CHARLOTTE, N.C. — Bank of America vaulted into the top 10 banks for insider lending last year with an increase of more than $358 million, much of it coming as credit markets froze and mounting financial calamity threatened the industry's survival.
For at least seven years, the bank's quarterly insider lending never exceeded $300 million and was often less than half that. But by the end of 2008, it had jumped to $624 million.
The dollar gain was the biggest of any bank in the country, a 135 percent hike from a year earlier. The average for all banks with insider loans was 5.7 percent.
The bank wouldn't say what drove the doubling. The bank's lead director, Temple Sloan, did not respond to two calls for comment.
The bulk of the gain came in the third quarter, when the financial sector entered its meltdown. Wall Street titan Lehman Brothers toppled. Washington Mutual failed. Wachovia experienced a "silent run" on deposits as concerns grew about its stability. Merrill Lynch floundered, and Bank of America agreed to buy it.
The government began talking about billions in aid to rescue banks, to reignite lending. In October, the bank received $15 billion in tax dollars, the first part of a government infusion that now totals $45 billion. Under pressure from lawmakers to demonstrate lending, Bank of America has said it made more than $115 billion in new loans in the fourth quarter alone.
Governance expert Nell Minow was surprised by the size of banks' insider lending in general and especially the biggest lenders, including Bank of America's $624 million. The sizeable dollars at stake and the potential for abuse compel disclosure, said Minow, co-founder of The Corporate Library, a corporate governance research firm.
"No loan of that amount can be considered routine on the borrower's side," she said "You need to have very, very extensive disclosure on this."
University of North Carolina-Chapel Hill banking professor Lissa Broome said insider lending laws are strong enough to deter favoritism. Broome, whose students debate insider lending issues, said it would be reasonable to consider more disclosure for banks receiving Troubled Asset Relief Program funds. But, she said, there's nothing out of line with increased insider lending by TARP recipients because the point of the aid money is to spur lending.
"I don't think it matters if the loan is to the bank's board of directors or somebody else," she said.
By definition, insiders are banks' executives, directors and any very large shareholders, and their companies.
Bank directors typically account for the biggest insider borrowing because they are often top executives with major companies, which routinely need bank loans. Bank of America's board, for example, includes the CEO of pharmacy giant CVS/Caremark, a senior adviser to brewer MillerCoors and the CEO of South Carolina real estate and investment firm The Barnet Co.
In a federal filing, the bank said "that in the ordinary course of business" it may provide loans and other services to directors, their family members or their businesses. No loan details were revealed. The directors, the bank said, found "none of these relationships was material."
Every quarter, banks have to report insider lending to regulators, but they don't have to say much. They report the total amount and the number of large borrowers, typically those with loans or credit lines of more than $500,000. But no names are reported, except upon request. Even then, they need only identify executives and major shareholders with large loans. Directors and their companies do not have to be revealed, and they are usually the biggest borrowers.
Bank of America reported six major borrowers for each of the last five quarters. At The Charlotte Observer's request, the bank had to name the three who are executives. They are mortgage head Barbara Desoer, chief financial officer Joe Price and Keith Banks, head of global wealth and investment management.
Insider loans to executives are much more limited than those to directors, their companies and shareholders with more than 10 percent of the stock, who can borrow hundreds of millions or more. Executives can borrow for their homes and to pay tuition for their children. Beyond that, their loans are limited to $100,000.
However, executives can borrow far more to fund other businesses they own. In those cases, they're subject to the same limits of other insider loans. Experts and regulators said it is unusual but not unheard of for top bank executives to run a side business.
Bank of America wouldn't say whether Desoer, Price and Banks have other business interests. A check of public records found no businesses, but ownership is often not readily apparent in those records.
JPMorgan, the only firm near the size of Bank of America, volunteered that its four executives with disclosable loans held a total of less than $4 million in home loans, all at least five years old. Its other three major borrowers are directors or their companies. In federal filings, JPMorgan names directors and companies to whom it makes loans but doesn't reveal the terms.
Bank of America wouldn't say which of its insider borrowers accounted for the $358.6 million leap last year. Experts said it was probably directors or their companies.
"The bulk of (insider) loans are to directors, not management," said Tony Plath, a University of North Carolina-Charlotte banking professor, who has worked for banks. "It's corporate borrowing."
Directors may have found that business financing dried up elsewhere, or that they could legitimately get a better rate by consolidating loans with the bank they serve, Plath said. However, he added, "It's incumbent on the bank to make sure in this environment, you're not providing credit to an insider that you wouldn't provide to a non-insider."
UNC professor Broome said the bank's insider lending might have grown because directors brought their financing needs to the bank as a show of support.
"Like the CEO of Bank of America publicly saying I'm buying more stock," she said of Ken Lewis' recent purchases of 400,000 shares.