Economic Crime and Collapse of Franklin National Bank - Case Study Example

Economic Crime- Collapse of Franklin National Bank The year 1974 was a year which had the most or worst financial disasters in the United s. This crisis was the worst since the year 1930. The failure of Franklin National bank in 1974 was a great shock to the financial sector, especially the banking sector. The failure caused shock waves in the international baking sector and this sector too was also close to a big disaster. The failure of the Franklin international bank prompted the US government to think about new regulations and methods that would help to stop such disasters in the future. Franklin National bank was the twentieth largest bank in the US in terms of its size. The failure of the bank invited changes in the existing banking regulations as well as practice. The failure tempted the banking policymakers to devise new international banking methods. Cooperation was encouraged in the international financial markets so to avoid financial disasters in the future. During the 1970’s and 1960’s, many American banks were internationalized. This included the Franklin national bank also. This bank even acquired an international owner named Michele Sindona (Spero.1999). On October 1974 the US core banking sector was severely shaken by the demise of the 20th largest bank in the country, the Franklin national bank. The failure of the bank was mainly caused by mismanagement as well as fraud. The failure of the bank caused severe after effects in the economy as well as in the social setup of the country. Jail sentences were awarded to many bankers who were associated with the Franklin bank. There was a suicide in Italy. The share holders of the bank lost heavily. But the depositors of the bank were saved by the Federal Reserve form suffering loss. The bank was declared insolvent in October 8 1974. The assets of the bank were taken over by the European American bank. The Federal Reserve was responsible to save the world financial sector from a major disaster. Going back, the bank attained success under the chairmanship of Mr. Arthur. T. Roth. He joined the bank in 1934 and rose to the position of chairman. He remarkably changed the identity of the bank which was established in 1926 through a variety of measures. He changed the small time bank during the great depression times into one of the largest banks in the US history. He invested huge money in the build up process of long island. The capital of the bank when it was opened in 1926 was around $50000. During the downfall period, it had assets worth 4 billion$. Roth introduced credit cards and drive in facilities. He was the first to promote federal housing administration mortgages. In the year 1948, Franklin became the largest bank in the Nassau County. Roth thus became a disquieting phenomenon in the American banking industry. He transformed the bank where there was no scope to grow further into unimaginable heights. The blame of collapse of the Franklin bank also can be put on Roth also. The troubles started when the bank began to invest lots of money into commercial New York in 1964. After the banks entry into to the market, there was a real-estate collapse which resulted in huge losses to the bank. In the annual general meeting on July 1968 there was opposition from the share holders regarding the policies of Roth and thus he was forced to step down from the post. Harold Gleason replaced him as the new CEO. Cashing on the weak financial situation of the bank, in 1972, an Italian named Michele Sindona invested 40 billion dollars into the bank. He got a controlling interest in the bank. Sindona was a multi millionaire as well as a close aide of the Vatican. He was later tried on charges of masterminding the demise of the Franklin bank. In 1980, Sindona was found guilty of many charges and was sentenced to 25 years in federal prison. After four years he was extradited to Italy where he was tried on fraud as well as murder. He was sentenced to life imprisonment. He committed suicide in 1986 by consuming cyanide in an Italian jail. Other officials of the Franklin bank also were indicted apart form Sindona. Main among them was Gleason who was tried for falsifying the records of the bank to conceal 5million$ in losses. He got a three year sentence and served one year in prison. In 1974, it was found that the illegally conceived foreign exchange losses amounted to 45 million dollars. Thus the functions of the bank were put to an end. More over the bank had announced that it had lost around 38 million dollars in other departments as well even though the bank was kept alive using massive loans from the Federal Reserve. The end of the bank happened on Oct 8, 1974. The controller declared that the bank was insolvent. However the next morning the depositors of the Franklin bank became European American bank depositors (DeWan). The Federal Reserve authorities moved quickly and smartly to protect t the depositors of the Franklin bank. The actions of the Federal Reserve did not cause a run on any other bank. All the depositors of the Franklin bank became customers of the European American bank and trust company. The failure of the Franklin national bank in fact did not affect the depositors severely. No single depositor was reported to have suffered a loss from the banks collapse. The federal deposit insurance corporation came to the rescue of the depositors. Their efforts were timely and imaginative. There was a smooth transition for the customers of the erstwhile Franklin bank towards the customers of the European American bank. The efficiency of the deposit insurance corporation and the Federal Reserve was widely noted and appreciated. The rescue of the Franklin national bank was one of the biggest rescue operations conducted by the Federal Reserve (October 8, 1974). Failure of the Franklin National bank can be attributed to different reasons. The main among them is that it suffered a series of deposit runs following substantial losses in foreign exchange trading. The bank also found itself facing a number of difficulties like excessive gearing, mismatching, bond trading, weak quality of assets, over dependence on purchase funds, foreign exchange losses etc. more over the management of the bank had taken efforts to hide losses in forex trading through a go for broke policy (Walker. 2001). Michele Sindona was born in 1920. He was Pope Paul VI’s banker and a very close aide. He was a tax lawyer by profession. He became one of the most powerful bankers of the Italian banking sector and one of the richest men in the world. He was first accused for washing heroin profits through his banks. He also took currency out of Italy through the bank of Vatican. In 1972, he acquired substantial interest in the Franklin bank. He was kidnapped by left wing terrorists on august 2 1979. Later he was convicted for bank fraud and got a twenty five year sentence. Michele Sindona, the Italian banker who was often referred as the mafia banker took over the Franklin bank in 1972 from Lawrence Tisch. He had influence in Vatican as well as in the Nixon administration. After acquisition, he started money laundering operation in favour of the Vatican bank and the drug cartel in Cecily. He widely used the banks ability for funds transfer, letter of credit production, and foreign trading of currencies. He used his influence in the Republican Party as well. With this influence he became the vice chairman of Franklin bank. He also became the largest share holder (The Rockefeller-Pentagon-Mafia Connection!!). The failure of the Franklin national bank in the US was the third financial crisis in less than ten years. According to experts the aggressive approach of the Franklin bank in European money markets coupled with weak dollar was the main causes of its demise. It was feared that the bankruptcy of the Franklin national bank would create setbacks as well as a negative impact in the deposit certificate market. But the timely intervention of the Federal Reserve did prevent further damages in the financial front (Dupuis, Lefebvre, Vachon). The US experinced deep financial slumps during the 1970’s. the 1970 slum was much steeper. The GDP fell from 3.1% to 2.9 in 1974, ie during the times of the Franklin bank’s collapse (Cross). Franklin national bank status was dramatically improved under the chairmanship of Arthur Roth. He is credited with introducing for the first time bank credit card as well as drive up teller window system. Customers need not climb down their vehicles for engaging in banking transactions. From 1926 to 1970, Arthur Roth played a significant role in the development of banking business in the long island area. His activities were usually against normal banking practices and always aimed to create new type of banking services. He turned the small bank of long island into a truly international bank which grew larger than the boundaries of long island. Roth gave prime importance on consumer needs. He always framed his policies thereby consumer confidence was acquired. He made loans and mortgages more easily accessible as well as user friendly. He was really interested in providing loans to the real estate sector in the long island area. As a result many homes and businesses were built on long island. He also made drastic and innovative changes in work place too. He advocated and implemented ban on smoking in the 1950’s. Recruitment of handicapped personnel was encouraged. He worked hard for the enlightment of the community as well. Despite his credentials in the bank, he was forced to vacate the seat in favour of Gleason. After his ouster, the Franklin national bank collapsed. The new European American bank which took over the reigns of Franklin bank still follows Roth’s principles (Franklin Square National Bank). During the first five months in the year 1974, the Franklin national bank lost around 63.6 million dollars. A loan of 1.75 billion was sanctioned by the Federal Reserve. As the story became unfolded, evidences were gathered which pointed the role of high ranked officials in the bank who were committing frauds and other illegal practices. Several of these high ranked executives were eventually convicted. During this situation the intervention of the deposit insurance corporation was widely encouraged as a result, the FDIC intervened in the year 1974. In the same year the federal deposit insurance corporation sold nearly 104 of the Franklin national banks branches. It also sold the assets of the Franklin bank to the European bank. 5.1 billion dollar assets of the closed Franklin international bank were sold by the Federal deposit insurance corporation by the year 1981. Still 185.3 million dollars are owing in the form of interest payments (History of U.S. Govt Bailouts). The real trouble of the Franklin bank started in the year 1964 when the bank expanded its base from long island to Manhattan. They were forced to give high risk loans to very young companies. Moreover the bank also saddled itself with an extra 25% more space than the actual need. By the year 1970, the operational earnings of the bank were on the downfall. The managers concluded that only a merger could save the bank. But before the merger, the bad news of foreign exchange losses greeted the bank. The frightened depositors began to withdraw money from the bank. Moreover the problem worsened after the news that the Securities and Exchange Commission was probing the dealings of the bank with an obscure Swiss bank named Amincor (Franklin National Fizzles Out). The old story of bank failures still continues in the US. In the year 2008, 25 banks were taken over by the federal deposit insurance corporation. There were only three failures in 2007 and none in 2006 and 2005. The failure of the Washington Mutual bank in 2008 was the largest banking failure in the US banking history. This failure was similar to that of Franklin national bank. The assets of this bank were taken over by JP Morgan chase. Other major failures were the closure of the Douglas national bank; the Hume bank etc. the latest among the causalities are America west bank, citizen’s community bank, Silverton bank, first bank of Idaho etc (Failed Bank List). Reference: Cross.P. The impact of recessions in the United States on Canada. (online). Available:http://www.statcan.gc.ca/pub/11-010-x/2009003/part-partie3-eng.htm DeWan.G. Breaking the Bank Roth Built. (online). Available:http://www.newsday.com/community/guide/lihistory/ny-past1109,0,6557342.story Dupuis.F, Lefebvre.M, Vachon.H. Financial crisis: neither the first nor the last,A return on historical crisis of the past 30 years. (online). Available:http://www.desjardins.com/en/a_propos/etudes_economiques/actualites/point_vue_economique/pve81003.pdf Failed Bank List. (online). Available:http://www.fdic.gov/bank/individual/failed/banklist.html Franklin National Fizzles Out. (online). Available:http://www.time.com/time/magazine/article/0,9171,944999,00.html Franklin Square National Bank - Long Island, New York - Major Bank Failure in 1974. (online).Available:http://www.scripophily.net/frannatban.html History of U.S. Govt Bailouts. (online). Available:http://www.propublica.org/special/government-bailouts October 8, 1974: Largest bank collapse in history; Franklin National Bank collapses; The Monitor reflects on the financial situation. (online). Available:http://www.csmonitor.com/centennial/on-this-day/2008/10/october-8-1974-largest-bank-collapse-in-history-franklin-national-bank-collapses-the-monitor-reflects-on-the-financial-situation/ Spero.J.E.1999. The Failure of the Franklin National Bank: Challenge to the International Banking System. (online). Available:http://www.beardbooks.com/beardbooks/the_failure_of_the_franklin_national_bank.html The Rockefeller-Pentagon-Mafia Connection!!. (online). Available:http://www.think-aboutit.com/conspiracy/TheRockefellerPentagonMafiaConnection.htm Walker.G.A. 2001. International banking regulation: law, policy, and practice. UK: Kluwer Law International. Read More