Wednesday, January 27, 2010

"Too Big to Fail

I decided to take a look at the history of this....

The first major bank to fail in the US since the FDIC was established was United States National Savings Bank, worth $1.5 billion. Shortly thereafter, on October 8, 1974, the Franklin National Bank in New York also failed. -- This was not a bailout but the FDIC insured depositors. Caused by mismanagement and fraud, it was at the time the largest bank failure in the history of the U.S. Out of the debacle came disgrace and jail sentences for several bankers, a suicide in Italy, huge losses for the bank's stockholders -- but not its depositors -- and a black eye for the federal bank regulatory system. A couple of months after Franklin was declared insolvent on Oct. 8, 1974, most of its assets were taken over by European-American (now known as EAB).

The United States Congress granted all thrifts in 1980, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts. This was the beginning of bank deregulation. Those regulations had kept us from another great depression.

In the 1980's there were increasing bailouts. In early May, 1984 Continental Illinois National Bank and Trust was seized by the US government as "too big to fail". Lytle later pleaded guilty to a count of defrauding Continental of $2.25 million and receiving $585,000 in kickbacks for approving risky loan applications. Lytle was sentenced to three and a half years in a federal prison. The US government remained in control until 10 years later when it was acquired by what is now Bank of America.

Lincoln Savings and Loan

The Lincoln Savings led to the Keating five political scandal, in which five US senators were implicated in an influence-peddling scheme. It was named for Charles Keating, who headed Lincoln Savings and made $300,000 as political contributions to them in the 1980s. Three of those senators—Alan Cranston (D-CA), Don Riegle (D-MI), and Dennis DeConcini (D-AZ)—found their political careers cut short as a result. Two others—John Glenn (D-OH) and John McCain (R-AZ)—were rebuked by the Senate Ethics Committee for exercising "poor judgment" for intervening with the federal regulators on behalf of Keating.

Silverado Savings and Loan

Silverado Savings and Loan collapsed in 1988, costing taxpayers $1.3 billion. Neil Bush, son of then Vice President of the United States George H. W. Bush, was Director of Silverado at the time. Neil Bush was accused of giving himself a loan from Silverado, but he denied all

The US Office of Thrift Supervision investigated Silverado's failure and determined that Neil Bush had engaged in numerous "breaches of his fiduciary duties involving multiple conflicts of interest." Although Bush was not indicted on criminal charges, a civil action was brought against him and the other Silverado directors by the Federal Deposit Insurance Corporation; it was eventually settled out of court, with Bush paying $50,000 as part of the settlement, the Washington Post reported.

As a director of a failing thrift, Bush voted to approve $100 million in what were ultimately bad loans to two of his business partners. And in voting for the loans, he failed to inform fellow board members at Silverado Savings & Loan that the loan applicants were his business partners.

Neil Bush paid a $50,000 fine and was banned from banking activities for his role in taking down Silverado, which cost taxpayers $1.3 billion.

If you are interested in the numbers rather than in some of the details, this site has the numbers from 1930 to now.

You will see the big increase during the 1980's and again in 2008 and 2009.

Note that the "Too big to fail" expression was only coined by the Reagan government. Before that FDIC protected depositors, but not investors or officers. In the 1980's the process of protecting officers and investors began.

This was not the intention of the original bank regulations. Of course this would lead investors to want to invest in banks that are "too big to fail." -- This was the beginning of our present troubles and can be reversed....

Oh, please note also that when the US government managed Continental Illinois National Bank and Trust, no one was screaming about Socialism. It was smarter than to leave the crooks in charge as Bush and Obama did this time.

And, BTW, Neil Bush, brother of George W Bush, was the first banker convicted of fraud who didn't go to jail. -- Prior to that, when fraud was uncovered, Bankers paid for their costs to the US Taxpayer....

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