Bank Cop Instills Fear in Those on His Watch : Regulation: Some contend that Comptroller of the Currency Robert L. Clarke swoops down like Sherman, leaving scorched lenders behind.

WASHINGTON —  He is arguably the most watched person in banking today. He may be the most feared. And he probably is the funniest at a time when there are many long faces.

As the nation’s chief regulator of national banks, Comptroller of the Currency Robert L. Clarke and his staff have been accused of launching SWAT-like examinations to unearth problem real estate loans. They’ve been accused of intimidating lenders, and blamed for a “credit crunch” that some believe has dried up funds even for good, healthy businesses.

As Clarke said in a June speech, making light of his reputation: “There is a rumor afoot in the land that I’m the regulator from hell.”

What Clarke is trying to do is save taxpayers from the kind of financial hell they are going through in the nation’s savings and loan fiasco. That debacle is estimated to cost as much as $500 billion over the next 30 years.

Although the banking industry’s troubles are far from the thrift industry’s, some big problems lie ahead. Some see real estate emerging as banking’s albatross in the 1990s, much as loans for energy, the Third World, farms and Texas real estate were in the 1980s.

Clarke, whose term expires in just four months, walks a tightrope trying to bring lenders in line forcefully, without choking off credit. That won’t be easy with the nation slipping closer to recession.

The jury is still out on whether he’s succeeding. But most experts agree with him that banks became too loose in their real estate lending in the late 1980s.

The quick-witted former scoutmaster and Presbyterian deacon hardly fits the part of regulatory tyrant. Dana Cook, a partner with the KPMG Peat Marwick accounting firm in Houston and one of Clarke’s best friends, recalls seeing Clarke mad only three times.

“And I’ve known him for 15 to 20 years. It takes a lot to get the man excited,” Cook said.

But his reputation as a brutal regulator dogs him. His office’s examinations over the past year have taken on the aura of a Gen. Sherman-style march scorching the banking industry. Starting in New England late last year, regulators have swept through the Mid-Atlantic and the Southeast as they headed across the country.

“There was this shock wave that seemed to hit the banks. Regulators from outside the state swooped in and stepped behind the desk of the resident regulators,” said Massachusetts Gov. Michael S. Dukakis, recalling what bankers in his state experienced.

As a result, Clarke and his examiners are being watched closely in California. Bankers have heard New England horror stories, true and exaggerated, and wonder if they will be next.

California banks so far have escaped the brunt of real estate problems that have devastated some institutions elsewhere. And bank regulators have yet to publicly turn up major real estate problems here. But with California’s commercial real estate market and economy slowing, there clearly is a growing nervousness.

Now Clarke is on the defensive. He and his defenders have tried to ease fears and encourage banks to keep making prudent loans. To get that message across, Clarke and his two bank regulatory colleagues, Federal Deposit Insurance Corp. Chairman L. William Seidman and Federal Reserve Chairman Alan Greenspan, took the extraordinary step of dropping in on a recent American Bankers Assn. board meeting.

“I’ve tried to reassure the bankers that we’re not telling them to quit making loans,” Clarke said. “We’re just trying to get people to be a little bit more careful. To pay attention.”

Clarke, 48, was born in Tulsa, Okla., grew up in New Mexico and settled in Houston, where he attended Rice University before earning his law degree at Harvard University. He became a banking lawyer, representing small institutions and serving as a bank director.

He also got involved in Republican politics, working on Secretary of State James A. Baker III’s unsuccessful run for Texas attorney general in 1978. Baker, while Treasury Secretary under former President Ronald Reagan helped Clarke land the comptroller’s job.

Clarke’s speeches, which his office publishes in bright yellow, blue, brown, gray and green covers, often seem like the sermons of a country preacher. He starts each with a joke to illustrate a point, usually digresses in the middle to tell another, and often wraps up with a third.

In warning bankers to learn from past mistakes, he tells of a historian who interviewed a small-town man boasting that he remembered the past “as if it were yesterday.” After failing to answer the historian’s questions, the man confessed, “I don’t remember much of what happened yesterday, either.”

In joking about his emerging reputation as “the regulator from hell,” Clarke told of a panhandler hiking 50 miles to meet John D. Rockefeller because the oil tycoon had “the reputation of being the most generous man in New York.” Rockefeller, Clarke said, asked the man to do him a favor: deny the rumor.

Clark and his defenders say they are merely forcing banks to recognize reality: that most real estate markets are soft. Banks financed too many office buildings, and too many loans on them won’t be repaid. They also are forcing banks to own up to some sloppy lending practices, such as poor documentation.

As Clarke often puts it, people can skinny dip so long as the tide is in. In banking, the tide is out.

That hasn’t been so easy for some bankers to accept. They rode a real estate boom in the 1980s that was rich with lending fees.

To some extent, they had no choice. Corporate loans dried up as many companies issued commercial paper, a form of IOU that helped them raise money on their own. But real estate was hot and profitable, and loans in such booming states as Massachusetts were considered virtually risk-free.

Clarke has warned about potential problems with real estate loans for three years. His defenders say the virtual collapse of Texas banking in the late 1980s, along with the S&L; fiasco, is evidence enough to justify more scrutiny.

“Nine out of the top 10 banks in Texas failed, all because of real estate. We’ve seen what it can do,” said FDIC chief Seidman.

Seidman also doubts that lenders are being treated unfairly in exams, as some lenders have complained.

“We’ve looked into a lot of complaints. One or two had justification, but 90% of the people complaining are unhappy at having to look at reality,” Seidman said.

Clarke said he takes the complaints seriously, but said economic forces are more important in deciding whether people are getting loans. He also notes that, due to the length of the nation’s economic recovery, many bank lending officers and their customers only know good times. Borrowers are not used to being told no, so blaming the regulator is an easy out.

“I don’t think there are very many bankers who in their heart of hearts believe that they’re not going to make a loan because they’re worried about regulatory pressures,” Clarke says. “I think they use regulatory pressure as an excuse sometimes, because it’s easier to say I can’t make the loan because the examiners are really being hard on us or the examiners won’t let me make the loan.”

Indeed, developers, accustomed to open spigots of money, often have been the loudest.

“The people who are complaining the most are people who want to build buildings and want to develop projects. The last thing we need in New England--and the last thing I would want to invest in if I were a bank--is another office building,” said Karl Case, a finance professor at Wellesley College, near Boston.

Most of the criticism comes from regional banks, who believe that regulators should be more flexible in allowing banks to work out problems with borrowers. They argue that the comptroller’s office for years has shown a double standard in the way it treats regional banks and large, “money center” institutions. The regional bankers say regulators are unyielding in forcing them to recognize problem real estate loans, but have yet to force the money center banks to fully face up to troubled loans they made a decade ago to developing countries.

So how real are the complaints that regulators are treating banks unfairly?

Clarke’s message the past few weeks has been that the rules have not changed, but that the softening economy and real estate markets are forcing them to take a closer look at real estate and business loans.

In simple terms, a regulator can force a bank to reclassify a loan as a problem one. That has two effects. First, payments can only be applied to the principal, so the bank cannot count the payments as income. Second, it forces banks to devalue their loans and set aside more money to cover potential losses on them.

Bankers interviewed for this story requested anonymity because they did not want to anger their examiners. But they agreed to provide some specifics about problems with Clarke’s examiners.

By and large, all say Clarke is doing a good job despite the controversy. They also agreed that, despite some talk to the contrary, the basic ground rules for examinations have not changed.

But they also felt the rules were being enforced more strictly, and with a different attitude than before. It’s as if police officers who ticketed people when they exceeded 65 miles per hour suddenly started to ticket those driving faster than 55.

The burden of proof, they argue, is now on banks to prove loans are good, not on regulators to prove they are bad. Because there is a substantial amount of discretion in exams, the individual examiners often determine how tough each bank is treated, although Clarke has promised exams will be conducted more consistently. And examiners, amid the real estate slowdown and S&L; debacle, recognize that no one gets ahead by being soft--so they have changed their attitudes.

“They are much more confrontational--a ‘We know and you don’t’ kind of attitude,” said one New England executive whose bank had disagreements with Clarke’s examiners.

One clear area of disagreement is over the regulators’ dim view of the kind of collateral used to back loans, such as real estate or personal guarantees.

With real estate values softening so quickly, regulators argue, collateral may not be worth nearly as much as estimated by banks or appraisers. And regulators generally believe that real estate markets are getting much worse.

Instead, regulators are emphasizing such things as whether rents are enough to cover loan payments on an office building. Or, in the case of a business loan, whether a company’s earnings are rising or falling.

Former FDIC chief William Isaac, now a Washington banking consultant with the Secura Group, said Clarke’s examiners are not forcing banks to classify good, solid loans as bad ones. What is different, Isaac said, is what happens once they discover a potential problem.

Isaac provides this example: a developer borrows to finance construction of an office building. Tenants are not leasing space as rapidly as was projected, and rents are below what was expected.

The developer can’t pay off the loan using income from the building, so he uses funds from his other businesses or his personal bank account. Regulators, Isaac says, will require the bank to prove that the borrower can continue making payments, or force the bank to classify the loan as a problem.

One Eastern banker said he had a case similar to Isaac’s example. Even though the investors were making payments on a loan for an office building, the examiner demanded that the bank get individual tax returns from each investor. When the investors balked, the examiner forced the bank to classify the loan as substandard--even though no payments had been missed.

That kind of action has led to charges that Clarke’s examiners do not understand real estate markets. But some call those complaints whining.

C. Todd Conover, Clarke’s predecessor as comptroller who is now with KPMG Peat Marwick in San Francisco, said he heard many similar complaints when he was cracking down on bad energy loans in the early 1980s. Banks said then that prices would recover--they fell instead--and that examiners did not understand the business.

“Whenever there are difficulties in a particular market sector and the examiners start reclassifying loans, bankers complain bitterly that you are being too tough,” Conover said.

Even critics of Clarke’s examiners say he listens well. He has visited New England several times to face his critics.

“Once we sat down with him and explained what was happening, he made a good faith effort to understand. Unfortunately, by that time a good deal of damage had been done,” Dukakis said.

Among those who have heard complaints from New England has been White House Chief of Staff John H. Sununu, a former governor of New Hampshire. Clarke said he has met with Sununu and that it went well. He denies feeling any pressure from the White House to back off.

“He (Sununu) was hearing from banks, and then undoubtedly from borrowers, in New England. Having been a governor of New Hampshire himself, I would be astonished if he weren’t getting some pressure from the same people in New Hampshire who have been complaining to me and to the current governor there. But I certainly have not felt any pressure,” Clarke said.

Still, rumors persist that because of the controversy he has caused, Clarke might not be reappointed when his five-year term expires in December.

His friends and acquaintances say he would like to stay on because he enjoys Washington, has goals he still wants to accomplish and is financially secure.

But whether President Bush will renominate him is still uncertain. Even people who know him well are uncertain.

“If we had to put a $100 bill on the table, I would bet that he would serve if he were asked. I’m not sure I would put a $100 bill on the table on whether he will be asked,” said Clarke’s friend Cook.

Clarke himself is diplomatically vague about his plans. “It’s a long commitment. If I were to be asked, I would have to think about it,” he said.