MNC move is hint real estate market may swing up

PHILIP MOELLER hLB

July 24, 1991|By PHILIP MOELLER | PHILIP MOELLER,SUN BUSINESS EDITOR

The best news of the summer was Friday's announcement by MNC Financial that it was placing oversight of $1.8 billion in bad ++ loans and other non-performing assets into its South Charles Realty subsidiary.

By doing so, Maryland's largest banking company was sending its strongest message to date that the worst may be over for the region's real estate market and the many financial and real estate companies that have been struggling for much of the past two years. As a dominant force in that market, any fresh air emanating from MNC would be a badly needed breeze for Maryland's becalmed economy.

MNC reportedly did not need the approval of federal regulators to take this step. But with the Feds having great practical control over MNC and its two banking units -- Baltimore's Maryland National Bank and Washington's American Security Bank -- it seems unlikely that Friday's action would have been taken without at least some informal regulatory blessing.

Putting responsibility for MNC's troubled assets in one place is not the same as getting these assets off its banks' books. But it is seen as a significant first step toward cleansing the banks' balance sheets.

More importantly, common wisdom (if there is such a thing) holds that this move would not have been taken if either MNC executives or regulators felt the volume of bad loans on the books was going to get much bigger.

The next step, acknowledged as a "logical possibility" by MNC Chairman Alfred Lerner, would be to spin off all responsibility for the bad assets into South Charles, stripping MNC's banks of any responsibility for these assets. This tactic was tried successfully by Pittsburgh's Mellon Bank a few years ago.

In oversimplified fashion, it would consist of South Charles Realty selling bonds that are backed by the $1.8 billion in bad assets. Working with underwriters, a market valuation would be placed on the assets.

I admit I have no idea what a potful of dubious real estate loans is worth in today's depressed market. That's a big reason why this strategy is riskier than it was when Mellon pulled it off. But say it was 60 cents on the dollar. That would mean South Charles could get $1.08 billion in gross proceeds by selling its holdings.

In reality, the size of any bond offering would be notably smaller. South Charles has employees and other operating expenses, and the bonds must also pay interest. Further, however, offering even a high interest rate wouldn't attract investors to buy bonds backed only with the full market valuation of the loans.

Instead, the amount of bonds sold would be small enough, as a percentage of the assets' original value, to give investors a cushion in case the assets sold for only 50 cents on the dollar, by way of example.

Given that MNC executives have not wanted to comment specifically on any scenario for South Charles Realty, it's fair to say a Mellon-like approach is hardly a certainty. Hunks of assets could be disposed of with bond-like support, assuming buyers could be found for them. The virtue of the Mellon approach is the way it quickly cuts MNC's bad assets out of the picture for its operating banks.

MNC and its banks would be on the hook for approximately the shortfall between the stated value of the bad assets that had been on itsbooks and whatever offsetting revenues were generated by South Charles as it disposed of those assets.

Again, assuming the volume of bad loans doesn't grow appreciably,it's not stretching to say that MNC has such resources.

If this approach is tried and succeeds, MNC would be left with two "clean" banks with a potent market position in a very lucrative market. Mr. Lerner then would have the option of either selling these units or not.

At heart, I'd rather see control of Maryland's flagship bank stay in Maryland, although the current wave of regional and national banking mergers makes such an outcome seem increasingly remote.

Even more important, however, is the value of having two healthy banks, whether they're independently owned and managed locally or not.

So, whatever choice Mr. Lerner might make, here's to the hope that he will have a choice, and that the announcement about South Charles Realty means he is getting close to having such a luxury.

*

With layoffs still reverberating through the private sector, especially in the financial and real estate communities, I continue to be mystified at the outrage voiced by some Maryland state employees at being forced to work 4 1/2 hours more a week without additional pay.

Gov. William Donald Schaefer's decision to extend the workweek from 35 1/2 to 40 hours is hardly cause for celebration. But it's preferable to the alternative, which from this corner would seem to be large-scale layoffs.

As it is, combining a job freeze with added working hours for remaining employees is an acceptable way of working through hard times, which is what Maryland's economy has been experiencing.

Mr. Schaefer's approach avoids layoffs, economizes on state funds and strives to maintain levels of public services.

The only thing I can figure is that many of the most embittered state employees must not believe layoffs were a serious possibility. I'm not sure if they think taxes should have been raised in the midst of a recession or that the state revenue shortfall was mythical.

I can understand critics of the governor being upset about some of his actions, including spending $1.7 million in state funds to fix up the governor's mansion. But faulting Mr. Schaefer doesn't invalidate the logic of his strategy for dealing with state employees.

I believe layoffs were a real possibility and, further, that the adverse reaction to extended state hours may make layoffs the preferred strategy for dealing with future budget cuts.

Without meaning to belittle opponents of the longer workweek, I wonder what they would say then?

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