An open letter and look at past history:

Mr. Hod Kosman
President and CEO
Platte Valley Bank
Scottsbluff, Nebraska

Dear Mr. Kosman:

I read with interest earlier this week that your bank was asked by the Federal Reserve to consider acquiring less successful banks with money to be lent to you as part of the Treasury Department’s Troubled Assets Relief Program (“TARP”).

If you have the time between the profitable management of your bank and negotiating with Treasury, you ought to consider contacting Dale Weight or Don McIntyre, both of Portland, Oregon.  These gentlemen are two of the former senior officers (Weight was President  and McIntyre was Executive Vice President for Mortgage Lending) of The Benj. Franklin Federal Savings and Loan Association of Portland.

In the early 1980s, The Benj. Franklin, as it was known, had reached over $1 billion in assets by carving out a reputation as a hometown, customer-oriented depository institution and leader in mortgage lending. 

By 1982, savings and loan institutions nationwide were in trouble.  Their mortgage portfolios were earning far less than current deposit rates dictated.  In short, they were shelling out more than they were taking in, and you can’t survive long under those circumstances. 

The regulators, in the form of the Federal Home Loan Bank of Seattle, approached The Benj. Franklin and asked them to take over the ailing Equitable Savings, also headquartered in Portland.  To persuade them to do the deal, the regulators offered The Benj. Franklin the opportunity to designate the lower-than-market mortgages they were taking on as an asset, an accounting treatment known as “goodwill.”  The regulators promised that the goodwill could be amortized over a period of 40 years.  The goodwill for Equitable Savings amounted to $340 million.  Later The Benj. Franklin agreed to acquire another, smaller institution when asked to by the regulators, again being offered and taking advantage of goodwill treatment.  It is believed that The Benj. Franklin would not have entered into these agreements had it not been for the federal government’s promise of the goodwill treatment.

Throughout the 1980s The Benj. Franklin remained profitable; in fact the company converted from a mutual savings and loan association (owned by depositors) to a stock company by selling stock to the public in December, 1986. Billions of dollars in originated and purchased mortgages performed well.  The institution continued to be a leader in the communities that it served, in both mortgage lending and deposit gathering.

However, not all savings institutions invested depositors’ funds so prudently.  By the end of the 1980s, after unfavorable regulation changes, a persistently-inverted yield curve and the availability of prevalent and cheap funds, many savings and loans had squandered their depositors’ money.  You may recall that many thrifts invested in inappropriate and dangerous vehicles, and some even defrauded their depositors and investors.  To protect individual depositors and the federal insurance fund, Congress passed a law in 1989 called the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”).  FIRREA established the Resolution Trust Corporation, which ended up purchasing savings and loan assets, ultimately costing taxpayers $125 billion.  The political climate was not unlike what is happening in Washington D.C. today.

But there was a lesser-known aspect of FIRREA that dramatically affected The Benj. Franklin.  It retroactively revoked the agreement between The Benj. Franklin and the FHLB — the agreement to allow amortization of goodwill, the loss on mortgages acquired in the FHLB-driven acquisitions.  When added back to the balance sheet, the remaining unamortized $330 million liability rendered The Benj. Franklin insolvent.  In spite of arguments that the original contract was valid and enforceable, on February 21, 1990, the federal government seized The Benj. Franklin and its assets.  Thousands of people lost their jobs, their retirement funds and their shareholder value.

Since then, an aggressive group of Benj. Franklin shareholders has sued the federal government, consistently winning and waiting to recover some of their lost investments.  But it’s been almost 19 years, and many of them have died, gotten discouraged or given up.  Suing the federal government requires time and tenacity, not to mention almost limitless funds.

So, Hod – may I call you Hod? –  during this financial crisis, it’s become fashionable to pontificate on how history repeats itself in some instances.  Just in case the moral of the story is lost on you, a caution:  not everyone is required to play by the book.  

Sincerely,

April Smith
Stonington, CT

www.tmcnet.com, Steve Jordon, Banks Consider Working with Federal Reserve on Financial Rescue, November 9, 2008.   

The author was an employee of The Benj. Franklin Federal Savings & Loan Association of Portland, Oregon, from 1976 until 1984.

April Smith is the owner of April Smith & Associates, Inc. 

She has over three decades of multi-layered experience in the field of mortgage finance.  She founded the firm in 1988, and she continues to provide hands-on strategy and planning for both new and established clients.  She is an active speaker and educator to the industry.  April is a recognized authority on mortgage due diligence.  You may contact April via her website.