Ex-Security Pacific head shares lessons on a 'Dead Bank Walking'

Northwestern Financial Review, Nov 18, 2000 by Olmsted, Monte

The merger of troubled California giant Security Pacific Corp. with Bank of America in 1992 triggered an onslaught of industry deals that remains ongoing. It's a story that has been ingrained in the minds of many bankers, regulators and industry experts who saw one of the early cases of a bank "too big to fail."

Who other than former Security Pacific leader Robert H. Smith could have written a book about what was then the nation's fifth-largest bank and its troubles characterized by the California land bust, risky real estate loans, bad decisions and arrogance?

No one. Earlier this year, Smith published his account of the bank's struggle to survive in the book "Dead Bank Walking." The former chairman and CEO of Security Pacific was in North Mankato, Minn., on Nov. 1 to speak about his experiences at Wolf Etter and Co.'s annual Bankers Seminar.

Northwestern Financial Review caught up with Smith prior to his speech as he discussed the merger scene, his bank's experiences and how community banks can learn from Security Pacific's blunders. "The book was not intended as a memoir," Smith said. "I tried to examine what we'd done wrong and what others did."

Today, the 65-year-old Smith lives near Pasadena, Calif., and ponders his future. He started a small investment banking firm that is now inactive, done some real estate investing and even made attempts to write a second book. Although Smith may be unsure where his future lies besides book tours, he knows one thing is certain. He doesn't miss the banking industry.

"Everybody's eyes are on you," Smith said.

The former Security Pacific leader said he wrote "Dead Bank Walking" for three reasons. First, the story was too fascinating to be ignored. "I woke up and couldn't believe all that happened. I felt I had an interesting story to share with others."

The story weaves around Security Pacific's downfall and includes cameos by some of banking and Wall Street's biggest names such as Warren Buffett, Donald Trump, Alan Greenspan and Bill Seidman.

A second reason was the enormous lessons to be learned. Security Pacific was a 120-year old institution that grew 10 times in size and was at the top of the banking industry. Six months after Smith took over as CEO, however, the bank was in desperate shape.

Smith said community banks can learn from Security Pacific, which disregarded one of the banking industry's eternal truths: "old mistakes repeat themselves." Mistakes on the list include: chasing markets in tough economic times; becoming over-concentrated in certain lending areas such as agriculture or real estate, and the theory that "success breeds arrogance," Smith said.

Overextending oneself in the fickle economy also can be hazardous. With all the ups in the stock market, there are bound to be a few corrections, Smith said. And while wading through the problems at Security Pacific, Smith said he learned not to depend on regulators. "The government is not always your friend. No one is too big or too small to fail. When [regulators] have to, they'll take you down," said Smith, contradicting the "too big to fail" theory.

The final reason for writing the book turned out to be "a cleansing of the mind." Guilt struck Smith, who believed it was his responsibility to inform the bank's 45,000 employees what really happened. As the bank struggled, Smith took copious notes, although not in preparation of the book. Rather, Smith feared he would be taken down with the sinking Security Pacific, as well as face challenges from the government and shareholders.

Smith also talked in general terms about the M&A environment and summed up a lot in one sentence. "Customers, community and employees become the orphans of a merger," Smith said.

He added that bank numbers will continue to shrink as consolidation creates efficiencies in the cost of doing business and in the ability to offer a broader range of products. Any bank in the $4 billion to $40 billion asset range is a likely acquisition target, and so are thrifts, Smith said.

"The thrift marketplace historically has been real estate lending, and that's been challenged significantly by real estate loan providers," Smith said.

He noted that with the breakdown of the Glass-Steagall Act, more mergers will occur between traditional bank entities and non-bank entities. He cited as an example one of the first deals under the Gramm-Leach Bliley Act. In June, discount brokerage firm Charles Schwab Corp. of San Francisco bought U.S. Trust Corp. of New York, a company that owns six banks and primarily serves affluent individuals.

"As long as the market stays strong, I think [consolidation] will continue," Smith said.

The M&A phenomenon, said Smith, reflects Charles Darwin's theory that only the strong survive. Community banks, said Smith, may capitalize from the consolidation frenzy because it will give them the chance to provide personal service to customers willing to pay a little more. For example, a farmer in need of a loan may be better off at a community bank because "if he goes to the branch of a big bank, he will be referred to someone who finds his needs irrelevant to their objective."