A Bit of Embarrassment

"I don't know of a single case where bank failure has not been attributable to gross misconduct," said the U.S. Comptroller of the Currency. Jaunty, loquacious James J. Saxon was in the limelight again and loving it, but what U.S. bankers saw was a glaring spotlight trained right on them. The occasion was the opening last week of hearings by Arkansas Senator John McClellan and his Senate Investigations Subcommittee, familiar probers of the nation's sinners, into a recent rash of troubles in U.S. banking.

The nation's banks have never been more prosperous, but their very prosperity has created some problems. Some shady elements have been attracted by the prospects of fast money, and even the Mafia and Murder Inc. have been tied to some bank difficulties. A few banks, unable to resist the lure of business on every side, have overextended themselves and met with woe. Eight banks were shut by state or federal authorities in 1964 and another four have failed this year--more than in any comparable period since the Depression.

Senator McClellan went out of his way to state the indisputable fact that the U.S. banking system is "basically sound and of the highest integrity." Reno Odlin, president of the American Bankers Association, pointed out that last year's failures involved only 0.06% of the nation's banks, said that "banking is probably one of the most racketeer-free industries in the country." All very true --but that did not take the sting out of the daily headlines about banking scandals, and it is unlikely to lessen the embarrassment of the banking community as the weeks of investigation wear on.

On to Las Vegas. Jim Saxon, who supervises the 4,700 U.S. national banks, charged as a starter that underworld activity, gambling and phony securities were behind the recent failure of chartered national banks in California, Colorado and Texas. He accused Don C. Silverthorne, president of the defunct San Francisco National Bank ($41 million in assets), of "gross misconduct and gross deception," said that he had exacted huge fees from some borrowers and then spent part of the money gambling in Las Vegas. "Untrue--and he knows it," replied Silverthorne, who gets his chance to testify this week.

At the Brighton National Bank in Colorado, said Saxon and his aides, a Denver mystery man named James W. Egan, whom they described as an apparent "front for gangsters," secretly got control of the bank before it had even opened, and "completely milked" its assets. Two financiers, one with a criminal record, took over the First National Bank of Marlin, Texas, through a front man, said Saxon; they promptly turned around and collected $179,000 in commissions for selling the bank mortgages of dubious value.

Saxon defended his controversial record of chartering 369 new national banks during 1963 and 1964, insisting that such expansion was essential to keep up with the expanding economy and to generate competition among lenders. Like many bankers, he blamed bank takeovers by unsavory characters on a loophole in federal law (since closed) that left federal officials in the dark about changes in bank ownership. Mindful of congressional cries that gangsters may still be buying up banks to sanitize their hot money, Joseph W. Barr, chairman of the Federal Deposit Insurance Corp., announced that he has set up a unit to help the Justice Department weed out criminals in banking.

Riskier Items. The McClellan hearings are the more embarrassing to bankers because they come just when a debate is heating up over whether U.S. banks have overextended credit. Squeezed between rising interest costs paid to depositors and stable rates on loans to business, banks are shunting more and more money into such high-yielding but riskier items as mortgages and consumer loans; they are also, some critics charge, lowering standards for borrowers. Installment credit extended by commercial banks has more than doubled since 1956, rose another 11% last year to $24 billion.

Most bankers still do not think that that is too much, but the number of critics is growing. Arthur L. Nash, senior loan executive of Manhattan's Brown Brothers Harriman, fears that "the stage may be set for trouble" because of careless lending, and H. Frederick Hagemann Jr., president of Boston's State Street Bank, worries because "banks are more highly loaned than at any time since the '20s." Says Ransom Cook, president of San Francisco's Wells Fargo Bank: "The proper criticism now is that banks aren't conservative enough." If Senator McClellan's current probe does nudge bankers in that direction, some bankers feel, it may even be worth the embarrassment.

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