Bank shot: as a boy, Richard Hartnack watched as his father wrote home loans; now he's a leader of one of the state's largest financial institutions.

Richard Hartnack was indoctrinated into the world of banking at a young age. He remembers his father, Carl, who was chairman of the old Security, Pacific Bank, holding meetings with bankers at their home in San Diego. Hartnack later served as a Marine Corps pilot in Vietnam. After spending 20 years at banks in Oregon and Chicago, he returned to California in 1991 as vice chairman of Union Bank of California. Since then, the San Francisco-based bank has become one of the state's largest financial institutions, with $42.6 billion in assets. Hartnack, who works from the downtown L.A. office on Figueroa Street, has witnessed the pressures of the global economy --particularly the effect of a l0-year downturn in Japan. (Union Bank is majority owed by Japan's Bank of Tokyo-Mitsubishi Ltd.)

Question: What do you think of the economy?

Answer: It is in a period of moderate growth. In some places it's in modest growth or even decline, and in some places it's hotter than that. We don't have an across-the-board booming economy. And because we had that for a few years back in the 1990s, everybody's probably going to be disappointed until we get back to that. We may never get back to exactly that circumstance. When you think about it, that circumstance was driven, in some measure, by a bit of a speculative bubble. We went from recession to moderate growth to accelerating growth, to an all-out boom period. If the standard by which we judge things is that all-out boom period, we're probably destined to some disappointment.

Q: What's holding things back?

A: What's different about the economy now is the jobless. In fact, if you just judge the economy by the GDP numbers, it's a pretty good economy. Moderate would probably even understate it a little bit, it's almost robust. But the jobless put a damper on the enthusiasm. That makes it somewhat riskier as an economic circumstance. Because there is a certain amount of appropriate hand-wringing about it, it makes people more cautious about investments.

Q: How has this affected loan growth?

A: Clearly, loan growth in the housing market is robust, and the small business area in the aggregate is pretty strong. But loan growth in the large middle-market and large corporate sector has been more problematic. If you look at Federal Reserve statistics on commercial and industrial loans across all institutions in the U.S., it's not robust growth. There's a lot of speculation as to why. But there is a correlation between minimum job creation and low loan demand. When you employ people, people tend to require capital investing around them. No one employs people and has them stay in an empty room. So when jobs aren't growing it's an indication companies are not investing in capital equipment.

Q: How would you say Southern California has fared compared with other markets?

A: It's among the strongest economies in the country. The Southeast U.S. and California are the two strongest economies in the U.S. Interestingly both have the most robust housing markets.

Q: When you look at the housing market, do you think People are waiting for the bubble to burst?

A: Southern California is interesting because we're just flat running out of space. But there are limits to people's ability to afford ever-rising prices, though there are not limits to the desire to own a home. The bubble issue is: If prices keep going up, what happens? People can only afford so much and low interest rates have extended that affordability. But at some point, at some interest rate, there is a price level that freezes out too many people and the market slows down. The more important question is: How do we manufacture housing that meets basic needs and is available at a price people can afford? Once we convert all the dairies to houses out in the inland Empire, the ballgame's over.

Q: Tell me your concerns about the state budget crisis.

A: The recall election was a high water mark for frustration, and we may yet see a couple more high water marks. There is a sense that we have a broken state and we need to fix it. The problem is, of course, that we have very passionate people that have different views about how to fix it. The governmental solution is often not the best solution. California needs to let its vibrant entrepreneurs get to work. California businesses have a long track record of creating jobs as long as they are unshackled.

Q: What are the biggest shackles?

A: A broken workers' compensation system, which is old news, a broken unemployment insurance program, and excessive government regulations. Why this state feels it necessary to always go further than every other state in regulation is a problem. It was OK when we were going further than every other state in the quality of education. But now we've gone further than every other state in prisons, and that's not doing anything for the economy. It's chasing people away.

Q: Are you seeing companies being chased away?

A: The national economy isn't very sensitive to whether the jobs are created in California, Utah or Florida. Jobs tend to be created in an environment where people can make the best total return on capital. In California, because this is an entrepreneur state, part of the total return on capital is, frankly, the weather, the beach, the lifestyle and the size of the market. There are a lot of things that cause a total return on capital besides just dollars. But we are now operating just outside the relevant range. I think we have an opportunity to get back from the precipice without damaging our lifestyle.

Q: Are there other major issues unique to California?

A: Tort reform. California businesses are subject to nuisance lawsuits that are greater than in other states. That's not to say that people don't deserve to have their lawsuits settled, but there are a lot of nuisance lawsuits. The bank isn't so much a target because we have staying power against the entrepreneurial tort reform industry. But we've settled some stupid lawsuits. Somehow or other we've got to get to tort reform because it's just one more offset to sunshine, ocean and mountains that causes companies to leave.

Q: How do you spend your time?

A: I probably spend most of my time today on strategy issues for the company. The biggest piece of that is the day-today work spent on acquisitions. It takes the most time--what you buy, who you buy.

Q: Growing up, did you know that you were going to be a banker?

A: It was high on my list. I went to college and took economics, accounting and computer classes. My dad did the businessin a very interesting way when he moved to San Diego and he took over the San Diego division of (Security Pacific Bank). He used to have meetings in our house on Saturday mornings with his staff, so I was exposed to some very bright guys who went on to be terrific bankers. Early on, when I was seven or eight years old, my dad had a second job--which tells you how much bankers used to make (laughs).

Q: What was the job?

A: He worked for a savings and loan on the weekend in housing tracts in La Mirada, where they were building houses in orange groves. I used to go out with him and it was impressive. Korean War veterans would pull up with their family and all their belongings in their car and maybe a trailer. They would buy a house for $100 down and close the deal in the garage of the model home where my dad sat at a typing table. I literally saw people go from living in a car to being homeowners with the exchange of $100 and signing some papers. The idea that you could buy a home easier than you can buy a car today was really stunning, really remarkable.

Q: How did those experiences shape your career?

A: They gave me a look into both consumer and corporate banking. It's an industry where you get to know lots of different businesses. You're really helping entrepreneurs financially manage their businesses. I was banker at one time for the second-largest helicopter services company in the world. Last year I finally learned how to fly a helicopter. It's harder than hell. It's both hands and both feet 100 percent of time. It's a lot harder than flying an airplane.

INTERVIEW

Richard Hartnack

Title: Vice Chairman, Head of Community Banking and Investment Services

Company: Union Bank of California

Born: Los Angeles, 1945

Education: B.A., economics, UCLA; MBA, Stanford

Career Turning Points: Twice moving to bigger markets: at First National Bank of Chicago in 1982 and at Union Bank of California in 1991

Most Admired People: His father, Carl Hartnack; Delta Airlines Chief Executive Leo Mullin, who was a colleague in Chicago; Jerry Bradshaw, former chief executive of Gary-Wheaton Bank in Chicago

Hobbies: Spending time with family, flying his plane, golf, staying at his second home at Black Butte Ranch in central Oregon 

Personal: Married for 32 years, three grown children