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Politician Wrong: Bank Not Flopping, But Tell That to Stockholders

August 31, 1990

BOSTON (AP) _ All week rumors swirled on Wall Street that federal regulators might take over the troubled Bank of New England. All week regulators denied they were true.

But when a congressional candidate Thursday flatly stated that the government had recommended liquidating the institution, the rumors gained new weight, dragging down Bank of New England’s stock price.

The episode demonstrated how rumors can move the nation’s financial markets, and how, like a game of telephone, rumors can change enough to threaten a company’s stability.

″The problem is that irresponsiblity like this press release can kill a bank,″ said Ellen Stockdale, a spokeswoman for the Comptroller of the Currency in Washington, which regulates federally chartered banks.

Democratic congressional hopeful Ted Dimauro issued a news release based on rampant rumors the bank would be seized by federal regulators. Dimauro learned of the rumors from a financial wire service report.

Dimauro wanted to take a shot at his opponent, Rep. Richard Neal, D-Mass., a member of the House Banking Committee, whom he accused of ignorance about the bank. But he got the facts wrong.

″This is a sad day for Massachusetts as the FDIC has recommended the liquidation of Bank of New England,″ a statement from Dimauro said. The Federal Deposit Insurance Corp. recommended nothing of the sort.

Dimauro later apologized, saying his statement should have noted the wire service report concerned speculation that shouldn’t have been presented as fact. He blamed an aide for releasing the statement without his approval.

Too late. The bank and federal regulators had to scramble to shore up the bank’s reputation, saying it was solvent and denying that a takeover was pending.

Already fighting to recover from New England’s depressed real estate market that left it holding millions of dollars in bad loans, the bank’s stock plummeted 38.5 percent to $1 a share from $1.62 1/2 in New York Stock Exchange trading Thursday.

The bank’s chairman and chief executive, Lawrence K. Fish, said the ″surprising and harmful rumors that have been circulating about Bank of New England during the last several days are completely untrue.″

″The facts are that we ... have been fully liquid since mid-June, operating expenses have been sharply reduced and our plans for a recapitalizatio n are well advanced,″ Fish said in a statement. ″Our recovery program is on track.″

Bank of New England has operated under federal orders since early this year. The bank came under heightened government scrutiny when a downturn in the economy and the real estate market exposed mountains of bad loans.

The bank lost close to $80 million in the first half of 1990, on top of more than $1 billion in losses last year. Under an operating plan with federal regulators, Bank of New England plans to sell off assets and slash its work force to reduce costs and raise money.

Against that backdrop, rumors have circulated occasionally about the bank’s future. Analysts said such speculation typically increases before a long holiday weekend.

The rumors in this case were so persistent they were likely to have an impact on the bank’s stock, said Don Kauth, an analyst with First Albany Corp.

″It’s been a distressed bank for some time and the continued deterioration in economic fundamentals in New England made their recovery that much more difficult,″ he said.

Kauth, like other analysts, gave credence to the notion of a federal takeover. ″Whether it’s this weekend or a month from now or two months from now, it is inevitable,″ he said.

Nonetheless, the politician’s statement led the bank to drop a policy against commenting on market rumors and regulators to drop theirs on a bank’s status.

″Officially we do not comment on the condition of the bank,″ Stockdale said. But she said the incident was ″so weird that we are saying the bank will be open after the (Labor Day) holiday. It will still be the Bank of New England on Tuesday. The press release is not true.″

On top its major error, Dimauro’s statement got an important fact wrong: Bank of New England is not regulated by the FDIC. A federally chartered institution, its regulator is the Comptroller of the Currency.

Stockdale said her office decides when a bank becomes insolvent, and when that happens the FDIC handles liquidation. ″So,″ she said, ″the press release doesn’t even talk about a situation that is real.″

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