The unit of Westinghouse Electric Corp. that caused the company's $1 billion-plus third-quarter loss has a taste for lending to big real estate projects, including some in the Baltimore area, and admits that it was used to taking bigger risks than banks would accept.
"They made some big investments, and I had the impression that they took some risks the banks wouldn't take," said Robert Hedrick, a securities analyst who follows Westinghouse for Principal Eppler Guerin & Turner Inc. in Dallas. "The banks were being squeezed [by federal bank regulators]; Westinghouse was unregulated, basically, and that's what gave them the risk-taking ability they had."
The risks came home to roost Monday for the second time in less than a year. Westinghouse announced Monday that losses in its Westinghouse Credit Corp. unit would spark a $1.48 billion third-quarter loss and force the firing of 4,000 workers. In February, the credit company had taken a $925 million charge, which gave the unit a $474 million loss for its last fiscal year.
The two big hits slammed the door on what had been a profitable subsidiary of the Pittsburgh-based defense, electrical equipment, television and radio and financial services conglomerate. In 1989, the credit subsidiary accounted for $157 million of the parent company's $922 million profit, according to Stewart Smith, a Westinghouse Credit spokesman.
"The announcement had to do with real estate," Mr. Smith said. "That's the basic problem of the company."
But even Mr. Smith wasn't disputing the basic picture that Mr. Hedrick painted. "I think that's fair," Mr. Smith said. "We weren't doing the same thing as the banks. We're not regulated by the Office of the Comptroller of the Currency or by the FDIC [Federal Deposit Insurance Corp.]. We're regulated by the market."
He added, "To the extent we took more risk, we were being compensated for that risk," in the form of higher interest rates and other charges.
That taste for extra risk showed in some of the investments the company made in the Baltimore area. While Mr. Smith couldn't give precise details of the company's investments in Maryland, Westinghouse and its credit unit were allied with some of the highest-profile, highest-risk developments in the area.
For example, Westinghouse Credit was a major backer of NVR L.P., which, as the parent company of Ryan Homes and NVHomes, is the second-biggest homebuilder in the metropolitan Baltimore market. NVR, which is based in McLean, Va., has had severe financial problems in the past year and has allowed its lenders to repossess most of the land it had acquired for future development.
Westinghouse, for example, gave a loan commitment to an NVR-led partnership for more than $25 million to develop the Villages at Lyonsfield Run, a 600-acre planned community in Owings Mills. It isn't clear how much of that money was actually lent, however. The project has not been built.
Westinghouse had also committed itself to finance the proposed Worldbridge Centre project in Middle River, which later collapsed when the developer, Dean Gitter, wasn't able to convince Baltimore County to grant needed zoning changes. Worldbridge Centre was slated to be an Asian-themed cultural, trade and investment complex, and its cost had been estimated at $1 billion.
A unit of the credit company has also held a majority stake in the Omni Inner Harbor Hotel in Baltimore. Mr. Smith couldn't comment on whether it still holds that stake, which was reported in The Sun last year.
The Omni deal was unusual for Westinghouse because it usually was a lender, not an owner.
The credit unit had $9.8 billion in assets as of June 30, according to filings the parent company made with the U.S. Securities and Exchange Commission. Of that, $7.3 billion was invested in loans and other receivables, including $2.9 billion of real estate loans. The biggest chunk, $3.3 billion, was in loans to medium-sized businesses, Mr. Smith said.
Less than 1 percent of the credit company's assets were tied up in financing the sale of the parent company's equipment, a function Mr. Smith said Westinghouse began phasing out 20 years ago, even though finance subsidiaries of some other industrial companies still make that kind of lending their principal business.
"The company changed because the market changed," said Mr. Smith. He said the market changed because of the deregulation of financial markets in the 1970s and 1980s. "It's what finance companies did at the time, and banks moved into finance companies' territory."