I have served on boards of directors three times, and each time my service ended abruptly. Once it was because I quit. Once it was because I spoke up. Once it was because I should have.
The Federal Savings and Loan Advisory Council advised the old Federal Home Loan Bank Board, which regulated the savings and loans before they went under or were turned into banks. The council had 12 directors, 10 of whom were supposed to be savings and loan executives.
I was, briefly, one of the two supposedly independent outsiders. (The other, to my amazement, was Gib Roessner, at that time the chief executive of City Federal, the largest S&L in New Jersey. Why was he considered independent? Because he had a broader perspective and contacts than the typical S&L chief - but in my book he was still, first and foremost, a thrift CEO.)
I got into trouble at the outset - for flying coach. The rest of the board members traveled first class, and they didn't want someone to set a precedent by moving to the back of the plane.
What really got them, though, was when they wanted thrifts to get Treasury tax and loan account balances.
Commercial banks were allowed to hold tax collections in these "T&L accounts" so that depositors' tax payments would not go immediately into the Treasury's account at the Fed and thereby draw down reserves and bankrupt the banking system. The bank on which you wrote your tax check would keep this money in a T&L account until it was finally called for movement to the Treasury's account at the Fed. The Treasury then spent the money immediately, so it went right back into the banking system.
How long did the typical T&L deposit remain in the bank? Eleven days. Well, the S&Ls wanted these T&L balances, too, even though no one wrote checks for taxes on a savings and loan.
I tried to explain why the banks had the balances. Then I added that you can't do very much in the mortgage market with an 11-day balance. (Maybe finance a very, very small house.)
But they said, "If the banks have them, we want them, too." I am sure this was why I was the only member ever not to be reappointed for a second year.
In a July column I wrote about having been a director of a medium-size commercial bank that weaseled out of a line-of-credit commitment to a real estate investment trust of which I was also a director. The REIT sued the bank, so I had to resign from one or the other. I chose to stay with the REIT, since it was in the right.
This came as a great relief to the bank's top officers. Why?
It was buying its own stock for more than book value. Now, I can see buying your stock below book; that brings reverse dilution and raises book value. But buying above book dilutes shareholder equity.
"Why are we doing this?" I would ask.
"We know of no investment as valuable as buying in our own stock," I was told.
The real reason, I learned later, was that the top managers had all bought stock on margin. If the stock dropped below a certain level, the managers would have to ante up more cash to meet margin calls, so they had the bank buy in its own stock to boost the price.
When the REIT conflict arose, the bank's executives were happy to see the guy who had made such a pest of himself on the buyback issue leave.
I stayed with the REIT until it went bankrupt and a conglomerate bought the assets. But I should have quit soon after it sued the bank.
There had been warning signs of trouble. Whenever I asked what our borrowers put into properties they were building, the answer was "sweat equity." What this meant, I later learned, was nothing.
The most important warning came at a meeting where the managing trustee admitted that we did not have enough income to pay our monthly dividend. He then proposed that we pay it anyway, assuming that a laggard debtor would come across in the next few days.
That is when I should have quit. The REIT paid the dividend, but that just postponed the inevitable for a month. If I had quit, I might not have been a defendant in the class action that claimed we had hidden the truth from shareholders.
Naturally, with this background, I have never been asked to serve on another board.
Mr. Nadler, an American Banker contributing editor, is a professor emeritus of finance at Rutgers University Graduate School of Management in Newark, N.J.
