September 14, 1986, Sunday, Late City Final Edition SECTION: Section 3; Page 1, Column 3; Financial Desk LENGTH: 4054 words HEADLINE: JOHN CONNALLY'S TEXAS-SIZED TROUBLES BYLINE: By ROBERT REINHOLD DATELINE: AUSTIN, Tex. BODY: WHEN John Connally's Presidential ambitions were dashed in 1980, he decided, at age 63, that it was time to quit politics and to start making some real money. He looked around his beloved home state of Texas, on the cusp of a fantastic boom in oil and real estate, and saw the opportunity to convert his powerful connections, tall good looks and silver tongue into a Texas-sized fortune. His friend and political protege, Ben F. Barnes, the former Lieutentant Governor of Texas, joined him. And together the men borrowed with abandon to build their empire with a rolling swagger much admired in Texas, and a conviction they couldn't lose. The two men built shopping malls in Houston, Giddings and other oil regions of Texas. They put up a 14-story office building in Houston. They developed an upscale housing subdivision in the lovely hills to the west of Austin, the capital of Texas. They built a 120-unit beachfront condominium and shopping mall on South Padre Island, Tex., a favorate refuge of wealthy Mexicans. They invested in oil and gas wells and a gas pipeline. And they freely signed personal guarantees for loans to pals who were playing the same investment game. But then the Texas economy went sour. The malls are not paying their way because of the oil price bust. The Houston office tower is nearly empty two years after it opened. The Austin economy has stumbled and the development there is stalled. The condominium opened just as the Mexican peso collapsed and is only about half sold. And the collapse of the American oil and gas industry has put the energy holdings of Mr. Connally and Mr. Barnes into the red. As a consequence of these mistakes, the two men are being swamped by a flood of foreclosures and lawsuits. Over the last 12 months or so, more than 35 lawsuits charging non-payment of debts or failure to meet contractual obligations have been filed in at least 13 Texas counties against the Barnes-Connally Partnership and related entities. The total amount claimed is about $40 million, and that is only a small part of their debt. A lawyer familiar with their affairs says the partnership has at least $215 million in outstanding loans and that its assets can bring nothing like that at today's depressed land and energy prices in Texas. Today, John B. Connally Jr., ''Big John'' as he was known in Washington, the former Secretary of the Treasury, Governor of Texas, confidant of Presidents PAGE 2 (c) 1986 The New York Times, September 14, 1986 and would-be President of the United States, even finds himself being sued by the tiny Texana National Bank of Belton because he does not have enough cash flow to meet a $3,237 monthly lease payment for furniture at the Padre Island condominiums. Among the items at issue are a queen-size rattan sofa sleeper for $889, lamps for $86 and standard bed pillows at $10 each. His own $750,000 penthouse unit there was put up for foreclosure auction, but the auction was postponed. IN many ways, the saga of John Connally is the story of Texas, a state that bet too heavily on itself, believing it could not lose. If his plight is very similar to that of the Hunt brothers and many other Texas business people, great public attention has been drawn to Mr. Connally as perhaps the most famous living Texan. It has also raised questions in many minds about whether John Connally was as good at cutting business deals as political ones. Some see tragedy of Shakespearean proportions in all this, for Mr. Connally, already wealthy when he began six years ago, may now well be forced in his twilight years to return to the site of his impoverished boyhood in south Texas. Court records in Wilson County show that he and his wife Idanell have designated as their ''homestead,'' which would be saved from creditors in a bankruptcy, a house and 15 acres valued at $326,200 in his native Floresville near San Antonio. His 7,320-acre Picosa ranch there, home to a herd of Santa Gertrudis cattle and appraised at $4.1 million, is subject to loan liens totaling $4.6 million that must be satisfied before the land could be sold. To the astonishment of friends, Mr. Connally, a lawyer, did not incorporate his main business so that he could shield his personal wealth from any business problems. The unincorporated partnership with Mr. Barnes means that the demands of creditors are crashing down on the two men personally, except for the troubled energy operations which are held in a publicly traded company, Chapman Energy Inc. of Dallas. Both men could be forced into personal bankruptcy as a consequence of the troubles of the partnership - particularly the real estate holdings, which are causing most of the trouble for Mr. Connally and Mr. Barnes. ''Connally had it all - four houses, a great family,'' observed a lawyer who knows him. ''Why did he do it? At age 69, what would he have done with the money if he got it? For him to risk it all is sad.'' But friends say that Mr. Connally did not incorporate because he simply did not foresee the possibility of failure. ''They are very confident people,'' said Walter B. Hailey Jr., an old friend of Mr. Connally and still a partner with him in Chapman Energy. ''They did not think they could fail. Why did Mr. Connally risk it all at his age? ''Because he enjoys building things,'' Mr. Hailey said. ''Money is only a way to keep score for that man. If everything went to hell today, next Monday he'd be back putting together deals.'' The crumbling of the Barnes-Connally ventures has had its impact on other Texas companies. Even the Austin law firm that represents the partnership - Brown, Maroney, Rose, Barber & Dye - has been torn by an internal dispute over whether the firm should continue serving Mr. Barnes and Mr. Connally. The men owe the firm more than $500,000, and the younger partners want to cut the pair off, fearing years of litigation work with little hope of payment, according PAGE 3 (c) 1986 The New York Times, September 14, 1986 to a source familiar with the firm's troubles. However, the managing partner, Howard Rose, who worked for Mr. Connally when he was Governor 25 years ago, wants to stick by his old friend. With Texas's shaky banks under extreme Federal pressure to avoid high-risk loans, Mr. Barnes and Mr. Connally are seeking new capital in the Far East, Florida and elsewhere in exchange for equity in their holdings, and meanwhile they are attempting to restructure their many delinquent loans. Whether they can raise enough in time is problematical. Mr. Connally continues to exude optimism and has taken heart at the recent firming of oil prices. But few experts see any speedy recovery here, and unless oil prices spurt dramatically in the next few months they could have difficulty meeting their debt payments, possibly forcing bankruptcy. Mr. Connally, normally one of the most accessible and talkative of public figures, declined to be interviewed for this story. Mr. Barnes, 48 now and once called the ''golden boy'' of Texas politics, did not return a call requesting comment. However, the Barnes-Connally dilemma was pieced together from court records and from interviews with present and former associates and with banking officials. EVEN as suppliers and contractors who have not been paid struggle, Mr. Connally has continued to live in style. He resides in a splendid gray brick home behind a black wrought-iron fence in the Estates of Barton Creek, the struggling Austin development he founded. He drives to work at the nearby Barnes-Connally Center, where a private elevator in the garage whisks him directly to his posh private office. He has three other homes: the ranch in Floresville, and condominiums in Houston and Padre Island. Friends say that Mr. Connally remains upbeat. ''He's not the kind of person who's going to be slowed down by temporary adversity,'' said George Christian, press secretary to President Lyndon B. Johnson and to Mr. Connally when he was Governor. ''He has not led a placid life. Every Texan is in a box today. Everybody I've heard of has some sort of problem - he is not unique. Every oil and real estate man is in the same position.'' If John Connally made many mistakes, there were plenty of bankers and insurance companies to help him make them during the boom days when his political clout was seen as the key to business success. ''Everybody wanted to meet him then,'' recalls Mr. Hailey. ''Everybody called me and said, 'Hailey, you know John Connally, can you help me get an appointment?' I watched bankers shove money at him. If he made a mistake it was that he should have taken them in as partners.'' The deepest irony of all is that it is the very Texas connections, nurtured since the days Mr. Connally was a student leader at the University of Texas, that helped lead him into such trouble. Critics say that, with his vast network of contacts, he easily won loans where others would have been turned away. ''A lot of people would think it a real honor to lend to such a prestigious man,'' said one banker not involved with Barnes-Connally. ''Here's this small-town banker and Barnes or Connally comes in - they pretty well got what they wanted.'' Some of the old ties have been strained to the breaking point now. The troubles have opened a rift between Mr. Barnes and his old business mentor, Herman A. Bennett, a wealthy contractor from Brownwood in central Texas. Mr. Bennett finds himself the target of a barrage of lawsuits as a result of his PAGE 4 (c) 1986 The New York Times, September 14, 1986 connection with Barnes-Connally. He co-signed several notes with them, including one in default for $4.8 million with the San Antonio Savings Association for four failed shopping centers. Should Mr. Connally and Mr. Barnes go broke, Mr. Bennett could be held liable for the full amount. On Sept. 2, Mr. Bennett sued his friend, Mr. Barnes, for $175,630 sought by the Westinghouse Credit Corporation on a defaulted loan to the two men to buy a barge in 1979. Mr. Bennett claimed that Mr. Barnes had agreed to indemnify him against this indebtedness last year, but lawyers said that Mr. Bennett would still be liable if Mr. Barnes cannot pay. Adding to Mr. Connally's woes is that, during the good days, he freely signed personal guarantees for loans for himself and friends. In 1981, at the height of the Houston boom, he signed such a guarantee for Bryan Lewis, a young campaign worker of his, to borrow $3.4 million at 12 percent to purchase and refurbish property in the posh River Oaks section of Houston. Mr. Lewis went bankrupt last May and now the First City National Bank of Houston is suing Mr. Connally to recover $3.2 million plus interest that had grown to $806,438 by last Jan. 10 and has been mounting at the rate of $1,067 a day since then. In another case, Mr. Connally and Mr. Barnes are being sued to make good on personal guarantees they signed for a $171,214 loan for friends to open a barbecue restaurant in Austin. The owners defaulted last April. The lesson many have drawn from all this is that the partners were better politicians than businessmen. A case in point is the troubled Estates of Barton Creek project here, begun in 1981 and built on the now deflated euphoria over Austin's ''high-tech'' growth. The 1,500-acre $150 million project - designed to include 1,500 homes, a country club, spa and conference center - is stalled in its first phase. So far only 212 lots have been developed and 152 sold. Builders who bought the lots have put up 92 homes so far, many of them still for sale at prices ranging from $300,000 to $1 million or more. Real estate experts here say Barnes-Connally overestimated the demand for such costly housing in Austin, and that the development is in the ''wrong'' school district, the Austin Independent School District. Wealthy families here prefer the suburban Eanes district to avoid busing for desegregation. ''Here were two politicos as partners,'' said Robert Barnstone, an Austin developer. ''They got all the approvals right in a very difficult city. They did the impossible. They got a bridge over our precious Barton Creek. They got the state highway people to put roads in. But when it came to making a business decision about whether this was a good deal, they got it all wrong.'' If Mr. Connally was not a shrewd businessman, he was certainly good for business, many associates found. Just his presence could galvanize a meeting of stock analysts or potential customers. Walter Hailey, his partner in Chapman Energy, a publicly traded company that was Mr. Connally's principal vehicle for his energy operations, recalls going to New York to meet analysts with John Connally as the star attraction. ''It's darn hard for Walter Hailey to draw a crowd,'' he said. ''But when John Connally comes, they just flock in. We had about 200 people. That's pretty good for a guy like me from Mesquite, Tex. I've done very well from my association with him.'' LIFE has been a roller coaster for John Connally and Ben Barnes. From humble beginnings as the son of a tenant farmer, Mr. Connally, who was graduated from the University of Texas law school, worked as a lawyer for the PAGE 5 (c) 1986 The New York Times, September 14, 1986 two famed wildcatters, Sid Richardson and Perry Bass, and rose to be Governor of Texas from 1963 to 1969. He was wounded in the assassination of President Kennedy in Dallas in 1963. He later served as Secretary of the Treasury under President Nixon, and was indicted -and acquitted - on charges that he had accepted a $10,000 bribe to influence the President to raise price supports for milk. He later converted to Republicanism. And he served two stints, a total of 14 years, as a highly paid senior partner in the prestigious Houston law firm of Vinson & Elkins until he left it in April of 1985 saying he had too many other business interests. Over the years he has served as a director of a number of major corporations. By 1980, according to varying estimates, he was worth from $6 million to $15 million, a modest fortune by Texas standards then. Mr. Barnes, who also sprang from humble Texas roots, seemed destined for national political prominence until 1972, when he was caught up in the infamous Sharpstown bribery and stock manipulation scandal in Houston. While he was never indicted, he was tarred by his connections to the confessed swindler, Frank Sharp, and his political career was aborted. Aside from the troubled real estate projects, Mr. Connally has interests in several publicly held companies. Among other things he is chairman of Chapman Energy; chairman of Cable Advertising Systems Inc., an Austin-based comany that provides television advertising spots on cable outlets; a director of American Physicians Service Group Inc. of Austin, which provides ''affordable'' malpractice insurance to doctors. He also has an interest in Primefax, a shaky venture meant to provide computerized repair information to appliance service people. Except for the insurance company, none are profitable. But it was the real estate deals that dragged the privately held Barnes-Connally partnership into the quagmire. All of them were badly timed and badly placed. Three years ago, they borrowed $19.3 million from the San Antonio Savings Association to build four shopping centers, in Houston, Alvin, Giddings and Floresville. The partnership stopped making payments on the loan early this year. According to Ray C. Wilson, president of the lender's real estate group, the failure was only partly due to the bad economy. ''They let the management slip,'' he said. By mutual agreement, a new management has been appointed and the partnership is trying to find a buyer for the malls, whose value has dropped since they were built. Mr. Wilson said his thrift institution would be willing to stop foreclosure proceedings if Barnes-Connally came up with $500,000 in arrears. ''They keep telling us they have substantial assets, but cannot raise cash now,'' he said. The thrift unit is also suing the partners and Herman Bennett, Mr. Barnes's mentor, for the $4.8 million personal guarantees they jointly signed. The news is even worse at the Triple Crown condominiums, a 104-unit project adjacent to the Ruidoso Downs racetrack in Ruidoso, N.M., a mountain resort favored by affluent Texans. After three years, none of the units, priced from $120,000 to $180,000, has been sold outright, according to Bill Skeen, director of asset management for Barnes-Connally; 10 have been sold on a time-share basis. The partnership owns one-third of the project, which was posted for foreclosure on Aug. 12 by the Albuquerque Savings and Loan Association to collect its $15 million first lien. The partnership plans to contest the foreclosure and is trying to find a buyer for the project. Meanwhile in Houston, Barnes-Connally is struggling with two failing projects. Two years ago, as the Houston office market was crashing, the partnership opened Shepherd Place, an odd-looking boxy building in an odd location near the River Oaks neighborhood, but distant from most commercial centers. Tenants have been scarce even for prime buildings, and Shepherd Place is only 20 percent occupied, says the management. The partnership hopes to sell the building to recover its $12 million investment. According to E.D. Wulfe, a commercial broker in Houston, the building cannot be profitable at today's effective rents of $9 to $10 a square foot even if fully occupied. It was just over a year ago that Barnes-Connally opened the Fry Road Crossing shopping center and it has already gone bankrupt. It is situated along Interstate 10 on the western outskirts of Houston, a once-promising area whose growth has slowed dramatically. Now 9 of the 20 or so storefronts are empty. The center was built with $11 million borrowed from the General Electric Credit Corporation, which is suing Mr. Connally and Mr. Barnes, both of whom signed personal guarantees for the loan. J.A. Patterson Jr., Dallas-based lawyer for the lender, said efforts to reach a workout had fallen apart and the lender decided to sue for foreclose. Chapman Energy is also a problem. It went public in 1982 on the theory that the time was ripe to pick up a lot of cheap oil and gas reserves from companies bankrupted by the price slide that began in 1982. Mr. Connally and Mr. Barnes each bought 1 million shares at $1 apiece. Roger Chapman, a Houston oilman, was the original president, but he backed out because of disagreements with Mr. Connally. At first the company prospered, raising revenues from $4.3 million in 1982 to $20.7 million in 1985. But the ''bargains'' it picked up in bankruptcy sales no longer look so good since the price of oil has fallen by more than half since last December. It bought reserves in the ground one year ago at from $6 to $7 a barrel for oil and $1 a thousand cubic feet for gas, and now the same can be purchased for $5 a barrel or less and 75 cents for gas. But the biggest albatross around Chapman's neck is the Phenix Transmission Company, a 909-mile gas pipeline in Kansas. It owns a 60 percent interest in the line, and it has pumped nothing but red ink because of the slump in demand for natural gas. In the meantime, Chapman, which made $177,245 in 1985, lost $1.9 million in the second quarter on top of a $20.1 million loss during the first quarter. Last month, bank creditors ordered Chapman to devote 90 percent of its cash flow to debt service. To raise new cash to continue operations, the company is seeking $100 million from pension plans and wealthy individuals who see a chance to pick up bargains in the distressed oil patch. Chapman's stock, once as high as $8 a share, had dropped to well below $2 last week. Through it all, John Connally has maintained a stiff upper lip. Though a Republican, he publicly joined Gov. Mark White, a Democrat, in calling for higher taxes to meet the state's budget deficit. And he has joined with two powerful Houston bankers, Ben Love, chairman and chief executive of Texas Commerce Bancshares and Walter Mischer Sr., chairman of Allied Bancshares, in supporting legislation that would permit Texas to participate in interstate banking. IT is only 85 miles south, as the crow flies, from the corridors of PAGE 7 (c) 1986 The New York Times, September 14, 1986 power in Austin to Floresville. Six miles from Floresville, on Farm-to-Market Road 2579, stand two royal blue steel gates along with a life-size painting of a Santa Gertrudis bull. They guard a cluster of five buildings of tan limestone with brown roofs separated from the road by a quarter-mile airstrip. This is the Connally homestead, all that may be left of his empire to bequeath to his three children and eight grandchildren. Said Roger Chapman, his erstwhile partner in the oil business: ''After all the success he has had in the political world, it is a shame that he has not been able to duplicate this success in the business world. It is possible that he tried to do too much too fast.'' FOR VACATIONS IN TEXAS A WHITE ELEPHANT SOUTH PADRE ISLAND, Tex. Standing out among the nondescript condominiums that line South Padre Island is a dramatic, white 14-story sloping structure with a plunging ''V'' center that one architect has likened to a bird in flight. The luxury condominum complex is Sunchase IV, a $21.5 million project that is only half-occupied and that seems to illustrate the business mistakes of the Barnes-Connally partnership. The Texas National Bank of Belton is suing Mr. Connally for default on a $152,139 loan taken to pay for furnishings for some of the 120 units at the complex. The loan, made in January l985, was personally guaranteed by Mr. Connally. Sunchase, completed in l984 with a construction loan from Manufacturers Hanover Trust Company, has 55 unsold units, more than any new luxury condominium on the island, which is Texas's premier coastal vacation resort. The once booming real estate market on South Padre has been depressed since l982 when the Mexican peso was first devalued in connection with the foreign debt crisis, and Texans were struck by falling oil prices. That dampened the investment enthusiasm of wealthy Mexicans from nearby Monterrey and oil-rich Texans who were the island's biggest condominium buyers. Unfortunately, it was in 1982 that Mr. Barnes and Mr. Connally started construction of their Sunchase project, which turned out to be among the last condominums built. Until the peso devaluation and falling oil prices ended the construction boom, ''real estate brokers had been order takers more than real estate salesmen'' for the free-spending Mexicans who flooded the island in the late l970's and early l980's, said Robert N. Pinkerton Jr., owner of a South Padre real estate company. Since 1982, condominium prices have fallen 25 to 30 percent, Mr. Pinkerton said. Sunchase, however, did not lower its prices -now at $240,000 to $325,000 for a two or three bedroom unit - although it is considering doing so as one of several options to get rid of the unsold units, according to Paul Oakes, president of the Sunchase Realty and Managment Company, which manages properties on South Padre for Barnes-Connally. Another luxury condominium built at the same time as Sunchase IV - Bridgepoint - has scheduled an auction for late September to get rid of 20 $300,000 to $600,000 units and Sunchase may take similar action if the auction is successful, Mr. Oakes said. PAGE 8 (c) 1986 The New York Times, September 14, 1986 One of the reasons the Barnes-Connally project has so many unsold units is that the view to the Gulf of Mexico on one side and to the laguna on its other side are blocked on the building's lower levels by adjacent developments, said Dennis Franke, another island real estate broker. In such a highly competitive market, ''it's hard to sell without a view,'' said Mr. Franke. Blocking the view to Laguna Madre is The Mall at Sunchase, a $10 million, 65,000-square-foot mall also developed by Barnes-Connally, which now holds a 50 percent interest. Half of the mall sites are leased. Construction began on the mall in early l985 and was completed later that year. ''It doesn't make sense, does it, that they constructed the mall'' despite the soft real estate market and weak tourist activity, Mr. Pinkerton said. Barnes-Connally is negotiating to sell its interest in the white, four-story heavily mirrored mall to the Community Investment Development Corporation of Missouri, which owns 25 percent and is the lender on the project, Mr. Oakes said. - PEGGIE I. EVANS GRAPHIC: Drawing of John Connally; photo of Ben F. Barnes in Austin SUBJECT: BIOGRAPHICAL INFORMATION; FINANCES; OIL (PETROLEUM) AND GASOLINE; RECESSION AND DEPRESSION; FINANCES, PERSONAL NAME: CONNALLY, JOHN BOWDEN JR; REINHOLD, ROBERT; CONNALLY, JOHN B (BIOGRAPHICAL SKETCH); BARNES, BEN F