Dad’s Personal Banking Crisis
I have been thinking about Dad all week and some of his lifetime stories. I mentioned in my last article that my Great Grandfather owned a bank and lost it in the Great Depression along with all his personal funds. He told my father to never own a bank. My father told me all this years later and said that he should have listened.
Back in the late 1960’s banking was still a special privilege and as such banks were all local (within the same county or parish in Louisiana). Since most money is created in the process of commercial loans that profit was supposed to remain in the local community. Nowadays the large 5 banks suck the life out of the country and funnel this special privilege directly to New York. At any rate the late 1960’s was before credit cards and home equity loans. Banking was much simpler then and loans were quite easy to obtain without the reams of paperwork required now. If your banker felt you were a good risk for a small consumer loan you just signed a simple loan agreement and that was that. Most bankers knew their customers and knew who was and who was not creditworthy in the community. Most banks were small and it was common to make many small consumer loans to cover cars, vacations and small business needs.
Dad purchased an interest is one of these small community banks and sat on the board of directors. He normally would go to the bank every afternoon for an hour or so and sit in on the regular loan committee meeting for the day's loans where they would approve all the loans made that day (or not). There were about a dozen directors and usually at least one of them had knowledge about the loan applicant. Of course the loan officers would make sure sufficient collateral was pledged but the loan committee would have to approve all loans over a certain amount. Dad always said he was startled at people’s balance sheets. Usually the very people who you thought had money were living week to week and the people who you thought did not have any assets were really quite well off. Thomas Stanley’s book, “The Millionaire Next Door” pretty much said the same thing a couple of decades later.
Dad enjoyed his involvement at the bank for several years but then one day the major stockholder and president of the bank announced that he was going to retire and sell his shares over time to a new gentleman that he was bringing in from out of town. The new gentleman was voted president by the board and began working full time at the bank. Everyone was excited because he knew several out of town business owners and he said they were all anxious to do business with him at his new bank. He made several loans to his old out of town customers and personally vouched for their credit. Then one day a few months after he arrived the bank examiners came by for a routine check of the banks accounts. It was called to everyone’s attention that the new out of town loans had not made their regular payments. The new president said there was simply some oversight in posting the payments and that he would see to it the next day. That night the President called the head teller and told him to meet him at the bank that night. He was to come at once and not to tell anyone. He ordered the teller to open the vault and give him all the vault cash or he would be fired on the spot. The President left town with a suitcase full of money in the dead of night.
The next morning all the directors heard what happened and immediately met to decide what to do. Dad dispatched all the directors in teams of three to investigate the out of town loans only to have everyone report back the next day that none of the businesses existed. Most were bogus addresses to vacant buildings in other towns. At this point panic started to set in with the directors since the bank attorney informed them that they were personally liable for the loans since they approved them. Most claimed that they simply did not have the assets to cover their portion and that they would become bankrupt. Furthermore the bank’s attorney told them that they were all liable in solido, meaning that each director was liable for the entire amount if the others went bankrupt. Since Dad was the most liquid of all the directors this meant that he could possibly be liable for the entire amount if everyone else declared bankruptcy.
At this point the bank examiner said he was going to close the bank and as Dad liked to quote, “put a lock on the front door the size of a car tire”. As you might imagine everyone was in a panic since all their bank stock would become worthless, the bank loans were still due by the directors and a community scandal would ensue. Dad assumed command and told the examiner that he demanded to have 24 hours. He also said he had to speak to the examiner’s supervisor. Reluctantly the examiner gave him until Friday at 5:00 pm the next day. They also started hunting his supervisor who was on vacation.
Thursday evening late a competing bank called and said they heard the bank was in trouble. He offered to take the bank off their hands if the directors would sign over all their stock to him and basically give him the bank. They would lose their bank stock but they would be off the hook for the bad loans. Dad said he just couldn’t afford to loose his investment and thanks but no thanks. After an all night session Thursday night Dad came up with a plan. The bank was going to loan each of the directors enough funds to cover the bad loans. The directors would have to pledge all the collateral they could come up with to the bank. They would continue to operate the bank and pay back the loans from the bank profits over the next three years. The only problem was that it was illegal for the directors to borrow funds from their own bank. They finally found the bank examiner’s supervisor in the Memphis airport between flights late Friday afternoon and Dad convinced him to bend the rules and allow the loans to the directors. I have often wondered exactly what Dad told the man to convince him but since he was potentially on the hook for the entire amount I am sure he was convincing.
At any rate the rules were bent, the bank was saved and the loans were repaid by the directors from the bank profits over the next few years. After the loans were repaid Dad sold his bank stock at a nice profit and resigned from the board of directors and ended his banking career. He said he should have listened to his Grandfather!
As for the new bank President, he was never heard from again. The only way the plan would have worked is for the scandal to remain quiet so charges were never filed. Discrete inquires were made but he nor the money was ever found. Most of the people involved are now long dead and the bank failed years later during the 1980’s under the new management.
Even a bank, which is a business that literally creates money, can go broke. Be careful with your assets and always have your “wealth insurance” paid up in the form of precious metals because there are always con men out there looking for an easy buck.
Larry lives in Shreveport, LA with his wife Puddy. Larry sells precious metals at the Silver Trading Company, LLC. Since 2001, Silver Trading Company has offered high volume sales of gold, silver, platinum and palladium to serious investors around the world. It also offers guidance about storage options for metals. Please visit Silver Trading Company’s website at www.silvertrading.net.
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