Last week, the Federal Reserve System’s Division of Banking Supervision & Regulation announced that it would develop new training to help bank examiners spot an issue that was a documented factor in at least four bank failures between 2009 and 2014.
The Federal Reserve’s Office of Inspector General, in lawyerly language, calls the problem a "dominant management official."
You and I might call him — and in every case cited by the Fed, you know, it was a man — a Boss Hogg.
The announcement that examiners will be trained to look for signs of a bank executive who dominates subordinates or assumes too many roles came in the OIG’s final report on the failure of a Maryland bank in 2014.
NBRS Financial, an hour from Baltimore in a little town with the lovely name of Rising Sun, was never a very big bank — assets of $155 million when it was shut down by state bank regulators, although it had been as big as $275 million a few years before. The loss to the Federal Deposit Insurance Corp. caused by the failure of NBRS was relatively small — just $24.3 million, which is less than half the threshold that normally triggers an in-depth OIG report.
But "unusual circumstances" at NBRS prompted the Inspector General to take a deep dive into all the causes of the bank failure. Those included some of the usual things one sees in a bank failure — a loan portfolio that was insufficiently diverse, poor credit-risk management, struggles with identifying problem loans before examiners pointed them out. Those weren’t the unusual circumstances that the OIG singled out.
Instead, although the report doesn’t call him by name, the real problem was Jack Goldstein, president, CEO and chairman of the board until the board finally forced him and one board member out in 2012.
That’s when the directors learned that Goldstein and the director "allegedly borrowed more than $3 million in the names of various relatives without disclosing their apparent interests in the loan proceeds."
But by then, examiners had for several fruitless years been telling the directors about a lot of other red flags: loans to Goldstein that violated insider lending limits; "questionable entertainment-related credit card transactions"; frequent turnover at the CFO position, resulting in Goldstein being "the only person able to provide answers to questions regarding numerous functions."
Am I the only one who reads this and thinks of the late Scooter Stuart, who was owner, president, CEO and chairman of One Bank & Trust until federal regulators forced the board to fire him? And maybe some others right here in Arkansas?
The NBRS board’s domination by Goldstein extended even to rubber-stamping a strategic plan that clearly wasn’t working. Specifically, the bank ramped up its commercial real estate lending in anticipation of a flood of new jobs as a result of military base reorganization and didn’t let up even when it became obvious that the projections weren’t coming true. The bank was losing millions year after year after year.
By the time the board wised up and cut Goldstein loose, the bank was beyond salvage. (One Bank & Trust has survived, thanks in part to the life insurance that Scooter Stuart kept in force.)
"We concluded that NBRS Financial’s President was a dominant management official who was heavily involved in the bank’s daily operations and surrounded himself with inexperienced senior executive staff," the OIG reported. "These circumstances, along with the bank’s internal control weaknesses, segregation of duties issues, and inadequate credit risk management practices, created an opportunity for the President to allegedly engage in insider abuse."
As far as I can tell, Goldstein has not been charged with any crime. But the dominant management official at three other failed banks cited by the OIG were — including legendary Virginia banker Edward J. Woodard Jr., who is 73 and serving a 23-year sentence in federal prison for bank fraud and related charges during his tenure as president of The Bank of the Commonwealth. He may get out before he’s 90.
Part of Woodard’s sad legacy will be helping bank regulators recognize a risk factor that had apparently been underappreciated. It might be that bank directors — or directors of other businesses, for that matter — can spot Boss Hogg behavior on their own before too much damage is done.
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Gwen Moritz is editor of Arkansas Business. Email her at GMoritz@ABPG.com. |