Friday, January 1, marks the 25th anniversary of the beginning of Rhode Island’s credit union crisis. I recently came across an article I wrote on the 10th anniversary of the closure, published in the December 2000 edition of Rhode Island Monthly magazine. It’s an interesting look back at a dramatic time in our state’s history, and it is posted below.
----------------------------------------
Where Were You When They Closed the Banks?
The memories may seem fresh, but the banking crisis exploded ten years ago next month. One insider reveals the surprising countdown to the worst financial crisis in the state’s recent history.
By David Preston
By 2 a.m., most of the New Year’s Eve revelers were gone. First Night was over, Kennedy Plaza was empty, and the city was cold and quiet on the first morning of 1991. High above the Plaza, Sheldon Whitehouse and an associate at the big downtown law firm Hinckley, Allen, Snyder and Comen were well on their way to pulling an all-nighter, gathering reams of documents incoming Governor Bruce Sundlun would need later that day.
It hadn’t been much of a New Year’s Eve or for that matter much of a holiday season for any of the Sundlun team, least of all Whitehouse. Since leaving his job as assistant attorney general in early December to come work with us on the transition team, he’d had a front-row seat for the rapid disintegration of financial institutions insured by Rhode Island Share and Deposit Indemnity Corporation (RISDIC). Now, on the last day of the year, the dike had collapsed and a financial tidal wave that had been building for two months was about to come crashing ashore. On his first official day as governor, Sundlun was declaring a legal bank holiday. It’s a phrase that always seems ironic – there was certainly nothing festive about what was about to unfold. In less than twenty-four hours, we knew Sundlun would padlock shut forty-five banks and credit unions.
For the members of the Sundlun team, the autumn of 1990 had been euphoric, a sweet victory after four years of hard work and bitter disappointment. Some had endured the thrashing Governor Edward DiPrete inflicted on Sundlun in 1986, when DiPrete won the election with 65 percent of the vote. Two years later I joined the Sundlun Team as policy adviser for what started out as another sacrificial offering to the campaign gods. On the June day in 1988 that I signed on, a published poll showed Sundlun trailing DiPrete almost three to one. But after a string of bad news for DiPrete it was suddenly a competitive race. In the end, though, despite $2 million of Sundlun’s personal money, we lost a heartbreaker, 51 percent of the vote to 49 percent. It was a tough loss, and I never saw Sundlun more disappointed than he was that election night.
In 1990, with DiPrete weakened, other Democrats smelled blood in the water and decided to run. A four-man race shrank to three when former Lieutenant Governor Richard Licht bailed out, leaving Providence Mayor Joseph R. Paolino, Jr., Warwick Mayor Frank Flaherty, and Sundlun.
As Sundlun’s deputy campaign manager, I sensed it was going to be a tough primary campaign and it was. Paolino jumped out to an early lead, while the Sundlun campaign floundered. Flaherty, less known statewide, was a distant third at the time. In late June, Paolino won the endorsement of the Democratic State Committee, which had been only too glad to have Sundlun carry their water in two previously hopeless efforts. But the same week, Brian Lunde and George Burger, two savvy Washington campaign operatives, arrived in town, and that changed everything. They redefined the direction of our campaign, enforced structure in our staff, crafted a clear and compelling message presenting Sundlun as the outsider – and then persuaded him to part with almost $2 million more than the $1 million he’d already committed to spend.
Having anted up, Sundlun became more focused. In September, the primary was ours: the general election in November, an anti-climax. The vaunted DiPrete campaign machine of the previous three elections was no more, and Sundlun racked up a 74-26 win, powered by another million dollars, and a corps of dedicated volunteers who took to heart the Sundlun message that he was an ‘independent businessman, not a professional politician.’
Sundlun liked meetings – but short ones – and as the campaign staff became the transition team, half a dozen of us would meet every day around 5:30 p.m. The meetings in the office at Sundlun’s Providence home at 320 South Main Street included the usual suspects: me, Whitehouse, key transition staffer Brian Gallogly, chief of staff-to-be Ed Wood, Patti Goldstein, and Cumberland State Senator David Cruise, one of a handful of elected officials who’d supported Sundlun in the primary, and a future chief of staff. Later, Barbara Cottam, who’d worked for Paolino at Providence City Hall and was Sundlun’s choice as press secretary, joined the group, and depending on who was in town that week, Lunde or Burger as well. It was a chance to catch up, make sure nothing fell through the cracks, and prep all of us for the next day.
The campaign mantra had been simple: a higher standard of political ethics and better fiscal management. From the beginning, we thought the biggest problem facing our new administration would be the budget deficit. Sundlun had promised to restore the sales tax to 6 percent after DiPrete had raised it to 7 percent six months earlier. To do that would require $34 million in cuts, not at all that much in a budget of $1.3 billion. But the deficit had ballooned over the course of the year, and ultimately as much as $260 million would have to be slashed just to bring the budget into balance, never mind keep Sundlun’s promise to cut taxes. By inauguration day, there was no disputing that Rhode Island faced an enormous deficit – percentage wise, the largest in the nation. The looming deficit colored every policy decision we made during the transition, and while we disputed its magnitude with the outgoing administration, RISDIC began to crumble.
The collapse of Heritage Loan and Investment Company, and subsequently RISDIC, is now part of Rhode Island legend. The Federal Hill institution was taken over by RISDIC in October 1990 when examiners found its book to be almost incomprehensible. A few weeks later, Joseph Mollicone, Jr., president and controlling shareholder of the bank, disappeared and ultimately turned into a fugitive as it became clear that more than $13 million in bank funds had also disappeared.
RISDIC made good on Heritage deposits. But depositors at other RISDIC institutions, led by insiders – members of the banks’ boards of directors and upper management – were worried that the agency would not be able to cover their deposits if the need arose. Thus began a series of what Whitehouse called “silent” runs, large-scale withdrawals by these insiders and others that gained momentum in early December and made the ultimate problem much worse.
Every afternoon now, Whitehouse arrived at our meetings at South Main Street from his vigil at the Department of Business Regulation (DBR). His updates of the banks’ dwindling liquidity grew increasingly alarming. Initially he told us, “I don’t know how they’re going to make it.”
Soon, though, that became, “They’re not going to make it.”
Shortly before Christmas, he was predicting that they might not even survive the next day. At first we figured that Whitehouse – the new kid on the team and not part of our original campaign group – was overreacting. Soon, we found out he was right. It was the morning of December 19, the Wednesday before Christmas. L. William Seidman, chairman of the Federal Deposit Insurance Corporation, and former Iowa Senator Roger Jepsen, then chairman of the National Credit Union Administration, arrived from Washington with a small army of regulators and examiners for a meeting at the State House. The DiPrete and Sundlun teams listened as Seidman delivered a two-part message: First, we’ve taken a look at these institutions and it’s really bad. Second, we can’t help you. Seidman suggested they seek what he called private capital to solve the problem. “There’s only one person in this town with that kind of money,” Sundlun said, and set up a meeting for that very day at 4 p.m. with Terry Murray, head of Fleet Bank.
The meeting that followed was cordial, but ultimately unsuccessful. Murray gave the same answer Seidman had given: sorry, we can’t help.
It was over for RISDIC.
Next day, Whitehouse began camping out in a conference room at the DBR, the agency responsible for examining and supervising the RISDIC-insured institutions. Federal officials joined them as well. The Treasury Department, even the White House, was involved now, concerned that a bank failure in Rhode Island could spread a panic that might topple other institutions weakened by the Northeast’s faltering economy. For Whitehouse, the immediate task was to determine just how bad it was. Meanwhile, RISDIC officials tried desperately to limp to January 1, so Sundlun could provide the necessary leadership.
We continued to hope for the best, that the feds would show some flexibility. On one hand, they were urging us not to do anything to incite a panic. On the other hand, they steadfastly refused to consider insuring three institutions we believed were healthy: Union Deposit Loan and Investment Bank, Chariho-Exeter Credit Union, and East Providence Credit Union. That refusal made it clear that whatever happened with RISDIC, we were on our own. Not only was there no federal money in the offing, but regulators were also completely unwilling to assume any risk.
Shortly after noon on December 31, the phone rang in the DBR conference room. Whitehouse picked it up. “A RISDIC attorney was on the other end,” he remembers. “He said, ‘I’m calling to let you know that the board is meeting and we have voted to put RISDIC into conservatorship. We’re sending documents to you and the governor (Sundlun) reflecting what we’ve done.’”
Now we knew how the end would come.
Whitehouse hung up and redialed. “RISDIC just pulled the plug,” he told Sundlun, “and voted to put themselves into conservatorship.”
“What the hell does that mean?” Sundlun asked.
“It means we own them now.”
Around four that afternoon, I was at the transition office at One State Street finishing up the writing of the next day’s inaugural address when I got a call from State Senator David Cruise. “The governor wants you to come down to the meeting a little early today,” he said.
I headed down the hill toward South Main Street. When I arrived, Whitehouse, who’d been huddled with Sundlun, showed me the RISDIC letter. “Conservatorship” looked an awful lot like “receivership,” legal-speak for what happens when bankrupt companies are taken over by the government.
“So this is how it happens,” I remember thinking. But how to deal with the mess in the short term? Eventually, we expected that the state government would establish something like the Resolution Trust Corporation (RTC) to sort through the rubble of the former credit unions. The RTC had been the feds’ creation in the aftermath of the meltdown of the country’s savings and loan industry. It had taken over and managed the assets of the S&Ls and paid off depositors, with the government making up the difference. To try to close the gap, it sold the assets of the old institutions for the best possible price. Ultimately, the successful Depositors Economic Protection Corporation (DEPCO), conceived and announced the following weekend, would become Rhode Island’s own version of the RTC.
But that was days – or weeks – away, or so we thought. The question now, as the sun set on 1990, was what to do with these credit unions that no longer had deposit insurance, as the law required. Many of them were in pitiful financial shape, tapped out on their lines of credit, some with only pennies per depositor left on-hand.
We had three options to thrash out, none of them appealing. First, assume responsibility for all the credit unions with the full faith and credit of the state. This would allow business to continue as usual on January 2. But no one knew how big that hole was that taxpayers would have to fill. (Ultimately, it would turn out to be $333 million of the $1.7 billion in total deposits that were paid back). And no one, least of all Sundlun, was ready to take such a big leap off a cliff in the dark. With the budget deficit as a backdrop, full faith and credit was out.
A second option was receivership, which meant that a court-appointed receiver would take over the assets of the institutions. Depositors would file claims against the receiver, and as the assets of the credit unions were sold, they would get some money. Given the depressed state of the economy, though, this was an awful option. I cringed, thinking of my parents nearing their sixties and forced to extract what remained of their life savings from the receivership that was once Columbian Credit Union. The obvious flaws in the receivership approach led us to kill that idea, which was probably the second worst possible choice.
The only one that was even worse was to allow several dozen virtually bankrupt banks and credit unions to open for business on January 2 without insurance. Any available money would be gone in minutes – maybe seconds. The resulting runs would have been a clear danger to public safety, particularly for the desperate thousands waiting outside in lines, watching their breath evaporate in the cold air, just as their savings had done.
We all knew that without full faith and credit, opening the day after New Year’s was not an option. So with surprising speed, the group decided to close the banks. Sundlun, quiet until now, nodded grimly. Everyone else, surprised at the quick consensus in favor of such a drastic action, fell silent. “Then that’s it,” Sundlun said. It was not a question. More silence. Then, the 5:30 p.m. fireworks from First Night exploded with a roar that reverberated down South Main Street and rattled the windows. It seemed to signal both the end and a beginning.
Whitehouse got on the phone and started making calls, tending to millions of details that needed to be handled before heading over to Hinckley, Allen, Snyder, and Comen. I trudged back to the transition office and wrote a brief new paragraph for the inaugural address alluding to the “problem.” Then I looked up a copy of Franklin Roosevelt’s speech to the nation after he declared a bank holiday in 1933 following panicky wide-scale bank runs. From that, I drafted a statement for the governor to give the following day. Toward the end of the draft remarks, seeking to strike an FDR-like tone, I wrote for Sundlun the line, “I am confident” that the crisis will be resolved quickly, and handed the pages to the governor.
In the entire three-page, double-spaced text, Sundlun made only one change. He crossed out the words “I am confident” and penciled in the more tentative “I hope.”
