Not All Bank Failures Are Created Equal
Remembering the bank founded by Jackie Robinson and how regulators dealt with its demise
This month, the Federal Deposit Insurance Corporation announced its seizure of New York's First Republic Bank. The bank's failure was second only to that of Washington Mutual’s collapse amid the 2008 financial crisis. As was the case with Washington Mutual in 2008, JPMorgan Chase stepped in to purchase First Republic.
The bank’s failure was the latest in a flurry of spectacular bank collapses. In April, three high-profile banks failed over just five days. Regulators seized Silvergate Bank and Signature Bank, both with significant exposure to the cryptocurrency market. In what some have described as the first high-tech bank run, Silicon Valley Bank lost $40 billion in deposits over a few hours.
With each of the banks in question, the government made depositors whole, even accounts with balances above the FDIC’s $250,000 insurance limit. As a result, tech companies with enormous bank deposits, such as Roku, which had $487 million, 26% of its $1.9 billion in cash held at the bank, never lost a penny.
Whether the FDIC’s approach to the recent bank failures constitutes a bailout or the most prudent approach to staunching a potential financial crisis is an item of fair debate. That said, the regulator's current stance on bank failures bears little resemblance to how it handled the demise of a legendary Black-owned financial institution — a bank that happened to be one of my clients.
‘Our Bank’ in Harlem
After he retired from the Brooklyn Dodgers in 1957, Jackie Robinson, major league baseball's first African American player, made a name for himself in the business world.
So after his retirement, Robinson joined Chock Full o'Nuts, becoming the first Black vice president of a major American corporation. He launched several businesses, including a construction company and a clothing store. Then Robinson set his sights on another goal: bringing a Black-owned and controlled bank to Harlem.
Founded in 1964 by a group of Black and Jewish investors led by Robinson, Harlem-based Freedom National Bank became one of the largest Black-owned banks in the United States. Initially, however, Harlemites were wary of Robinson’s venture.
Many in the community erroneously suspected that the ex-Dodger was a frontman for wealthy white investors. As a 2019 Yahoo! Finance piece on Robinson explains, there was a legitimate reason for their concern:
Harlem never forgot the lesson it learned from Dunbar National Bank. In 1928, John D. Rockefeller, Jr. established a bank in the neighborhood in order to “help the negro help himself.” The Harlem business community was promised a significant stake of the bank, but that never came to pass. Rockefeller kept 75% of the bank’s stock and refused to sell the remaining shares — until he was “sure the bank would succeed.”
The unsavory deal left a bitter taste in the mouth of its residents. So when Robinson came uptown pitching a black-owned bank that would work for the betterment of the community — the very community the bank was looking to serve was leery.
Many in Harlem feared that Robinson was merely the frontman for white bankers. He was even criticized by Malcolm X, who believed in black separatism and took issue with Robinson’s integration approach to civil rights.
Despite the community's initial reservations, Robinson, who served as the bank's first chairman, was undeterred in his mission to create a financial entity to finance “the economic aspirations of the nation’s pre-eminent black neighborhood.” In time, sentiments changed, and the Black community warmed to Freedom National:
The black community eventually embraced the institution, endearingly calling it “Our Bank.” Clarence Funnye, leader of the Congress of Racial Equality, wrote of the bank: “Before Freedom National, you went into a white bank with the distinct impression you went in with what you had in your hand, begging the powers that be and generally you were turned down. With Freedom, the community looks less like a colony, less of an arena of exploitation.”
For years, the bank struggled to balance a desire to provide financial opportunities to Harlem’s minority community with the regulatory constraints of prudent banking. But in the end, the combination of a lousy economy, loan losses, and internal disputes was more than the bank could withstand.
On November 9, 1990, regulators shut the doors of Freedom National Bank. At the time, the institution founded in the wake of the civil rights movement was one of the largest Black-owned banks of the era. It boasted $101.9 million in assets, over twenty thousand depositors, and nearly one hundred employees.
But instead of lending to community businesses, almost 60 percent of the bank's assets were in securities. Robinson’s goal of investing in Harlem was practically an afterthought.
To be sure, the bank had its problems. But could regulators have done more to save Freedom National Bank or lessened the financial impact on its depositors? Curiously, FDIC showed little interest in preserving the bank or allowing it to be acquired, even though a deal was on the table:
After Federal regulators dismissed several recapitalization plans that would have involved Federal assistance, the board approved a merger with the Boston Bank of Commerce, Mr. Robinson said. On Nov. 7, the board and the Boston bank presented the plan to the Comptroller's office, which asked for time to review it.
"Nothing was said to us that day or the next that indicated they were not going to accept that offer," he said. "At least somebody could have said to us, 'Friday is the deadline.' "
Ronald A. Homer, chairman and chief executive of the Boston Bank of Commerce, said regulators informed his bank late that Thursday night that they were unsure that the bank had enough time to raise the money for a merger.
According to an editorial in The Washington Post the following year, the FDIC’s handling of Freedom National Bank's problems, which came during a recession and the worst series of bank failures in fifty years, was a symbol of regulatory inequity (emphasis in bold is mine):
[The FDIC’s] decision is seen in Congress as the most serious political blunder the FDIC has made in years.
In the vast majority of the 800 bank failures in the last four years, the FDIC did not simply pay off insured accounts. Instead, the agency usually has arranged for new owners to take over the failed banks so that all the customers get all their money back.
That wasn't done in the case of Freedom National, a decision that has led to sharp bipartisan criticism in both houses of Congress, where Freedom National has become the symbol of how unfair deposit insurance can be…
The losses suffered by Freedom National's depositors contrast with what happened to customers of Bank of New England in Boston last week. No depositor lost a dime at Bank of New England, one of the biggest bank failures in history…
It would have cost the FDIC about $8 million to pay the uninsured depositors in full, while the agency had to spend more than $200 million to cover accounts over $100,000 at Bank of New England.
Freedom National only had $14.7 million in accounts of more than $100,000 (the FDIC’s insurance limit at the time). But instead of making its depositors whole on the entirety of their deposits, the FDIC only guaranteed the first $100,000 in each account and only fifty cents for every dollar above the FDIC limit.
Among the customers whose deposits exceeded the FDIC insurance limit were the United Negro College Fund, the National Urban League, and Columbia University. Those depositors, as well as Abyssinian Baptist, Canaan Baptist, and 11 other churches, were essentially washed out along with the bank’s investors.
I wasn’t surprised when the FDIC closed Freedom National Bank. Just disappointed.
In those days, Harlem was a different place. There was no gentrification, GAP, Starbucks, or Whole Foods stores. At the time, I was a bond salesman for a Little Rock investment firm. The first time I visited Freedom National, the only taxis in Harlem were the so-called “gypsy cabs,” not the yellow taxis we’ve come to associate with “The City.”
When people at my firm learned about my plan to visit a bank in Harlem, they were concerned for my safety. But I never felt threatened in Harlem. And before long, the bank on the same block as the Apollo Theater was one of my best clients.
But the relationship was so much more. Every time I visited Freedom National Bank, it was like stepping into history. I was proud to say I did business with the bank started by Jackie Robinson.
A few days after the bank closed for good, I got a call on my direct line. It was an examiner for the FDIC. They needed me to walk them through the bank’s investments.
Ultimately, I helped to sell off the bank’s entire securities portfolio. I remember how awful the whole thing felt. Now, when I see how regulators deal with banks deemed “too big to fail,” I can't help but recall the demise of Jackie Robinson’s labor of love.
I'll always believe that while Freedom National Bank may not have been too big to fail, the bank on the corner of 125th and Frederick Douglass Boulevard, Harlem’s own bank, deserved better than the death sentence it received.
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Thanks for sharing.
A sad story for Harlem and the depositors, so unfair.