Joel On The Road

By Joel Thurtell

It’s terrible that execs of broke A.I.G. gave themselves $165 million in bonuses, tapped from public bailout money.

And yes, it’s outragaeous that top dogs from failed Countrywide bank whose profiteering in sub-prime mortgages helped bring on our present panic would now be making big bucks buying and flipping properties their own greed forced into foreclosure.

Meanwhile, Fed Chairman Ben Bernanke wants to rein in banks whose officials took risks knowing the government would consider them “too big to fail.”

Size is not the point. Ownership is key. If you decide a bank should be saved, fine, save it, but don’t leave it in the hands of the original proprietors who put it in jeopardy.

We ought to consider whether we don’t have a special banking class of citizens who seem to reap fortune from others’ misery after having created the misery. If they prove themselves incompetent, we need to ban those folk from the banking industry.

I was not trained in banking or finance. I’m a historian through education and a journalist by profession. I’m writing a book called “How To Stop A Bank Run.” In researching my book, I  spent a few quiet days perusing state banking records at the Michigan Office of Financial and Insurance Services in Lansing. I’ve been studying the annual reports of the banking commissioners to the governors in the late 19th and early 20th centuries before and during the Great Depression.

I think I’ve discovered why the crooked capitalists from Countrywide are allowed to make money off the disaster they spawned: It is the way we do things in this country.

Much of my book deals with the Banking Crisis of 1933, because my story involves a small town banker who, we’re told, defied President Roosevelt’s edict that all banks close in March 1933. She claimed she kept her little bank open for business.

In Michigan, 163 banks failed between January 1, 1930 and February 11, 1933. By early 1933, major banks in Detroit, including one with Henry Ford as a prime investor, were ready to fail. Disaster was approaching. Officials in Washington, financiers in New York and most of all the bankers in Detroit knew a steamroller was coming. Throughout the roaring twenties, on average 600 banks a year had failed in the U.S., but they were mainly small, rural banks. Michigan was different. It was big. It was home to the auto industry, an economic monoculture in serious distress following the Great Crash of 1929.

On Tuesday, February 14, 1933, Gov. William Comstock of Michigan ordered the state’s banks to take a breather. The Michigan banking holiday had a domino-like effect, prompting banks in other states to scream that they couldn’t meet their Michigan depositors’ and hometown depositors’ demands. Governors in most states ordered holidays and finally FDR on March 6, 1933 ordered all banks in the country to close.

Many, it would turn out, were insolvent and would never re-open.

Here’s the parallel with Countrywide today: As bank examiners looked at the books in Michigan and found many moribund banks whose weaknesses they had somehow overlooked in their annual iinspections, someone had to be appointed to sell off what assets were left and try to repay depositors. Often, the assets were real estate with little value the banks had acquired through foreclosures. Often, too, over-investment in mortgages whose values had plunged had placed the banks in their pickle.

You would think someone independent, with no financial interest in the failed institution, would have been appointed to re-organize or liquify the accounts.

Nope. As a rule, the person appointed as conservator was the bank’s cashier — the very person who drove the bank to ruin. This is not an unfair statement. During the Great Depression, a University of Michigan professor of business administration, Robert Rodkey, concluded that bank officers’ incompetence was a prime reason for the banks’ troubles.

I suppose it could be argued that someone like the bank’s cashier would best know the bank’s situation. But according to Prof. Rodkey (“State Bank Failures in Michigan; A Study of the Causes of Michigan State Bank Failures During the Depression and Prior to the Banking Holiday, With Suggested Remedies”), ignorance of sound banking practices on the part of cashiers was a primary source of the trouble.

Why would you appoint incompetents to fix the problem?

It was no doubt the easiest thing to do. They called  it a “banking crisis” because it literally was an emergency, and appointing someone on site who knew the books may have seemed a smart move. However, it was not uncommon for regulators to come from families heavily involved in banking, so maybe the examiners were a bit too sympathetic to the bankers.

For some reason, anyway, it was those very troublesome cashiers who got to “solve” problems they most likely created.

Such a person would be in a wonderful position to muffle or entirely suppress any information about the bank’s situation. Such a person would be in a great position to help find a new cashier in case the insolvent bank were somehow re-organized. Often if not invariably the new cashier was the same pre-crisis cashier and the same person who served as conservator.

How do I know this? In the banking office in Lansing, I found an amazing document. It’s nothing more than the annual report of the banking commissioner to the governor for 1930. But that year was the critical one. That was when all the state’s banks were figuratively lined up at the side of a cliff where many would step off and never climb back. Someone placed alphabetical thumb tabs in this obviously much-used copy of the report. Over the next few years they marked it up, penning or pencilling in the names of conservators and new cashiers and writing down the ultimate fate of each bank.

The book is a treasure — a snapshot of what happened to Michigan’s banks after the banking holidays. It is a revelation. It showed me  what happened to the two banks in my hometown, Lowell, Michigan, where examiners in 1933 found that both Lowell banks were insolvent. 

In real terms, what did the insolvency of these two small-town banks mean? My grandfather, Martin Houseman, ran a meat market and grocery story on Main Street in Lowell not 100 yards from the City State Bank of Lowell. Half a mile east was the Lowell State Bank. I grew up hearing the family story of how my grandfather had to close Houseman’s Grocery Store in 1936 because his customers simply had no money to pay him.

I discussed this with my mother recently, and with other people from Lowell. Nobody had any idea that the two banks had failed. The Lowell Historical Society notes only that the two banks “merged.” That is true, but it neglects to fill in the facts that one bank over a period of years managed to pay depositors 43 cents on the dollar while the other paid 46.8 cents on the dollar.

No wonder my grandfather’s customers had no money. Thanks to their hometown bankers, they lost most of their savings.

Meanwhile, quietly, the two failed banks were consolidated into a single bank with names of officers from the defunct banks appearing on the new bank’s masthead, and the cashier of one of the dead banks, who also served as conservator after that bank was closed, emerging as cashier of the new Lowell State Savings Bank.

There was no downside for the officers of many of Michigan’s Depression banks that failed. Quietly, they were allowed to maintain control.

Just as now there seems no downside for bankers who pushed us into the abyss.

Drop me a line at joelthurtell(at)gmail.com