host of bad real estate and energy loans. But the bank's executives are convinced that they can solve their problems without turning to Uncle Sam for help.