Stephen Pizzo & Mary Fricker's 1992 Written Testimony To Congress

416 WRITTEN TESTIMONY OF STEPHEN P. PIZZO AND MARY FRICKER CO-Author INSIDE JOB: The Looting of America's Savings and Loans Keeping

bank

deregulation

from

becoming

a

replay

of

thrift

deregulation and the carnage that followed is one of the most dangerous challenges facing Congress.

Echoing, almost to a word,

the pleas of thrift industry lobbyists 10 years ago, bankers and their lobbyists are pushing Congress hard for bank deregulation:

In 1981

savings

and loans were

clamoring

for

deregulation

because, they said, theY couldn't make a profit making home loans. They needAd to be able to diversify,

to get into ventures that

offered the promise of a higher return.

Competition from money

market funds, they said, was killing them. (Note: Many healthy S&Ls opposed that deregulation.).

-- Now, almost exactly a decade later the nation's big banks are Clamoring for their own deregulation because, they too claim, they can't make a profit making commercial and consumer loans. They say they need to diversify, to get into ventures that offer the promise of higher returns.

Competition from investment banks,

financial

conglomerates and international banks, they say, is killing them. (Note:

Manr

independent

community

banks

are

opposing

this

deregulation. )

Commercial Banking vs. Investment Banking:

High on bankers'

list of wants is the dismantling of the Glass­

417 Steagall Act,

which was passed in 1933 because many of the bank

failures fOllowing the market crash in 1929 were caused by risky transactions

conducted

between

banks

and

their

securities

affiliates. The Glass-Steagall Act removed banks from Wall Street and, to entice a gun shy public back to banks, it created federal deposit insurance.

(Bankers today want only one of these Glass­

Steagall provisions r.etained .These WOUld-be speCUlators still want deposit insurance. Free enterprise and level playing fields is one thing, but removing their federally-backed insurance safety net is qui te another.)

If Congress again opens up banking to Wall Street speCUlation, as it opened Up S&Ls and banks to real estate speCUlation, regulators will quickly lose control over the complex series of events that a pervasive marketplace will immediately set in motion.

Insider

abuse,

between

self-deal.ing,

and beck scratching relationships

institutions will run rampant.

While speCUlators play en

impor~ant

role in a free market economy,

their instincts and perspectives are exactly the opposite of those we want in our bankers.

Wall Street investment bankers are to

commercial bankers what fighter pilots are to airline pilots. One takes risks, the other avoids them. Investment bankers put their investors'

money at total risk.

On this high wire,

there is no

collateral and no federal insurance net below. An unlUCky investor can take a plunge - not only to the floor but right through it, in some cases losing far more than just the money he invested. This is the world that commercial bankers want to re-enter.

4

418 And the Bush administration wants to accommodate this wish, hoping the repeal of the Glass-steagall Act will attract new money to the banking industry,

SO

the government won't have to recapitalize

failing banks itself.

Treasury Secretary Nicholas Brady

is almost giddy over the prospect of merging banks and Wall Street. It makes

sense,

he

says,

because investment

banking

shares

a

"natural synergy" with commercial banking.

Sound familiar? savings

and

The same argument was

loans

wanted

to

get

used a

into

the

decade

ago when

construction

and

development business. Developers needed loans - thrifts made loans. Bingo. Natural synergy. RegUlations prohibiting such joint ventures were abolished,

and sure enough private capital poured into the

thrift industry as developers bought thrifts and thrifts acquired their own construction companies.

"My God! This is what I've been waiting for all my life!" gasped the owner of (now defunct) San Marino Savings and Loan.

Almost immediately the predictable happened. The historical arms­ length relationship that had existed between lender and borrower vanished, and with it went due diligence, common sense and, in too many cases, ethics. Thanks

~o

taxpayer

$300

is

stuck

with

facilitating that bit of synergy the billion

dollars

worth

of

repossessed real estate from failed thrifts. If we sold $1 million worth of this stuff a day, it would take 800 years to sell it all.

Deregulated banks can look forward to a similar script, with some of the same bad actors.

u.S.

Attorney Joe Cage in Shreveport,

5

419

Louisiana, told us, "Some of the same people who took down savings and loans,

are out in the 'securities business and banking now,

already in place. And they're just waiting for Congress to abolish the Glass-steagall Act. If that happens I'm afraid they'll take the banks just like they did the savings and loans."

Bankers want a piece of the insurance business as well. This idea was also tried by the S&Ls and proved just another way to loot the system. Many of the old S&L crowd - Gene Phillips, Charles Keating, Jr., Herman Beebe, Mike Milken - also had their hooks in insurance companies that have since failed: Pacific Standard Life, Executive Life, AMI Life, and a daisy chain of Texas insurance companies, to mention a few. An associate of a major S&L defaulter testified in court recently ... "Wayne told me that the S&Ls were tapped out and that we should find a new source for money. He told me we should consider getting into the insurance business."

Treasury wants corporate America to be able to own these banking­ securities-insurance conglomerates. But the benefits of corporate ownershi~

and securities and insurance underwriting,would accrue

primarily to (1) major companies that would like to have a bank (with its federally insured deposits) in their stables and to (2) bankers who have proven themselves so inept that they must have a huge infusion of private capital - from a new corporate owner - or a chance to "double down" on Wall Street in a desperate attempt to win big.

A

new breed of banker will use deposits to inflats the

value of stock, extortion to sell insurance and investor's capital to benefit the bank or the bank's corporate ownership. Forget for a moment what bankers say they need and instead ask yourself if

6

420

their customers, and your voters - taxpayers - need any of

this~

The big "money center" bankers argue that without deregulation American banks will not be able to compete with European banks after 1992,

when the European Common Market will combine in a

universal banking system with broad banking and securities powers. They also complain that they can't compete with the Japanese banks that

are

Am~rican

flooding

U. S.

markets.

They

pointedly note

that

no

bank ranks among the world's 10 largest banks.

So what? While European and Japanese banks appear more fragile every day, American regional and community banks grow stronger. Could that be why Japanese banks - widely believed to be under severe stress in spite of their happy-talk annual reports - are tapping into our regional markets? Why should Congress move in the direction of weakness instead of strength? If American mega-banks want to compete without restriction in the international arena, fine.

Deregulate them,

wish them well,

withdraw their deposit

insurance and let them have at it.

These bankers say they want a level playing field, so give it to them

hal t

the

50-year-old

tradition of

exempting

foreign

deposits from deposit insurance premiums. It's interesting that, though bankers are complaining about all the so-called "outdated" regUlations which are impairing their profitability, somehow

forgotten

this

particular

one.

How

they have

convenient

this

"outdated" regUlation is for a bank like Bankers Trust - recently approved for securities underwriting by the Fsderal Reserve Board ­

7

421

whiCh has about twice as many foreign as domestic deposits.

Many

smaller

banks,

primarily

represented

Bankers Association of America, banks' alarm

deregulation agenda is

that

they

are

are

by

the

Independent

bitterly fighting the

big

and their reward for sounding the

seen

on

Capitol

Hill

as

"whiners."

Interesting. The healthy regional banks are whiners and the nearly insolvent tumor-like, mega-banks - bearing about them a legion of past mistakes like the chains around Ebenezzer' s

dead business

partner's ghost - are welcomed by Congress with open ears. It's most

curious,

and if this

legislation passes,

and results

in

encroaching

on

another disaster, voters will want to know why.

Some

banks

worry

that

other

industries

are

traditional banking services. American Express, for example, offers through

its

subsidiaries:

services,

securities,

planning,

investment

depository

credit banking,

cards,

services, mutual

merchant

real

funds,

banking.

estate

financial

international

banking, international currency transactions, insurance and data processing.

What

they do

not

offer

are

insured

deposits

and

community lending.

We favor letting banks become financial service centers in their communities - selling insurance, stocks, bonds and mutual funds, offering financial planning services and in general meeting the financial needs of their customers. But, to do this. banks do not need the inevitable conflicts of interest inherent in corporate ownerShip

or

the

enormous

insurance

underwriting.

What

risks

inherent

in

securities

and

advantages occur to the American

8

422

public by allowing banks into these fields? None.

Firewalls

Bankers

assure

their

critics

that

the

potential

dangers

of

corporate ownership and securities and insurance underwriting are moot issues because bankers will agree to impenetrable firewalls between

their

affiliates. example,

If

corporate, the

f~rewalls

deposi ts -

banking,

securities will

securities

company gets

protect

the

they claim. Apparently,

bank's

and

into

insurance

trouble,

federally

for

insured

through S0me magicai osmosis

that only works one way, Americans are asked to believe that banks w.ill enjoy the benefits of having securities affiliates without ever being affected by their problems.

But even as pro-deregulation £orces pay lip service to firewalls, they attack them. Federal Reserve Board chairman Alan Greenspan, who

has

been

leading

the

charge

toward

bank

deregulation

evidently undaunted by his doomed infatuation back in 1985 with S&L deregUlation and Charles Keating,

Jr. - cut to the heart of the

firewalls matter when he admitted that firewalls

"undercut the

reason for granting any additional powers to banking organizaticns in the first place."

And this time Greenspan might just be right. Firewalls proved quite unreliable during the S&L debacle. In the 1980s, when a thrift's risky investments started going sour,

regulatory firewalls were

easily breached. For example, thrift executives were forbidden by regulations

from

making

loans

to

9

themselves,

their

families,

423 business associates or interests - a firewall. To get around this firewall, thrift management simply found like-minded management at other thrifts and each made loans to one another. So much for fire walls.

Our expensive S&L lessons should have taught Congress that if banks are allowed back into the securities business something like this would almost certainly occur the next time Wall Street crashes:

A bank's

securities

clients

would

suddenly be

strapped

for

hundreds of millions of dollars to cover margin calls as programmed trading plunged the market to new depths.

- The bank's securities affiliate itself would be trying to support stocks it had underwritten and would need a big cash infusion fast.

So what do we have?

We have

a

group of

frantic,

cash-starved

players who own a bank but can't use its cash to bail themselves out of trouble. In this scenario it wouldn't take these desperate bankers

long to figure out that a

like-minded -

and similarly

strapped - bank holding company was just a phone call away. They could quickly arrange millions in loans to each other and to each other's clients just like thrift officers did. In the flash of a wire transfer and a dollars,

programmed trade,

maybe billions,

hundreds of millions of

would go right down another federally­

insured rat hole. They'd worry about dealing with irate regulators later.

Though these scenarios are simplified versions of what would no

10

424

doubt be almost incomprebensively complex transactions - to hide them from regulators - ths fundamental point is this: A business in deep trouble, seeing a chance to make a killing, will use all the assets at its disposal (particularly those belonging to someone else),

evsn

federally

insured ones,

and will

worry

about

the

consequences later.

Banking

consultant

firewalls

and

firewalls

work

has in

David

Silver

concluded, normal

has

studied

"History

times,

even

the

indicates strong

question that,

firewalls

of

while are

inadequate when they are needed most -- in times of fire."

Walter Wriston, former chairman of Citicorp, candidly admitted the futility of firewalls when he said,

"Lawyers can say you have

separation, but the marketplace is persuasive and it would not see it that way."

An historical look at one bank, Continental Illinois Bank & Trust CO. of Chicago, says reams about bank deregulation. In 1933 it was the first major bank in the country to be bailed out by the federal government as a result of the Great Depression. In 1984 the federal government bailed it out again, to the tune of S4.5 billion. Both times, according to FDIC chairman Irvine Sprague, the problems were the

same:

"Concentration

of

assets,

purSUit of growth at any cost

out-of-territory

lending,

go for the fast buck; a bigger

bank means more compensation for its management."

Prior to the

second bailout, Continental had hooked up with the flim-flam crowd at Penn Square Bank in Oklahoma City,

where wild speculation,

insider abuse and fraud sucked the life from both Penn Squars and

11

425

COntinental.

Did those two lessons teach Continental anything about prudence and risk? Apparently not. In 1967 when the stock market crashed Continental (still owned primarily by the federal government) was caught

with

its

options

down

which

gave

Continental

an

opportunity to show Americans how firewalls don't work. It made an emergency $385 million loan to its options trading subsidiary in spite

of

a

firewall

(regulation)

that

prohibited

such

a

transaction. Reportedly, the bank was never censured by regulators because they agreed the loan was critical to Continental's survival -

but they did require that Continental route the money to its

holding company,

to avoid a direct violation of the regulation

against a bank making a loan to its own securities affiliate.

None of these concerns has deterred the Bush Administration and many on Capitol Hill from supporting a two-tiered holding company structure

that

deregulation.

is In

so

ludicrous

these

it must

two-tisred

New

be

a

parody

World

on

bank

conglomerates,

commercial and industrial companies would own a Diversified Holding Company that: would own a string of companies estate,

insurance

and

various

commercial

(engaged in real enterprises).

The

Diversified Holding COmpany would also own a Financial services Holding COmpany that would own a bank, a securities affiliate and . other subsidiaries.

The Financial Services Holding COmpany and its subsidiaries would be "absolutely prohibited" from lending "upstream" to its parent Diversified Holding Company and subsidiaries, yet according to one

12

426

summary the structure "would permit non-banking firms to invest their

significant

resources

in

the

capital

deficient

banking

industry." Why, one might ask, would they want to do that, if they can't use the bank f S

money? Maybe as a selfless act of pUblic

service?

How examiners might detect lending within that maze has not been explained. control

The~e's

such

a

not a bank examiner in this country who could

corporate

banking

octopus.

If

S&L

couldn't stop the looting at savings and loans -

regulators

which are by

comparison a fairly straight forward corporate structure - what hope is there that bank regulators will be able to monitor a two­ tiered hOlding

company

structure with multiple

affiliates

and

subsidiaries?

In

fact,

banking's

high

flyers

will

be

deceptions by an examination system that -

encouraged

in

their

according to George

Champion, retired chairman of Chase Manhattan Bank, and Paul Craig Roberts, a former assistant secretary of ·the Treasury, writing in 1989 -

is incompetent,

rife with conflict of interest

and has

broken down. The General Accounting Office said in March that in 37 out of the 72 cases it studied, regulators weren't aggressive enough in dealing with troublesome banks. In candid moments bankers themselves will tell you that lax accounting guidelines permit troubled banks to distort the truth and hide their problems until another day.

It is this antiquated and inadequate system Congress that is about to

ask

to monitor

banks

involved in

13

secur.J.ties

and

insurance

427

underwri ting.

RegUlators will have

to unravel

complex bank hOlding company structures, national and international activities,

the dealings of

foreign

transactions,

sophisticated hedges and

straddles and options and swaps, and thousands of daily electronic transfers among affiliates and SUbsidiaries and brokers.

At the same time the current legislation pays only lip service to a

strong

regulatory

structure.

It

does

not

outline

how

the

regulatory structure will be beefed up, or where the money will come

from

to

attract

the

thousands

of

additional

first-rate

examiners that will be needed. If specific provisions for funding this examination force are not included in any bank deregulation legiSlation, the legiSlation should be dropped like a hot potato. If Congress tries to enact it later, the same bankers who are now purring like kittens, to get what they want, will become tigers who will

attack

any

plan

that

increases

their

deposit

insurance

premiums or asks them to contribute to the regulatory kitty.

Interstate Branching

Bankers pleas for interstate branching should also be ignored. It isn't needed - banks can already loan everywhere and draw deposits from

everywhere

(and both powers have

been

a

maj or source of

problems for banks). Allowing them to have branches everywhere will only encourage the creation of more mega-banks as the tumor-banks gobble

up,

PackMan style,

heal thy

community

banks

across

the

country to feed their lust for a nationwide branching structure.

The net result of interstate branching will be fewer banks and the

14

J~

~_~_--==-----------

428

consolidation of the industry into a group of mega-banks, each of which will then be perceived by regulators as being decidedly Too 0­

Big To

F~il.

Instead ofAS mall percentage of the industry falling

into that questionable category, nearly the entire industry will fallon the taxpayer's shoulders.

Another unpleasant fallout of interstate banking will be increased unemployment.

The reason is simple.

Small business supplies and

creates the majority of jobs in America. not the big corporations whiCh.

in fact,

move

jobs offshore.

Once America's cOJIUnuni ty

banking structure has been absorbed by the big banks. which in turn have been absorbed by Fortune 500 corporations,

the commercial

lending patterns which made America the world capital of small business and entrepreneurship will change course. Banks steeped in the

corporate culture will

not understand

the

needs

of

small

business and will prefer channeling their loans into more familiar corporate ventures. Slowly small business will be choked off as operating loans, inventory loans and start-up capital dry up. In the end Congress will be massive

government

loan

faced with only one guarantee

program

for

alternative small

-

a

business

finance - a government program which, we can all rest assured, will be mismanaged and very expensive.

Banks' demands for dramatic changes come at a time when banks are weaker than they have been since the Great Depression. Almost 1,000 banks have failed in the last four years, more than failed in the first

50

years

after

Glass-Steagall

was

passed.

Restrictive

regulations did not cause these problems, as the big banks would have Congress believe. Instead,

in the last five years American

15

429

bankers have discovered about S75 billion in bad loans on their books. With judgment that faulty,

it's terrifying to think what

they could have done on Wall Street. Never ones to be contrite about losing other people's money,

however,

the bankers explain

that in essence the devil made them do it. They say that it was those "old-fashioned federal regUlations" barring banks from other, potentially greener pastures that forced them into those bad deals.

Others disagree.

Irvine Sprague,

FDIC chairman until 1986,

said

most bank failures are caused by one thing - greed. The Comptroller of the

Currency said bad management

is

to blame.

The General

Accounting Office found insider abuse at 64 percent of the bank failures it studied. The FDIC reported that criminal misconduct by insiders was a major contributing factor in 45 percent of recent bank failures.,

Swindlers have always been attracted to banks because, as legendary bank robber Willie Sutton explained, "that's where the money is." During our eight-year stUdy of savings and loans, the biggest S&L rogues we identified had cut their teeth by looting banks first. An FBI agent in Texas told us, "The only difference (between banks and thrifts in Texas) is that the FDIC still has its head in the sand on banks. When I looked at the banks that closed between 1984 and 1987, in many of them 1 found people 1 knew, the same S&L crowd I'm investigating from the failed thrifts there."

High flyers like these make it a point to know where the money is and to get at it before regulators know its ,gone. And they stand today straining at the starting gate, with their eyes on Congress

16

430

and the banks. A man who arranges mezzanine financing for leveraged buyouts told us not long ago,

"I think I'll go buy a bank. They

only cost $3 million." When an LBO player thinks a stodgy old bank is suddenly attractive, should congress begin to worry?

As for bankers who find themselves locked in this fatal attraction, they should turn for advice to some of their former cousins who pushed so hard for savings and loan deregulation. thrift operators

mi~ht

These former

tell bankers to be careful what they ask for

- they might just get it.

What should congress do?

The lesson of the S&L crisis is that deregulation of the financial services industry should be treated like brain surgery - a little bit goes a long way. Cut away too much and the patient you were trying to help will wake up acting in strange and self destructive ways.

Some banks are sick and they need congressional medicine. But not the narcotics they are begging for. What they need is:

Risk-based deposit premiums. - Insurance premiums on foreign deposits. - No insurance coverage for banks that underwrite securities and insurance or are owned by industrial corporations. - Increased insurance premiums for banks that involve themselves in the risky worlds of foreign exchange contracts,

17

interest-rate

431 swap contracts and the like. - Early closure and no forbearance regardless of asset size. Capital

standards

as

negotiated

through

the

Bank

for

bonds

and

International Settlements in 19BB. Allowing

banks

to

sell

(not

underwrite)

stocks,

insurance and offer a broad range of financial services. - Rebuilding the Bank Insurance Fund immediately, so no forbearance

is necessary, even if taxpayers have to kick into the pot.

- Downsizing banks until they all have plenty of capital (Bank of

~erica

showed how it's done.)

- Hiring enough examiners to examine every bank once a year.

- Making bank examination reports public. (If $500 billion in bad

news in the S&L industry didn't start a run on deposits, a negative

bank examination sure won't.)

Requiring detailed,

a

bank' s

quarterly

and annual

reports

to be more

like the 10Ks required by the Securities and Exchange

Commission. - Requiring foreign banks to operate under U.S. bank regulations and requiring U.S. banks to conduct their foreign operations in conformance with U.S. regulatory standards (unless of course they wish to relinquish their deposit insurance coverage.) Limiting, but not eliminating, the use of brokered deposits. Legislating

a

stop

to the

Federal ReseirVe Board's

de

facto

deregulation of banks.

But the bottom line is really this: Most banks are healthy. They know what they're doing. Leave them alone. Don't be spooked into a big 'operation when some delicate surgery will do.

IB

432

It would be nice to think that Congress will apply the lessons of S&L deregulation to bank deregulation, but the record says Congress doesn't learn from history.-Perdinand Pecora's "Wall street Under Oath," for example, which is the story of_ congressional hearings held in 1933 and 1934 on the collapse of Wall Street and the banking industry, reads as though it were written today. Even the players are the same: J.P. Morgan and Company, Chase Bankers

Trust

Company,

Dillon,

Read

and

Natio~al

Company,

Bank,

Drexel

and

Company, Lehman Brothers, Kuhn Loeb and Company (Lehman and Kuhn Loeb are now part of Sherson/Lehman).

More recently, in 1976 the House Banking Committee held hearings in Texas to investigate bank failures, cOD1Illittee,

and the chairman of the

Fernand St Germain, said at those hearings,

"We have

been repeatedly told that most major bank failures have been caused by criminal conduct."

Committee member Henry Gonzalez said,

"Inadequate regUlation is

what has made possible the kind of outlandish sordid conduct we have discovered."

Yet

six years

legislation

later St Germain

to

deregUlation

sponsored the Garn-St

savings

and

loans,

as

Germain

though

his

hearings in Texas had never taken place. (Gonzalez voted against it.) Thus unleashed, S&Ls during the unregulated 19BOs united with securi ties firms

and insurance companies,

and the resul ts were

thoroughly predictable. Drexel Burnham Lambert, Lehman Brothers, Lincoln Savings, Columbia ::;avings, San Jacinto Savings, Pacific Standard Life Insurance, Executive Life Insurance, AMI Insurance,

19

433

Vernon

Savings

for

a

brief

moment

in

time

they

enjoyed

a

deregulated relationship. Now they no longer exist.

Is that what Americans want for their banks?

**** In addition to the attached material, we refer readers of this congressional record to two important books:

"Bailout" by Irvine

Sprague (FDIC chairman until 1986), pUblished by Basic Books, Inc., in 1986, and "Wall Street Under Oath" by Ferdinand Pecora (Counsel to the United states Senate Committee on Banking and Currency, 1933-1934), published by Augustus M. Kelley in 1939 and reprinted in 1968. Because both books are out of print and may be difficult to acquire, we are attaching important passages:

From Irvine Sprague in "Bailout:"

"The list of super banks is sure to grow as interstate banking, an inevitable fact of the future,

will just as inevitably produce

combinations that will dwarf the present giants of the industry ... Major banks will continue to be treated differently than small ones. I cannot believe that any future FDIC board would allow the cOllapse of one of the giants of American banking."

**** "The major banks of the nation today range virtually unchecked throughout

the

world,

gathering

20

deposits,

lending

money

with

434

abandon, and piling up off-book liabilities - some risky and few capitalized."

**** "The record of repeat behavior points to the greed factor that remains the major - often the only - reason for a bank's failure. Banks fail in the vast majority of cases because their managements seek growth at all cost, reach for profits without due regard to risk,

give privileged treatment to insiders,

future

course

of

interest

rates.

Some

or gamble

simply

on the

have

dishonest

Oath"

(written,

management that loots the bank."

**** From

Ferdinand

Pecora

in

"Wall

Street

Under

remember, in 1939):

"Under the surface of the governmental regulation of the securities market,

the

same forces

that produced the

riotous

speculative

excesses of the 'wild bull market' of 1929 still give evidences of their eXistence and influence. Though repressed for the present, it cannot be doubted that, given a suitable opportunity, they would spring back into pernicious activity.

"Frequently we are told that this regulation has been throttling the country's prosperity."

****

21

· 435

"The public

is sometimes

forgetful.

As

its memory of the

unhappy m?rket collapse of 1929 becomes blurred, it may lend at least

one

ear

to

the

persuasive

voices

of

The

Street

subtly

pleading for a return to the 'good old times.' Forgotten, perhaps, by some are the shattering revelations of the Senate Committee's investigation; forgotten the practices and ethics that The Street followed and defenqed when its own sway was undisputed in those good old days.

"After five short years, we may now need to be reminded what Wall Street was like before Uncle Sam stationed a

policeman at its

corner, lest, in time to come, some attempt be made to abolish that post.

II

**** "National City Bank grew to be not merely a bank in the old­ fashioned sense, but essentially a factory for the manufacture of stocks and bonds, a wholesaler

a~d

retailer for their sale, and a

stock speCUlator and gambler participating in some of the most notorious pools of the 'wild bull market' of 1929.

"But how was this possible? For surely, the layman will protest, the law does not permit a bank to engage in such activities. A bank,

especially

a

national

bank,

is,

or

is

supposed to

be,

sacrosanct, its power strictlY limited by Act of Congress, and its activities carefully and regularly examined by skilled examiners.

22

436

"The layman is right. But he has reckoned without the ingenuity of the

legal

technicians

and

the

complaisance

of

governmental

authorities toward powerful financial and business groups during the lamented pre-New Deal era. With their superior advantages, a method was worked out whereby a bank could assume a veritable dual personality. In one aspect - the aspect which it presented to the bank

examiner

and

as to which it was

subj ect to governmental

control - it observed strictly all the proprieties of a properly managed bank.

In the other aspect,

it knew no regUlation and no

limitations: it COUld, and did, engage in the most diverse, risky and unbanklike operations.

"The technical instrument which enabled the bank to carry on in this

Dr.

Jekyll-Mr.

Hyde

fashion

was

known

as

the

'banking

affiliate. '"

.*** "Altogether,

during

the

years

1928-1932,

deducting heavy losses of .about

inclusive,

and

after

$4 million for the depression

years, 1931 and 1932, Albert Wiggin, the head of Chase National Bank,

and his family corporations still showed a net income for

the whole period of over $8.6 million. Not many Americans could look back, in 1933, upon so satisfactory a balance sheet.

"How were these millions made? ... Mr. Wiggin was able to make an income many times in excess of his ($175,000) salary, in large part by using his unique opportunities as the trusted and all-powerful head of a great bank, for his personal advantage.

23

437 "To assist him in his private operations, Mr. Wiggins formed no less than six corporations,

all of them owned and controlled by

himself or members of his immediate family.

Three of these were

Canadian corporations organized in the hope that they might prove useful in reducing income taxes . . . •

"Mr. \'1i.ggin' s private operations in Chase Bank stock for his own benefit, with

moreover,

extensive

and

wer.e intimately intertwined and'synchronized intricate

manipUlations

of

the

same

stock

undertaken by the bank's own affiliates. The full story of these involved relationships is an incredible one."

As

will

be

the

relationships

which

legislation now being considered.

24

inevitably

grow

from

the