In the 1990s, I manage failed savings & loan institutions until becoming a Sr. Criminal Investigator. The RTC/FDIC attempts to recover losses of the depositors and the the taxpayer by whatever means required. The recovery includes the pursuit of responsible officers & directors and liability insurance coverage. As it progresses, criminal activity is a significant component. It is probable that breach of criminal statutes is a material factor in Madison’s failure.
Madison Guaranty Savings & Loan forms a real estate subsidiary, Madison Financial Corporation. It invests heavily in a manufactured housing development named Whitewater. Whitewater garners much national publicity because it is political. Arkansas law restricts a bank’s investment in or loans to a real estate subsidiary to 6% of the bank’s capital. Regulators warn Madison on numerous occasions to cease this activity. And yet, Madison ownership & management ignore them. Whitewater Development and others require ever increasing capital for development and operation. Bank depositors unwittingly provide the funds for this private development. And, the ultimate plan is to sell Whitewater to insiders.
Our investigation proves that Madison executives circumvent normal & accepted banking practices purposely. In order to provide funds for Whitewater, executive management approves significant overdrafts regularly. Subsequently, the bank charges-off overdrafts monthly as it notes in Board minutes. Moreover, the overdrafts exceed $2,000,000 and are a significant factor in Madison’s failure. As a result, the CEO is indicted and convicted, dying in prison.
Whitewater is just one of Madison’s criminal investigations that leads to failure. Moreover, it illustrates the potential for abuse within the financial industry. Honorable owners, professional management and well-trained state & federal regulators are essential. They mitigate the chances for wide spread abuse. However, depositors, investors, borrowers have a duty to investigate the banks in which they invest their reputations.