Panic in the Loop by Vickers Raymond B

Author:Vickers, Raymond B.
Language: eng
Format: epub
ISBN: 9780739166420
Publisher: Lexington Books, a division of Rowman & Littlefield Publishers, Inc.

The comptroller’s office had known for years that the officers and directors of the Bowmanville National Bank were abusing their fiduciary positions. In April 1930, Deputy Comptroller John L. Proctor had criticized management for the “unsatisfactory conditions and policies” of the bank, especially the “unwarranted” and excessive loans granted to John A. Schmidt, a bank director, in violation of federal law. The comptroller’s office had been aware, specifically, of the illegal loans to officers and directors of the bank since at least 1928. By early 1930, the insider loans exceeded 10 percent of all loans and represented nearly the bank’s entire capital. Still, the comptroller’s office failed to force the resignations of the officers or directors, preferring instead to admonish them privately. Regulators also allowed the directors to issue dividends, which depleted the bank’s meager capital and deceived the public about its true condition. Because of the extreme secrecy cloaking the comptroller’s office, the public was unaware of the illegal activities at the bank.42

In addition to the insider abuses, most of the loans of the bank were secured with dubious real estate mortgages. By September 1931, federal examiners were reporting that officers and directors of the bank had made “liberal use of the funds and many of these loans are now found to be of questionable value.” The bank was in such a “highly unsatisfactory” condition that examiners in the field balked at certifying its solvency. They reported to Washington that there was “absolutely no hope for corrective measures from [the] present board of directors.” Frustrated examiners observed, “While this bank occupies a very desirable location and one that should be continued if possible, it remains that the directors as a whole are badly involved.” They concluded that “a continued drain on the deposits is gradually bringing the situation to a point where a suspension will be necessary.”

Yet the comptroller’s office refused to take decisive action to limit depositors’ losses. Deputy Comptroller Proctor merely wrote a letter complaining that the bank held “a menacing aggregate of slow and doubtful assets” totaling significantly more than twice the bank’s capital. Proctor issued a dead-letter warning to the board of directors that the bank was in “a most unsatisfactory condition.” Management flagrantly ignored regulators and did not even bother to require collateral or financial statements from one another as they continued to fund their own pet projects with depositors’ money. Refusing to remove management or close the bank, submissive senior regulators in Washington allowed the plunder to continue unabated while depositors’ losses mounted.43

On June 11, 1932, John P. O’Shaughnessy, vice president and director, and Elmer A. Suckow, cashier, of the Bowmanville National Bank, met in Washington with Deputy Comptroller Proctor to discuss the crisis at the bank. The two promoter-bankers, who had defaulted on their own loans at the bank, told Proctor that the institution could be saved if it received an additional loan from the RFC. And they said they needed further “leniency on the part of [the comptroller’s office] and its representatives in Chicago.

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