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News September 2019

Financial Fortitude

Will Your Banker Save You in the Next Crash?

By Karen Telleen-Lawton

Banking regulations are arcane and boring to all but those in the field. Consumer watchdog groups were rare or non-existent until Ralph Nader’s 1965 Unsafe at any Speed exposed auto manufacturers’ dismal safety records. Any financial sector watchdogs were no match for the relentless self-interest of the financial sector.

Long ago but not too far away (depending on where you live), a small-town banker saved his customers from financial ruin. According to Edward Massey’s historical novel Telluride Promise, Charles Waggoner saw disaster coming in 1929. His actions landed him in hot water, but he will forever be known as an American hero in the unremitting struggle to provide small investors a fair shake in the financial sector.

Waggoner presided over Colorado’s Bank of Telluride (BOT). As he recounted later, “I had been watching what was going on in the whole country and any damn fool could see, the loans were too much, the credit was too shaky, and every month more banks were failing. …Those big banks were going to be unable … to give us back the money we put on deposit with them. I needed the money to give my depositors back their money. It was better off in their mattress than in …any bank … for the next couple of years.”

After a futile request to Denver banks to give BOT a loan, Waggoner decided to pull off a daring scheme. On August 30, 1929, he requested a colleague use special bank codes to telegram six New York banks. The telegrams requested that funds be deposited in the Bank of Telluride’s account at the Chase National Bank in New York. After confirming the money had reached the Bank of Telluride’s account, he used certified checks to pay off his banks’ debt (as well as a personal loan, it must be added). He then instructed an employee to issue certified checks to each customer. After all this furious check-writing, Waggoner wrote to Colorado’s banking commissioner, explaining his actions:

“I am using the money to square some matters for my bank and to help rescue my depositors from losses that they do not deserve to suffer. You will no doubt become involved in this matter, and I am sure I can count on you to defend the interests of the little people against the conscienceless Denver and New York banks. They are rapacious and soulless, and nothing would delight me more than to be a part of their downfall.”

Of course, Waggoner was right about the coming crash: the stock market plunge that began the Great Depression happened just two months later.

In the aftermath, Congress passed banking legislation including the 1933 Glass-Steagall Act. One provision restricted affiliation between banks and securities firms with the goal of protecting ordinary “riskless” savings accounts from higher-risk investments. Glass-Steagall also required banks to have federal deposit insurance.

Banking regulations are arcane and boring to all but those in the field. Consumer watchdog groups were rare or non-existent until Ralph Nader’s 1965 Unsafe at any Speed exposed auto manufacturers’ dismal safety records. Any financial sector watchdogs were no match for the relentless self-interest of the financial sector. In the decades after the 1930s, the consumer protections established by Glass-Steagall Act were weakened with lax enforcement, lenient interpretations, and loopholes.

The restrictions were finished off completely in 1999 when the Gramm–Leach–Bliley Act (GLBA) officially repealed these parts of the Act. Banks, securities firms, and insurance companies could once again cooperate and consolidate. They could even serve simultaneously as an officer, director, or employee of a securities firm and a member bank without being subject to conflict of interest prohibitions.

Many believe the 2008 Great Recession could have been prevented in Glass-Steagall was operating with its original intent. The consolidations resulted in mega-financial institutions that were “too big to fail,” and had to be bailed out at great cost to the taxpayer and very little cost to those who were culpable. The U.S. Financial Crisis Inquiry Commission 2011 findings concluded that "the crisis was avoidable” and listed five causes:

  • Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages;
  • Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk;
  • An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis;
  • Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and
  • Systemic breaches in accountability and ethics at all levels.

The bottom line in the industry known for the bottom line is this: it is imperative that we elect representatives who have the strength and fortitude to stand up for consumers rather than be beholden to financial industry. There aren’t many Waggoners who will be willing to sacrifice for their bank customers.

As for his deed, Waggoner was sentenced to 15 years in prison. During the six years he served before being paroled, the Glass-Steagall Act become law. He never returned to Telluride, but the townspeople have not forgotten. A plaque is attached to the building that once housed the Bank of Telluride. It describes Waggoner as “the Robin Hood who stole from the rich to protect the people of Telluride.”

 

Karen Telleen-Lawton helps seniors help themselves by providing bias-free financial advice. She is a Certified Financial Planner™ professional, the Principal of Decisive Path Fee-Only Financial Advisory in Santa Barbara, California (http://www.DecisivePath.com). Reach her with your questions or comments at  This email address is being protected from spambots. You need JavaScript enabled to view it. .

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