Departure from conservative origins doomed M&I Bank

SCOTTSDALE, ARIZ. - On an empty desert lot covered with snake holes, cactus and scraggly brush lie the clearest clues to the demise of Marshall & Ilsley Corp., the once-great Wisconsin bank company brought down by its expansion into red-hot real estate markets at the worst possible time.

The lot once sold for $225,000, financed by an $180,000 M&I loan that went bad in 2008. Victor and Rita Lockwood recently bought the lot for $20,000 -- they're looking for a place to park a trailer if they default on their $586,000 M&I loan and lose their home across the road.

Two pieces of desert property, two loans that ultimately could cost M&I hundreds of thousands of dollars -- and the same scenario has been playing out over and over, with no end in sight.

"Everything just went to hell," Victor Lockwood said with a sigh during an interview in the couple's spacious living room. "I just want out of this mess."

Welcome to Arizona, real estate's Death Valley. This is where M&I Bank and many other lenders lost billions of dollars when the real estate bubble burst, throwing countless homes into foreclosure, some with mortgages in the millions of dollars.

In M&I's case, loan losses -- concentrated heavily in Arizona and Florida -- became unbearable, totaling $4.8 billion across its portfolio from Dec. 31, 2007, through last year, with another $4.7 billion in write-offs still likely. The situation left it with little choice but to be absorbed by the Canadian parent of Harris Bank last week in a $4.1 billion all-stock deal.

A fixture in Wisconsin since 1847, it was by far the largest bank based in Wisconsin before the deal closed. It has more than two dozen branches in Minnesota. But it will see its name fade away as it is rebranded BMO Harris Bank in the next year and a half.

"It's an ignominious ending for what was once a proud and distinguished bank," said Bernie Hlavac, 75, a retired Stevens Point, Wis., financial executive and longtime M&I shareholder.

Unfamiliar markets

The story of how M&I went from being the "gold standard" of banking -- a term repeated by several bankers -- to the latest victim of the mortgage meltdown was written in the corporation's headquarters on Water Street in downtown Milwaukee. But it played out in Arizona and Florida, where the once-staid bank went looking for profits and growth it couldn't find in the Midwest.

The markets it targeted were known for huge and rapid fluctuations in property values -- movements that are difficult for Midwest bankers to fathom, said Jeffrey Gaia, chairman and chief executive officer of the Biltmore Bank in Phoenix.

"The variations between the highs and lows are minuscule in the Midwest," said Gaia, a native of St. Louis who has been in Arizona since 1988. "In Arizona, they are as high and deep as the Grand Canyon."

"Make a mistake at the top of the market in Milwaukee and it's not going to kill you," Gaia said. "Do it here, and it could kill you."

M&I's prowess in writing loans stood out in some undeveloped areas of metro Phoenix because many other lenders -- with the exception of the National Bank of Arizona -- shunned those areas. M&I, which went from having 14 branches in Maricopa County in 2000 to 45, needed the loan revenue.

"They decided, 'We're going to grow in Arizona -- we have a bunch of branches, now we need the loans,' " said Michael Thorell, president and CEO at the Pinnacle Bank in Scottsdale. "They had to support that growth, and the only way banks can make revenue is with loans."

Some of the areas targeted by M&I are desolate -- a few homes scattered amid dirt roads and undeveloped lots.

Brett Barry, a Realtor with about 20 years' experience, reviewed one area north of Scottsdale with properties foreclosed by M&I and other lenders.

Shifting fortunes

It's quite a change from a few years ago, when some areas outside Phoenix were flooded with people like the Lockwoods, driving prices up in their search for the perfect piece of land.

The Lockwoods' dream began to collapse in 2009 when Victor, 71, a tool and die maker, had health problems that prevented him from working. And Rita, 61, who deals poker at a casino, lost several months of work because of a broken wrist. M&I has rejected an extension of a loan modification, so when their interest rate and payments increase next year, they expect to lose the home -- and move into a trailer across the dirt road.

"What other choice do we have?" Rita asks.

M&I will lose, too -- the Maricopa County assessor values the home now at $390,000, about $200,000 less than the mortgage.

Some of those, too, went south.

In August 2007, M&I wrote a $6.75 million loan for an 18,700-square-foot home -- complete with basketball court, baseball field, theater and separate guesthouse -- on a five-acre property in north Scottsdale. When that loan went bad, the bank took the property back last year and put it up for sale, asking $4.99 million.

The gated home was bought this year for $3.6 million by a limited liability corporation; it is now the home of former Arizona Cardinals quarterback Kurt Warner, according to three real estate sources. Warner's agent declined to comment.

Today, many M&I employees are wondering whether they will lose their jobs under the new owners.

Shareholders received BMO shares that will pay a much bigger dividend than M&I's did at the end, but the decline in M&I's stock still stings.