by: David Reavill
There is a process, a set of circumstances that are so eerily similar that I’ve come to call this the work of a demon. It has that same malevolence and reeks the same harm as the demonic. Perhaps I’ve overstated my case; I’ll let you decide.
When I realized that three large banks, First Republic, Silvergate, and Signature, were all failing, I knew our demon had returned. This demon has slept for over 30 years, only to return today. The last time I saw his chaos and destruction was in 1988. I was an institutional broker; most of my clients were the regional banks and savings and loans on the West Coast.
One of my favorite customers was Gibraltar Savings and Loan, the century-old, conservative institution that was a favorite among the well-off citizens of Pasadena and Beverly Hills. This S&L was as conservatively managed as its customers. The risk was not something that Gibraltar would even consider; they aimed to provide a reasonable return while avoiding even the possibility of loss.
So, when the head of Gibraltar’s Brokerage called and suggested that we go out to our usual monthly lunch, I thought nothing of it. Gibraltar was always one of my favorite events; as they were such a well-run bank, I knew it would be a relaxing interlude. How wrong I was.
At lunch, Tom suggested that we begin with a glass of wine, and instantly I knew something was up. We rarely drank at lunch. As lunch progressed, Tom explained that they were going out of business, not just the brokerage division, but the entire Bank.
His words struck like a bolt of lightning. How could this be? A Senior Executive at one of the nation’s best-run, most conservatively managed S&Ls was telling me that they were failing. It took me a moment to focus as Tom described how the Bank’s capital position was upside down. Simply put, the Bank’s capital account, which invested primarily in US Treasuries (sound familiar), was declining each time interest rates were raised. Treasuries, you’ll recall, decline in value as interest rates rise. And like today, the Federal Reserve was in a tightening phase. Looking back then, the Fed raised rates by only 400 basis points, from 5.85% to 9.85%. But that was enough to push Gibralter’s capital account under and, with it, the entire Bank.
Tom and I didn’t order lunch that day, just another glass of wine, as he continued to outline what he saw would happen to his division and the Bank at large. It would be nearly a year and a half before the Bank would cease operation. And that decision was made not by bank management but by the FSLIC (the Federal Savings and Loan Insurance Corporation), which placed the Bank in receivership even though the Bank had roughly $300 million in capital remaining. The FSLIC declared that the Bank’s capital “trends” were such that it needed to be shut down immediately. Several shareholder lawsuits ensued, but unfortunately, shareholders lost in court.
Shareholders lost, employees lost, and savers and investors lost. And as we sat that day in far-off Southern California, we realized our fate lies in Washington. Principally with a group of bureaucrats, who didn’t know Gibraltar, and likely could not relate to their situation.
Today that history repeats, and the demon returns. After the failure of Gibraltar Savings and Loan, several major S&Ls also failed, leading up to the most significant bank failure in history, Washington Mutual, WaMu. Nearly a decade after Gibralter’s loss, WaMu was a victim of the same combination of rising interest rates and increased regulation. WaMu was another notch on the regulator’s belt, and as it turns out, an essential building block on the colossus that has become JP Morgan Chase, the nation’s largest Bank.
We were much more naive when Tom and I sat down to lunch. We assumed that a well-run bank would survive almost any storm coming our way. Little did we know that a faraway demon plays the tune, and we must dance to his music. That demon hides behind the many layers of a faceless, nameless bureaucracy.