In 1974, a large American bank, Franklin National Bank, failed. Over the coming years, many others would follow. While there were some commonalities between Franklin National Bank and the other banks that failed, this bank was peculiar. It was peculiarly badly managed. What is illuminating though is how bad management seemed to self-perpetuate at Franklin. When a large stake in the company changed hands, with consequences for management, the buyer was organized crime linked Michele Sindona.
Franklin National Bank
Franklin National Bank was based on Long Island, New York, a growing suburban market that was a favorable home for the bank. Here, Franklin National Bank faced little competition as New York state banking law effectively kept potential competitors in New York City from expanding outside it. Amidst tremendous development around it, the bank’s assets grew from $78 million to over $1 billion between 1950 and 1962.
Having achieved this scale, Franklin National Bank eventually expanded into New York City in the late 1960s, once restrictions on banks’ geographic footprint were removed. Through this period, the bank was also innovative. It was the first with a drive-up teller window and the first to issue a credit card. It had become the 20th largest American bank by 1974 with $4.5 billion in assets. However, Franklin was not particularly profitable; its earnings consistently declined between 1970 and 1974. Already by 1971, the bank had earnings of 48 cents per $100 in assets, a level a bit less than half of the usual level in American banking at that time. In the following two years, while the average industry return-on-assets fell, the already-low return-on-assets of Franklin National Bank fell by even more.
The bank had been troubled for some time. Aggressive lending in its years of growth meant Franklin’s loan losses could be three to five times the norm for banks in some years. Then, as interest rates rose starting in the late 1960s, the marginal cost of raising new deposits or money market funds proved much higher than its average cost of funds. Yet, the bank was happy to lend out money so long as the interest rate was higher than its average cost of funds. This meant that the bank’s growth was difficult to sustain profitably because it was borrowing new funds at too expensive a rate relative to the yield on its assets. Franklin’s operating expenses were also too high, much higher than normal.
Franklin National Bank’s share price roughly halved over the years 1970 to 1973, again at odds with the performance of banks generally. So, in 1972, Laurence A. Tisch, head of Loews Corporation, was interested in selling his approximately 20% stake in the bank. The interested buyer was a murky Italian financier, Michele Sindona.
Michele Sindona was born in Sicily in 1920. He studied law and became a tax attorney and accountant. Sindona worked his way up the ranks of Societa Generale Immobiliare, an Italian real estate and construction firm which at one time owned Washington D.C.’s Watergate complex. He also acquired a small Italian construction firm of his own and became a financial adviser to the Vatican; Pope Paul VI sought his advice on the Vatican’s investment portfolio.
By some means, Sindona amassed a fortune of as much as $450 million invested in firms in banking and other industries. This was pulled off with some suspicion. Sindona had ties to organized crime and a secret society, a supposed Masonic lodge named Propaganda Due, the same organization to which the later Prime Minister Silvio Berlusconi infamously belonged, and which the Italian Parliament identified as a subversive organization.
Sindona would illegally transfer money from banks he controlled in Italy to acquire his interest in Franklin National Bank. By this means he bought Tisch’s 20% of the bank’s shares in 1972 for $40 million through a Liechtenstein-based holding company, Fasco A.G. In all, Sindona would later be accused of illegally funneling up to $225 million from Italian banks he controlled to banks he bought elsewhere. While a very imperfect leader of the bank himself, Franklin National Bank’s former chairman Arthur T. Roth protested the purchase of shares by Sindona all the way to New York state banking authorities.
For his part, Sindona admitted to buying the shares with little preceding research and may not have known the extent of Franklin’s troubles. Nonetheless, Sindona thought he could turn the bank around by increasing the scale of its speculation in foreign currency markets, a strategy pursued by his Italian banks. To this end, Sindona created a new international division. The bank also increased its leverage and lending to maximize income, much of this at fixed interest rates that eventually looked unappealing when rates rose in 1973.
In the years of deteriorating earnings, Franklin National Bank had to turn to speculating in foreign exchange markets to make a profit. The bank was doing just a hair better than breaking even on its normal operations. These speculations and questionable lending grew to larger scale after Sindona bought into the company. But there were problems. The bank was funding fixed rate loans with far too expensive floating rate capital borrowed in the money markets when interest rates were rising.
While the situation was quickly deteriorating, Sindona tried to merge the bank with Talcott National, a factoring and finance company, which he also controlled and which was profitable. The goal was to put Franklin’s large net tax assets, essentially the benefits accruing from the tax-advantaged status of its municipal bond investments, to use in a company with positive taxable income. Unfortunately, the Federal Reserve Board rejected the acquisition.
Then, in May 1974, the bank announced large losses in foreign exchange speculation. Some $46 million was lost in these trades in the first six months of 1974 alone. The bank falsely claimed it was insured against a substantial part of this though. Combined with other items, the bank’s deficit in these months came to $83 million total. Sindona experienced his own losses, separate from those of Franklin National Bank, and stole $30 million from the bank to cover these other trading losses.
Further, some $4 million in prior gains from foreign exchange trading turned out to be fabricated. These profits arose from unusual transactions with Switzerland-based Amincor Bank which Sindona had had previous dealings with and which counted a board member in common with Franklin National Bank. Franklin National Bank suspended its dividend payments in May 1974 and trading in its shares was suspended.
This prompted larger withdrawals from depositors. There was a run on the bank which brought deposits from $2.99 billion in May to $1.37 billion near the end of September 1974. It was estimated that the bank needed between $85 million and $150 million in new equity capital to survive. Sindona did manage to receive a $100 million loan from the Italian government-controlled Banco di Roma but this was to be used towards saving the Italian banks Sindona controlled.
So, Franklin National Bank was declared insolvent on October 8, 1974. Sindona’s European holdings, such as Banca Privata Finanziaria in Italy and others in West Germany and Switzerland, were publicly recognized as bankrupt around the same time. Even his holy client, the Vatican, took some investment losses but claimed these were much less than the $100 million being reported in the press.
Resolution and Investigation
Rather surprisingly perhaps, the Federal Reserve lent Franklin $1.75 billion to prevent a disorderly bankruptcy. Around the same time through, the Federal Deposit Insurance Corporation had been organizing a sale of the bank which was sold for $125 million to European American Bank immediately when the insolvency was announced. European American Bank took on $1.7 billion of liabilities, principally what was left of Franklin’s deposits, and $1.58 billion in loans and securities.
This was pulled off with no losses to depositors but Franklin remained the largest American bank failure, at least in nominal terms, for over a decade. It was over 50% larger than the largest bank failure up to then. However, it preceded a spate of bank failures in 1975-76. By the end of 1976, five of the ten largest bank failures in American history had occurred in just the prior two years and nine of the largest ten in just the prior six years.
In connection with the failure, the Securities and Exchange Commission filed fraud charges in October 1974 which eventually saw several executives of the bank charged with fraud. Across the Atlantic, Giorgio Ambrosoli, an Italian lawyer winding down one of Sindona’s Italian banks, Banca Privata Italiana, was assassinated in Milan after speaking to American officials about Sindona’s speculations. Ambrosoli had prepared a 2,000-page report outlining Sindona’s financial activities. Sindona himself was convicted in the United States in 1980, extradited to Italy in 1984, charged for crimes there, and died himself shortly after his sentencing in 1986.
The signs of trouble were not merely covered up by growth, the trouble was to some extent caused by the growth of Franklin National Bank. Capital was sourced at too high a cost and lent out for too long at rates that proved too low. However, the astounding contribution to the bank’s failure was poor management. Bad management at the bank was self-perpetuating. Changes in shareholding did not change this as Michele Sindona proved not to be a savior but yet another source of problems. Further illustrating the point, a poorly managed bank attracts dubious characters, like Franklin’s currency trader Donald Emrich who had earlier in his career been fired from two other banks for improprieties. A well-managed bank would likely have avoided multiplying its problems in this way.
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Read about Herstatt Bank, which around the same time as Franklin national bank, faced its own large foreign currency losses. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
1. Allan, John H. Franklin Found Insolvent by U.S. And Taken Over, The New York Times, 9 Oct. 1974.
2. Gordon, John Steele. “The Italian Job: Lessons from the Death of the Franklin National Bank.” ABA Banking Journal, 2022, p. 42.
3. Rose, Sanford. “What Really Went Wrong at Franklin National.” Fortune, Oct. 1974.
4. Saxon, Wolfgang. Michele Sindona, Jailed Italian Financier, Dies of Cyanide Poisoning At 65; At the Center of Scandals, The New York Times, 23 Mar. 1986.
5. Sinkey, Joseph F. “Identifying large problem/failed banks: The case of Franklin National Bank of New York.” The Journal of Financial and Quantitative Analysis, vol. 12, no. 5, Dec. 1977, pp. 779–800.