Wednesday, June 20, 2012

New Amsterdam National Bank,

New Amsterdam National Bank,

from the book "The Romance And Tragedy Of Banking", by Thomas P. Kane.

The New Amsterdam National Bank was closed under similar circumstances and liquidated with like results. The capital of this association was $1,000,000, its deposits $3,269,000, and its totalliabilities$5,984,000. The bank was not insolvent when it was closed. This institution was known as the theatrical bank of New York City. Its depositors and customers consisted largely of actors, race track men, gamblers, saloon-keepers and sportsmen. The bank was placed in the hands of a receiver January 30, 1908. Its depositors were paid in full with interest from the date of closing, and the receivership was finally terminated April 14, 1909, after turning over to an agent of the stockholders cash and assets amounting to $1,027,612.

After the elimination of F. Augustus Heinze from the Mercantile National Bank and the closing of the National Bank of North America and the New Amsterdam National Bank, the Federal authorities at Washington put expert accountants on the books of these three institutions for the purpose of ascertaining whether any criminal violations of law had been committed by Heinze, Morse and others in connection with their management of these banks. As a result of these investigations Heinze and Morse were indicted by the Federal Grand Jury for misapplication of the funds of the Mercantile National Bank and falsification of the books of the National Bank of North America in connection with certain loans made upon the stock of the American Ice Company, a Morse concern. Morse was tried first. His trial covered a period of several weeks, and resulted in a verdict of guilty. He subsequently resorted to every known means and legal technicality to secure a new trial, but without avail, and was finally sentenced to a term of fifteen years in the penitentiary at Atlanta, Ga. After serving about two and a half years of his sentence, Morse was pardoned by President Taft because of failing health, it having been represented to him, and substantiated by medical experts after an examination, that he would live but a few months if his incarceration in prison were continued.

Heinze was more fortunate. He was tried some months later and acquitted. The original indictment of Heinze in 1909 contained a number of counts, many of which were stricken out by the court on the trial of the case upon technical grounds. The court held that the indictment charging misapplication of the funds of the Mercantile National Bank was defective because it did not charge conversion of such funds, and that the word "conversion" was necessary as supplying the legal measure, which the court was unable to find in the indictment for "willful misapplication."

In 1910 Heinze was again indicted on practically the same charge, the indictment alleging that the purpose of the misapplication of the funds of the bank was to inflate the stock of the United Copper Company. The indictment was again found to be faulty and was quashed. The Government then appealed from the decision of the court to the Supreme Court of the United States, under the Act of Congress of March 2, 1907, authorizing an appeal by the Government in criminal cases involving points of law. On December 5, 1910, the Supreme Court reversed the decision of the United States Circuit Court of New York and held that the various counts in the indictments referred to charging Heinze with misapplication of the funds of the bank were sufficient. But as the transactions covered by the indictments on which the Supreme Court ruled were practically the same as those covered by the indictment on which Heinze was tried and acquitted during the previous spring, no further action was taken by the Government, and Heinze escaped punishment.

The Farmers and Drovers National Bank of Waynesburg, Pa.

The Farmers and Drovers National Bank was placed in the hands of a receiver on December 12, 1906. This was a very old and reputable institution. It was originally organized in 1835, and became a national association on February 25, 1865. Before its conversion into the national system it had the reputation of having been a strong, successful and conservatively managed institution. The capital of this bank was $200,000 and its deposits were nearly $500,000. It was not a large bank, but for rascality of management it has not been surpassed.

For some time before its failure it was known by the Comptroller's office to have been freely rediscounting its bills receivables and otherwise borrowing money. The national banking laws limited the liabilities of a bank for borrowed money to an amount not exceeding the capital stock of the association. When the reports of the bank examiner showed that the liabilities of this bank of the nature indicated largely exceeded the capital of the association, strenuous measures were resorted to to secure a reduction of the amount to at least the legal limit. There was no evidence furnished or obtainable upon which to base a suspicion that the bank was insolvent, and without such evidence, or well-grounded suspicion, the Comptroller had no authority under the law to close and take possession of the association. The bank was practically in charge of an examiner for some time before it was closed, for the sole purpose of securing a reduction in the large line of rediscounts, and it was supposed that reasonable progress was being made in this connection, when it was discovered that the books of the bank did not reflect its true condition in respect to the extent of these liabilities. The examiner was then promptly instructed to close its doors pending a thorough investigation to determine its true condition.

On November 12, 1906, the date of the last report of condition made by the bank previous to the date of its closing, the notes and bills rediscounted were reported as $349,474.61, or $149,474.61 in excess of the capital stock of the association, and the amount due to banks and bankers was shown to be only $3,674.71.

New Amsterdam National Bank. Continued

Upon taking charge of the bank one month later, theexaminerwho had been appointed temporary receiver, found that the rediscounts were several hundred thousand dollars greater than the amount reported and that the books of the bank were so grossly falsified as to be wholly unreliable. Numerous notes were presented to the receiver soon after his appointment, bearing the endorsement of the Farmers and Drovers National Bank, which had been rediscounted in good faith by other banks, but did not appear as a liability of the Waynesburg bank upon its books.

Several months before this bank was closed, information was received by the Comptroller from outside sources that the bank was borrowing money freely and that its published reports of condition did not correctly show theseliabilities. The examiner was advised of this fact and instructed to make a thorough investigation of the bank's condition in this respect. His examination covered a period of from twelve to fourteen days. At the commencement of this examination the cashier, who was the sole manager of the bank, informed him that the bank had no liabilities for rediscounts other than those shown by its books. During the progress of this examination evidence was obtained through the examination of other banks, which completely refuted this statement of the cashier. When he was confronted with the evidence of these rediscounts and asked why they did not appear upon the books of the bank, the cashier produced a private book which he kept in his desk, the existence of which was previously unknown to the examiner. An examination of this record showed rediscounts largely in excess of those theretofore discovered by the examiner, but even this record did not contain a complete list of such liabilities. Outside investigation was continued by the examiner, without any clue or assistance from the cashier, until liabilities for rediscounts were uncovered aggregating the enormous sum of nearly $620,000, not a dollar of which appeared upon the books. One of the cashier's plans of operation was to make a deposit with a bank, shift all balances to that bank, then borrow from it as much as possible, checking out the account and leaving an overdraft.

When this condition of affairs was discovered by the examiner he required the cashier to give the bank security in the nominal value of at least three hundred thousand dollars to cover any losses on the rediscounted paper, or any liabilitity of the cashier individually resulting from his acts.

While the cashier was criminally liable under the law for falsification of the books of the bank and reports made to the Comptroller, there was no evidence of insolvency of the association, and there was no reason to believe at that time that the rediscounted paper was not collectible. But as the cashier was found to be wholly unreliable and unsafe, the next and only course for the Comptroller to pursue was to demand his resignation or removal from the bank, pending the presentation of the evidence of criminal violations of law against him to the United States Attorney and placing the bank in a condition to withstand the effect of the disclosures which would follow his arrest. This demand was promptly made, insisted upon, and complied with on August 27, 1906, but was not carried out in good faith by the directors of the bank, who, secretly and without the knowledge of the examiner or the Comptroller, elected him vice-president of the association, and continued him in a position which enabled him to still carry on his nefarious operations, and it was not known by the Comptroller that this action had been taken by the board until the name of this cashier appeared as vice-president in the next report of condition of the bank made some time later.

Under such a condition of affairs, with deception practiced upon him at every turn, and the records of the bank's transactions wholly unreliable, it was absolutely impossible for the examiner to determine the true condition of this bank during its active existence, and it was months after the association had been placed in the hands of a receiver before the extent of its liabilities on rediscounted paper could be definitely ascertained, and then only through the slow process of awaiting the filing and proving of claims of creditors.

Many of the notes found in the bank were later proven to be forgeries when presented by the receiver for collection, and a number of those that were genuine were claimed by the makers to have been paid at maturity, but were carelessly left in the bank after payment, thus demonstrating the loose methods which prevailed, not only on the part of the bank in the conduct of its business but by some of its customers in their dealings with the institution.

Much of the rediscounted paper that was not forged was in the names of makers who were financially irresponsible and consequently was uncollectible.

As is usual in such cases, the examiner and the Comptroller were severely criticised and censured for not discovering during the active existence of this bank the conditions which were disclosed subsequent to its closing, and the Comptroller was charged with having a knowledge of these facts for months before he took possession of the association.

Mr.Ridgelywas Comptroller at the time and the criticisms referred to were directed against him. It was charged editorially by some of the newspapers that the bank was permitted to continue in business long after it was known by the Comptroller to be in a most unsatisfactory condition, in order to subserve the interests of some of the officials of the bank who were candidates for political office at the approaching election. Allegations of this character and of a similar nature are usually without any foundation in fact, and display the ignorance or malice of those responsible for them.

Whenever a national bank fails, no matter from what cause, the examiner and the administrative officials charged with the duty of supervising the banks are criticised with more or less severity by the press and the public in general and by the depositors and stockholders of the failed institution in particular. The examiner is usually held responsible for not promptly discovering and reporting the unsatisfactory conditions which led to the failure, or administrative officials are censured for undue leniency, while, as a rule, the facts are that there was neither negligence nor incompetency on the part of the examiner nor undue forbearance on the part of the supervising officials. As before stated, sincere and intelligent criticism of the manner in which public officials discharge their duties are generally wholesome and productive of beneficial results, but erroneous criticism is not only harmful in its effect but is unjust to those against whom it is directed, and when applied to bank examiners or to those charged with the administration of the banking laws, is generally based upon ignorance or misconception of the law, or the facts, or both, and is therefore misleading and accomplishes no good purpose. Bank examiners are not infallible, and they do not always discover and size up a condition as it really exists, but instances of this kind are the exceptions and not the rule. Their estimates as to the real condition of a bank are generally reasonably accurate. Their powers are limited. They may suggest where they have no authority to direct, and if their advice or suggestions were followed by bank officers they would always be found to be on the side of safety and in the interest of good banking.

Failures Of The National Bank Of North America And The Amsterdam National Bank Of New York City

The failures of the National Bank of North America and the Amsterdam National Bank of New York City, which occurred during the last year of Mr. Ridgely's administration, while not involving very large interests, were of no less importance because of the prominence of the parties concerned and the intimate relation of these failures to the panic of 1907.

These banks were not large institutions, measured by the standard of what constitutes largeness in New York City, and neither bank was insolvent when it was closed.

The capital of the National Bank of North America was $2,000,000. Its deposits amounted to $6,890,000, and its total liabilities to $13,326,000. It was placed in the hands of a receiver by the Comptroller on January 27, 1908, after the adoption of a resolution by its board of directors requesting him to make an examination of the bank, and to take temporary charge of its affairs, if, in his judgment, the situation warranted such action.

This resolution of the directors was not adopted because of any belief on their part that the bank was insolvent. But on account of the extreme difficulty experienced in realizing on the assets rapidly enough to enable them to meet the demands of depositors, which had been very heavy and persistent during the several previous days, and the fear of further large withdrawals, they deemed it best in the interests of the association to temporarily suspend operations and thus prevent a sacrifice of the assets, which otherwise would have been necessary, as the Clearing House Association had refused to extend to the bank any further assistance.

The persistent run upon this institution which necessitated its suspension was due wholly to a lack of confidence in the management, of which Charles W. Morse was the controlling factor. Morse was known to be intimately associated with F. Augustus Heinze, who at that time was very much in the public eye, having acquired an unenviable reputation in connection with his prolonged contest with the Standard Oil Company in Montana over a deal in Amalgamated Copper. He had been accused of having manipulated the courts and the Legislature of that State in his own interests, and of other dishonorable transactions in mining and banking, and Thomas W. Lawson made him the object of criticism in his articles on "Frenzied Finance." Morse, Heinze and their associates had the reputation of being speculators, or, at least, of being engaged in operations of very questionable merit. They jointly owned or controlled a number of small banking institutions in New York, National and State. It was assumed, as a matter of course, that the speculative operations in which they were known to be engaged, were being financed by these banks, and this suspicion was not calculated to inspire confidence in the management of the banks or in the stability of the institutions with which they were connected. Consequently, on the first indication of a financial disturbance, these institutions were the object of distrust and attack, and the panic of 1907 forced them to succumb.

That the National Bank of North America was not insolvent when it was closed was fully demonstrated by the rapid liquidation of its affairs under the receivership. Its creditors were paid in full with interest from the date of closing, and cash and assets amounting to $2,387,750 were returned to the stockholders. The receivership was finally closed October 31, 1908, within eight months from the date of suspension.

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