A deal of trouble

FINANCE & ECONOMICS

Riggs National and PNC

Feb 10th 2005 NEW YORK
From The Economist print edition

The fall of an august institution

FOR almost 170 years, Riggs National has been the bank of choice for the great and good of Washington, DC, and the world. The “bank of presidents” managed the accounts of 21 first families, including those of Abraham Lincoln and Dwight Eisenhower, financed the Mexican War and the purchase of Alaska, and handled most of the accounts of the diplomats that breezed through America's capital.

But along with the great and good Riggs also banked for the shady and sordid. In late January, the bank pleaded guilty to money-laundering offences concerning the accounts of various foreigners, including Augusto Pinochet, the former dictator of Chile. On February 7th, the proposed acquisition of Riggs by PNC Financial, a Pennsylvania bank that was to be Riggs's knight in shining armour, fell apart—only to be saved three days later.

Last July PNC agreed to pay $779m to buy Riggs as part of its strategy of expanding its bank network across the east coast. But fearful of Riggs's legal problems, PNC took precautions. It negotiated the right to walk away from the transaction should Riggs suffer a “material regulatory impairment” before the deal's close. After Riggs's guilty plea last month, PNC began sidling away. It slashed its original offer by 20% and demanded that Riggs settle or put aside reserves for private lawsuits outstanding against it, including one on behalf of the victims of the terrorist attacks of September 11th 2001.

Riggs's board of directors unanimously rejected the offer—and sued, to force PNC to honour the original deal or, failing this, to pay Riggs for the “resulting damage” caused by the failure of the acquisition. But on February 10th Riggs suddenly agreed to be bought by PNC for $654m.

Recent events have scarcely made Riggs a more attractive target. Other potential buyers would have been likely to think twice before acquiring a bank faced with mounting legal fees and continuing investigations. Riggs is still working with regulators to revamp its money-laundering controls. In its latest financial report, Riggs estimated that it spent $20m in the fourth quarter of last year dealing with investigations and lawsuits and strengthening its internal systems.

Then there are fines. Riggs suffered a $25m civil penalty from the Treasury Department last May. The price of last month's admission of guilt was a $16m fine, which may be increased.

Beyond this is the worry that Riggs's sullied reputation could affect its core operations. The bank's main attraction is its branches: 51 of them in and around Washington, one of the wealthiest areas in America. But most of its branches are in urban areas, not the faster-growing suburbs.

Riggs's books look poor, too. It lost $100m in 2004, $60m of it in the fourth quarter. Its deposits slid from $4.3 billion at the end of 2003 to $3.0 billion in December last year. Much of this reduction is likely to have been the result of the shedding of its embassy businesses, but some of it might have been the consequence of customers switching to banks with cleaner reputations. Worse, on February 8th Moody's, a credit-rating agency, downgraded Riggs's debt, which could lead to a higher cost of borrowing. It has been a long fall for the bank of presidents.

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