The World Bank - March 23, 2004
An Alternative to Government Management Companies-
The Mellon Bank Approach
Richard H. Daniel,
Mellon National Bank
Retired Vice Chairman & Chief Credit Officer
In October of 1986 I joined Mellon National Bank inPittsburgh, Pennsylvania, as a Vice Chairman and Chief Credit Officer. The Chairman was worried about the health of the bank's loan portfolio after the demise of their Chief Credit Officer two years prior. He had lacked a strong replacement, and was looking for someone to determine if Mellon might have a credit problem.
My first task was to assess the health of the credit process and theexpertise of the people running it. It didn't take long before I was spearheading an aggressive effort to identify all of the non-performing loans (NPLs) that had missed being identified by the existing loan monitoring system.
By the end of 1986, the NPLs had increased 77% from the prior year's end, and the credit process was still producing new ones.
As a result, in June of 1987 the Boardfelt it was necessary to make a change in senior management. Frank V. Cahouet was brought in as Chairman and CEO. Senior management was immediately restructured and a program was begun to address the business and financial consequences of the significant increase in the NPLs.
During that year we continued to find additional NPLs, and by the end of the year they had climbed to $1,649 million,an increase of over $1 billion in two years. The Loss Reserve was increased by $1,056 million, creating a 1987 year-end loss of $844 million.
I should point out that we were working on this problem in the latter part of the 1980s, when the economy was beginning to turn down for the second time in that decade. And, it was magnified by the fact that Mellon missed identifying a significantnumber of problem loans earlier, and was not ready to address the incremental problems of the succeeding economic downturn. Consequently, our problem borrowers had become sicker than we had realized.
In order to attack this persistent problem, we decided to split the credit group into two separate parts - one to fix the process of new asset generation and oversight, and one to manage the growingvolume of problem loans. These functions are commonly known as Credit Policy Administration and Problem Loan Management, or Loan Workouts. Since we were able to attract a seasoned Credit Policy Officer who became available at the time, we decided to have him head the Credit Policy Department, reporting to me, and I would focus on the process of beefing up the newly named “Special Assets”Department.
By the beginning of 1988, we had also concluded that we were in need of strengthening every other aspect of our bank's operations. Actions included developing and implementing strategies to improve the performance of our major lines of business, remaining steadfast in our commitment to contain expenses, and run a lean and productive operation, continuing to strengthen and refine our creditcontrols, and executing an innovative financial restructuring plan.
In July of '88, Mellon announced a capital financing and asset restructuring program to strengthen its capital base and sell a substantial portion of its lower quality domestic assets to accelerate the timetable for realizing the profit potential of the company's market franchise. It included the issuance of $275 million ofpreferred stock and $250 million of additional equity capital, both of which were sold to the investment banking firm of Warburg Pincus. The plan was completed three months later when certain lower quality NPAs were sold to a newly established independent bank - Grant Street National Bank, In Liquidation (GSNB). Its sole purpose was to acquire the identified assets, liquidate them, and then...