Notes

Aside from an agricultural downturn that ravaged banks throughout the 1920s, the next major crisis after the Panic of 1907 was the Great Depression. More than 6,000 banks failed between 1930 and 1933, after which the pace of closures slowed to a nearly imperceptible drizzle. But while Bank of America sidestepped this fate, it only barely survived. In the early 1930s, regulators concluded that Bank of America was in "appalling shape." That it was "hopelessly insolvent" and "could not possibly stand up on its own," says Gary Hector in Breaking the Bank: The Decline of BankAmerica. The official book value of its holding company was $49.82 per share in 1930. Yet, the bank's own chairman estimated its value at a mere $14.50 a share. By 1933, Bank of America was within hours of being declared "unsound" and thus subject to subsequent failure or seizure. The governor of the Federal Reserve Bank of San Francisco believed Bank of America was "on the edge of bankruptcy." Had it not been for a middle-of-the-night appeal directly to the U.S. Treasury Secretary by a well-connected political operative, regulators wouldn't have allowed it to reopen after the week-long bank holiday in March of that year. The U.S. bank industry fell into a 40-year slumber after the Great Depression. While World War II fueled a brisk economic recovery across the United States, memories of the 1930s remained on risk managers' minds. When conflicts arose between revenue growth and risk management, the latter won the day. This changed in the 1970s. Soaring oil prices from the oil embargos of 1973 and 1979 triggered rapid inflation, caused the Federal Reserve to raise short-term interest rates to nearly 20%, and resulted in the final breakdown of the international monetary system. To top things off, newly enriched oil-producers like Saudi Arabia started depositing billions upon billions of dollars into U.S. banks which then needed to be lent out, lest the banks report lower profitability. The net result was a series of linked crises in the 1980s that culminated in the less-developed-country crisis. Throughout the period, banks recycled "petrodollars" from oil exporting countries to oil importing countries, principally throughout Central and South America. "Countries don't go broke," was the mantra proselytized by Citigroup's indomitable CEO Walter Wriston. Despite Wriston's assurances, social agitation coupled with oppressive debt burdens pushed countries like Argentina and Mexico to begin defaulting on their bank loans in the mid-1980s. Virtually every large U.S. lender was hobbled, though few as critically as Bank of America. In 1985, it posted its first quarterly loss since the Great Depression. By the second quarter of 1986, its trailing 12 months' loss exceeded $1 billion. Only one other bank in history, Continental Illinois, had ever lost as much -- and it ended up as a ward of the FDIC.