What I know about banking could be written on the back of a $3 bill, so it was with some trepidation that I sat down to read the official report on the spectacular collapse of the New Orleans bank, First NBC.
The reasons had to be too technical to grasp if the extent of your knowledge is that lending expensive money to people who can't pay it back is a bad idea.
Even if bankers took leave of their senses, forgetting the lessons of the 2008 financial crisis, moreover, it was not conceivable that state and federal regulators would overlook elementary mistakes for several years while losses grew to $996.9 million. No, this was going to be a head-scratcher; the reasons for the bank's failure were bound to overtax the layman.
Think again. The report, prepared by the Federal Deposit Insurance Corporation's Inspector General, requires no more than a basic command of bureaucratese. First NBC was the victim of schoolboy error, and a child could understand why it will be remembered as the Deposit Insurance Fund's costliest loss since the bankers brought the country to its knees a decade ago.
The recipe that culminated in the collapse of First NBC Bank this spring had many of the same ingredients present in other large bank failures…
The great subprime mortgage caper brought forth just one prison sentence, and running a bank into the ground does not require the commission of criminal offenses. A federal grand jury is investigating the First NBC debacle, however, and if an indictment is handed up, the bank's founder and former Chief Executive Officer Ashton Ryan is presumably the likeliest to be named in it.
Ryan, according to the Inspector General's report, was able to chart the bank's reckless course because his board was supine and regulators were inattentive. While the report does not allege criminality, it does reveal that Ryan fell short of the ethical standards the public is entitled to expect from the custodians of its money.
Ryan was well remunerated for his dominant role at First NBC, earning $1.6 million in 2015, but evidently suffered an attack of the shorts on at least one occasion. That was when he borrowed $2 million from a First NBC customer who had just taken out a $9 million unsecured loan. Ryan made several “questionable lending decisions,” according to the report, but few can have involved such a blatant conflict of interest as this one. They were, however, frequently and manifestly imprudent.
After Ryan established First NBC in 2006, it rapidly grew and apparently flourished in the post-Katrina bustle. The bank soon had 35 branches in Louisiana, and five in the Florida Panhandle, as well as several subsidiaries that “were used primarily to facilitate investments in various federal and state tax credit investment programs.”
A federal grand jury has opened a criminal inquiry into the $1 billion collapse of First NBC Bank, a onetime darling of the New Orleans busine…
Whoops! Some technical jargon there. Evidently, First NBC wound up with a sackful of tax credits and no profits to set them against, an investment strategy that would never have occurred to us amateurs. But there is no need to grasp the arcana of the banking business to see why First NBC was doomed.
The Inspector General's report notes that First NBC paid higher rates of interest than all its competitors, which not only reduced profits but attracted deposits that exceeded federal insurance limits, and were liable to be promptly withdrawn at the first hint of trouble. Sure enough, when it turned out that “accounting errors related to the tax credit investments” had led First NBC to overstate is earnings by $54 million in its 2015 financial statement, a run on the bank ensued and its fate was sealed.
By the end of 2016, Ryan had been removed as CEO and was ousted from the bank entirely just before it went belly up in April of this year.
A supine board had allowed him to call pretty well all the shots, with authority to approve loans off his own bat to the tune of $13 million and no senior officials with the clout to restrain his worst excesses. Ryan doubled as Chief Financial Officer while loans were made and extended to “financially distressed” customers, sometimes just so they could meet their existing obligations. The board attempted to put some checks and balances in place, but too late; the bank's fate was sealed. The feds should have move in as early as 2010, according to the Inspector General, who noted that all the classic warning signs, such as a headstrong and cavalier CEO, were evident from the beginning.
When First NBC closed down, it was sitting on $4 billion. You'd have to be an expert to turn that into a disaster.