Officers of some of New York City's largest banks today said their insitutions would probably not have made the $2.6 million loan extended by Manufacturers Hanover Trust Co. to budget director Bert Lance. The loan and other banking transactions by Lance are being investigated by the Comptroller of the Currency.
The reason, they said, was that the collateral appears to have been inadequate and the loan was riskier than usual since all of the proceeds were used to purchase stock - a practice normally ruled out. For reasons of prudence, by the Federal Reserve Board's margin rules.
"If what has been reported secured the loan to Lance, this bank wouldn't have done it," said the officer for one of New York City's banking gaints who, like the others, was only willing ot discuss the matter if neither he nor his bank was identified.
"It is not what we would consider a good piece of business, because of the marketability of the collateral," said another bank official.
Before getting his loan at Manufacturers Hanover, Lance first approached Citibank in New York. At the time, Citibank was NBG's New York correspondent. A source familiar with Lance's attempt to borrow from Citibank says he was turned down there.
"In Chicago, Attorney General Griffin Bell said that he owns about 2,100 shares of national Bank of Georgia stock and that he has been a stockholder for 20 years. At one time he was a director of the bank.)
(Bell said that if any matters concerning Lance or the bank reach the Justic Department, he may have to excuse himself.)
Lance borrowed the $2.6 million in April, 1975, using all of the proceeds to purchase 148,118 shares of 21 per cent of the stock of the National Bank of Georgia (NBG) where he was then President.
A month after Lance obtained the loan, NBG opened a noninterest bearing correspondent account with Manufactuers Hanover,initially depositing $250,000 and later increasing that to between $800,000 and $1.5 million.
What the Comptroller's office is trying to determine is whether any tie-in existed between Lance's loan and the correspondent account which either gave Lance preferential terms or allowed him to obtain the loan in the first place.
A bank establishes correspondent accounts with banks in other cities to broaden the services available to its customers. It is considered to be a misapplication of bank funds, however, if the money in a correspondent account is used as a compensating balance so a bank officer can obtain a personal loan.
Lance, at a press conference on Friday, revealed that the Comptroller has questioned him about an internal memo from the files of Manufacturers Hanover dated April 24, 1975, the date Lance obtained his loan, which also refers to a hopedfor correspondent relationship with NBG that is put at "20 per cent of the facility." The word "facility" is not spelled out but usually means "loan" for bankers.
Both Lance and the bank have denied there was anything improper or illegal in the way the loan was granted, or any quid pro quo between the correspondent account and the loan. And they have defended the interest rate on the loan and the other terms as comparable to what other borrowers in Lance's category could obtain.
Lance revealed that the interest rate on the loan was 0.5 per cent over the prime rate for the first two years, and 1 per cent above the rate that bank's charge their most credit-worthy corporate borrowers for the third year. Collateral included the NBG shares, some stock in another bank in Calhoun, Ga., that Lance previously headed, and the proceeds from his life insurance policy.
"With the collateral and other requirements, most other bankers would think those as pretty stiff terms for someone of Lance's stature and net worth," said a Manufacturers Hanover spokesman.
But officers of other New York City banks who were interviewed today did not consider the terms particularly stiff, noting that Lance a lrealy had substantial debts when he went to Manufacturers Hanover, that the collateral was not very liquid, and that the loan was somewhat unusual because it was used entirely to purchase stock.
The Federal Reserce Board's margin requirements curretnly limit bank financing that goew for pruchasing financing that goes for purhcasing shares to 50 per cent of the value of a stock which is listed on a national securities exchange or is on a list of overthecounter stocks manintained by the Fed which are subject to the same restrictions.
The reason for the rule is to guard against a drop in market price for stock that is used as collateral for a bank loan.
If Lance were to have tried to get a loan to pruchase General Motors shares, for example, a bank could have financed only half the purchase price and he would have had to put up the other 50 per cent himself.
But because NBG shares are not traded on any securities exchange and are not on the Fed's overthecounter list, they are exempt from this Fed margin requirement or Regulation U. Therefore, the loan to finance the entire cost of purchase of the Georgia bank's shares was permissible under the law.
But the bankers who were questioned noted that NBG shares, the main collateral the manufacturers Hanover loan, could not - in the event of a loan default - be disposed of very easily without taking a large loss because the shares are thinly traded - unlike a more liquid stock like General Motors which is nonetheless subject to the 50 per cent margin requirement.
"If we got that as collateral, we would be in a lot of trouble because the stock is not worth zip since it is hard to unload," one banker said.
Several said that Lance's recent difficulties in trying to sell his NBG shares - a commitment he made as part of his confirmation as budget director - without taking a big loss point up this problem.
One banker also noted that "loaning money for the purchase of stock is not a very productive loan" and is known as a "nopurpose loan" in banking parlance. "Unlike a loan to purchase new plant or new equipment, this loan doesn't do anything for productivity. And it is less encouraged than the loan that is for productive use."
A spokesman for Manufacturers Honover today reiterated that the bank believed the loan to Lance was "fully collateralized",and "made in a way that we construe to be prudent banking practices."