A Bad Case of the Jitters

Manufacturers Hanover is the latest target of rumors in the financial world

The rumors last Thursday first erupted in Europe. Manufacturers Hanover, the fourth-largest U.S. bank, was reported to be scrambling frantically to raise cash abroad because it was no longer able to get money in the U.S. Other American banks, or so the stories had it, also faced new dangers. Then, with little more provocation than that, something akin to a panic began to spread. It swept like a spring twister through markets that were already tense and jittery about the health of the American financial system after the narrow escape from failure a week earlier of Chicago's Continental Illinois Bank.

On Wall Street, investors began battering bank stocks. Hardest hit was Manufacturers Hanover, which lost 3% points, or nearly 11% of its value, in a single day of trading. A sharp slump in bank issues helped drive the Dow Jones industrial average to 1103.43, its lowest level in 15 months. In bond trading, prices also sank. Elsewhere, sell-offs rocked the London Stock Exchange, and the high-flying U.S. dollar went into a steep tailspin.

Manufacturers Hanover denied that it suddenly needed to raise cash and called the rumors "absurd." Senior Vice President James Hambelton said the bank had one of the smallest portfolios of bad loans of any lender its size.

In all, less than 2% of Manufacturers Hanover's loans are nonperforming, or not paying interest. Said Hambelton: "We never had any funding problems." The banker was particularly incensed by reports that Manufacturers Hanover was selling off British government bonds, or "gilts," to help meet obligations. He angrily denied even owning such bonds.

The banking worries reached all the way into the Oval Office of the White House. Thursday afternoon, Treasury officials briefed President Reagan on the turmoil in the markets. White House Spokesman Larry Speakes said afterward that Reagan had been assured that the Manufacturers Hanover rumors were "without foundation."

After all the jitters on Thursday, however, financial markets opened calmly on Friday. The dollar strengthened abroad, and the Dow Jones industrial average rose nearly 4 points, to 1107.10. Bank stocks recouped some of their losses from the previous day. The whiff of panic seemed to be over, at least for now.

Nonetheless, the episode on Thursday showed how vulnerable the financial system has become to runaway rumors. Banking woes ranging from huge portfolios of bad foreign loans, to rising interest rates, to the near collapse of Chicago's Continental have made investors nervously look around at the whole banking system. Only a $7.5 billion Government-led rescue kept Continental (1983 assets: = $42 billion) from becoming the largest U.S. banking casualty in history. Said James Hanbury, a banking analyst for the Manhattan securities firm Wertheim & Co.: "After Continental, investors are acting first and asking questions later."