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January 10, 2001

FleetBoston Sells Package of Bad Loans to Patriarch
By Tim Quinson, Bloomberg

Bad Loans Are Bad News for Banks in Slowing Economy ... Weiss comments

BOSTON - FleetBoston Financial Corp., the eighth-largest U.S. bank, sold bad loans for about $1 billion to Patriarch Partners LLC as companies struggle to pay their debts amid a slowing economy.

New York-based Patriarch, founded in April by investors Dennis Dolan and Lynn Tilton, paid $725 million in cash, plus zero-coupon bonds with a face value of $275 million, the Wall Street Journal reported. In return, Patriarch gets loans to U.S. companies with a face value of $1.35 billion.

The transaction shrinks FleetBoston's non-performing loan portfolio by 10%, said James Mahoney, the bank's spokesman, in an interview. The Boston-based company will reduce its loan-loss reserves by $75 million, lowering those reserves to $2.2 billion, he said.

Banks are starting to tell investors that their bad loans are mounting. Bank of America Corp., the country's largest bank, last month reduced its fourth-quarter profit projection, citing a rise in bad loans.

"We can expect a huge increase in bad debts as the U.S. economy goes into recession and banks will report declining profits" said John Aitken, head of banking research at Kelton International in London.

About 20% of the loans sold to Patriarch are non- performing, Mahoney said. The rest are "troubled but accruing," he said.

It's the first time in more than 10 years that a U.S. bank that wasn't being shut or sold has resorted to passing on its bad debt in this way, the Journal reported. Other U.S. banks may follow suit, the paper said, citing people familiar with the situation.

Just two days ago, we told you about the slew of bad loans piling up like corpses at Bank of America's doorstep, and that a number of other banks face the same situation. Today, FleetBoston unloaded over $1 billion in bad loans -- a measure usually reserved for bank bailouts during extreme crises.

FleetBoston's move is evidence of just how dire the situation is. U.S. businesses (excluding banks and other lenders) hold $6.3 trillion in outstanding debt, according to the Fed. And with the economy skidding to a halt, defaults on those loans are skyrocketing.

Banks won't be able to lend any more money because they're too busy cleaning up the mess leftover from the easy credit environment of the last couple of years. And that spells disaster for U.S. businesses and the economy in general.

As lines of credit dry up because of mounting loan defaults, even the largest businesses won't be able to find funding. This will spark a credit panic that could send the economy into a severe recession. Just look at Japan. Eleven years ago, that country ran into the same kind of credit crunch that is currently threatening the U.S. The result was a recession that still hobbles Japan's economy today.

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