A bank is like a car with the CEO at the wheel.

Next to the CEO are the loan officer, saying "Go left!' and the investment officer, saying, "Go right!"

Lying on the floor are the marketing officer, with a hand on the gas pedal, and the operations officer, with a hand on the brake.

In the middle of the back seat is the market research officer, looking out the back window and saying, "I can see the road clearly, let me steer!"

Next to the researcher is a consultant saying, "Something is wrong with this car! Pay me to fix it!"

On the floor in the back is the examiner, saying, "Stop the car! I want to take it apart!."

Finally, sitting in back corner is the trust officer, fast asleep.

I use this old story as a launching point for this argument:

No matter who else is trying to chart your course, if your trust officer is asleep, your bank is definitely in trouble.

Trust assets, properly managed, can be a marvelous source of growth and profits for the bank, with little demand on capital or top officials' time. But if something goes wrong, they can cause a major crash.

I know one bank that had a ton of IBM stock in one account, and IBM rose so much in one day that at the end of the day IBM comprised more than 5% of that account's holdings by value. The next day, IBM dropped in price and the holding dropped below 5%.

But the trust customer sued, saying the bank had allowed its IBM holdings to be more than the legal or contractual limit allowed, and demanded compensation for the amount that IBM subsequently declined below that one day's high.

I have heard of banks being surcharged many millions for handling accounts as registrar/transfer agent for a customer later proven to be fraudulent. The bank was sued on the old "deep pockets theory" - you sue the party with money.

Trust operations are no sleeping matter, as my old friend Joe McElroy, who has spent four decades in trust work, can attest.

Joe spent 23 years with Bank of New York, rising from trainee to top trust officer. Then he decided to try for one of the biggest trust jobs in the nation - head of trust at the old Manufacturers Hanover Trust.

Joe feels one of the main reasons he won the job was because he had investment as well as administrative experience at a "hands-on" level. This allowed him to understand the essentials and the nuances of both major aspects of the business without taking a crash course.

Joe is now retired, but happily works out of his Westfield, N.J., home, as a consultant in lawsuits and arbitration involving business.

At first, Joe refrained from serving as an expert witness against his old industry. But one day as he was about to turn down a case against a bank, the lawyer asked him just to hear his story.

Joe was horrified at what he learned.

The bank as executor had failed to perform fundamental duties. It had not used due diligence in protecting the estate, and a substantial and avoidable loss occurred.

Joe joined the plaintiff's team, which won in surrogate's court.

What advice does Joe give to community banks with trust departments? Watch out - for fraud, dishonesty, incompetence, and unethical conduct.

He hastens to emphasize that the true "rotten apples" in the trust business are few - limited, in his long experience, to fewer than a handful. Yet the effects of this tiny minority can be devastating to the overwhelming majority.

Your bank's reputation for honesty is its most valuable asset. Guard it fiercely. If it is at all evident that some party is behaving improperly or is ignoring sound defense of trust assets, the bank must take remedial action immediately if it wants to avoid the law courts.

Here are some more of Joe's pointers.

*If something looks peculiar but your bank lacks the expertise to handle it, turn to correspondents - or even to bank examiners - for advice.

*Refer to the "Comptroller's Handbook for Fiduciary Activities" for answers. Though state banks are not under OCC jurisdiction except for rules and procedures on common/commingled funds, but many of the rules and citations in the handbook apply to all trust departments.

*Beware of caving in to self-interested or misdirected pressure from co- trustees. Remember, banks are usually held to a higher standard of skill, and must apply that skill for the sole benefit of the trust.

*Document, document, document. Joe has seen situations where he was convinced that the bank had said and done all the right things but couldn't prove it in court when confronted with a hostile co-trustee or beneficiary with a "selective" or "faulty" memory.

*You have a serious obligation to keep informed on all matters pertaining to your trusts.

*Behave like a banker! People come to banks in part because they expect high standards there.

*Don't turn the management of the trust department over to the cost cutters and marketers. If the old-fashioned, dull, but experienced trust officer has no voice in policy, you will lose your best insurance against disasters. Your trust department profits will be short-lived, and you won't be able to deliver on all the promises that have been made.

Sensible cost control? Yes. Aggressive but realistic selling? Yes. Prudence and fiduciary principles? Always.

Finally, the trust business is a common-sense business. When you have a problem, just ask yourself, "Would I want my solution described on the front page of the local newspaper?"

Works every time.

Mr. Nadler is a contributing editor of the American Banker and professor of finance at Rutgers University Graduate School of Management.

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