Fight For Survival

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Behind the sedate granite facades and oak-paneled boardroom doors of Wall Street, a bitter power struggle is under way that could well decide the fate of the $2.7 trillion U.S. banking industry. The battle pits behemoth against behemoth, commercial banks against investment-banking houses, prestigious names like Citicorp, Bankers Trust and BankAmerica against equally blue-chip concerns like First Boston, Salomon Brothers and Goldman, Sachs. But fundamentally, the struggle matches traditional U.S. bank-lending practices against computer-driven techniques that are drastically changing the way that more than $6 trillion worth of nongovernment credit is channeled through the U.S. economy.

Old-fashioned bank methods are losing that contest. Increasingly, a chorus of experts, including Federal Reserve Board Chairman Paul Volcker, seem to agree that without changes in banking rules that go back half a century, more and more of those institutions will be pressed to the financial wall. Many, indeed, are already there. In general, banking profitability has been deteriorating for the past 15 years, and an estimated 25% of the country's 14,000 banks are losing money this year. U.S. banks, says Paul Baastad, an analyst at the San Francisco brokerage of S.G. Warburg & Co., are under "tremendous pressure. The quality of their assets most likely will ( continue to show significant deterioration, as it has over the past decade."

The challenge facing the banks is summed up in an arcane and inelegant word: securitization. The term describes a sophisticated method of using powerful computers to package traditional loans into securities. The new instruments are then bought and sold like conventional bonds in the credit marketplace. Securitization is double edged: in only a few years, the technique has given an enormous boon to consumers in the form of lower interest rates and fresh infusions of money for mortgages and car loans. Banks have also gained from securitization, observes Lowell Bryan, a director at the McKinsey consulting firm. They have, he says, been able to sell many of their own loans to securitizers and thus free scarce capital for more lending activity.

The loans that remain in banking hands, however, are of steadily decreasing quality in areas like oil-related activity, farming, real estate and Third World debt. The drag of those deteriorating assets has put the banking system at increasing long-term risk. In 1984 and 1985 U.S. banks had to write off between $15 billion and $16 billion worth of bad debts. In 1986 the figure is estimated at $21 billion. Last week, when many big banks reported their first-quarter earnings, the results were broadly depressed. Manufacturers Hanover's profits, for example, fell 21%, to $81 million, while Chase Manhattan's dropped 28%, to $104.1 million. "Compared to making loans, investment banking is a low-risk field," says William Haraf, a visiting scholar on financial deregulation at the American Enterprise Institute, a Washington think tank.