It’s a Wonderful Sub-Prime Life

It's A Wonderful Life (1946 movie)

The Bailey Building & Loan Association (BB&L) was one of the worst run banks in America. It would have topped the FDIC’s problem bank list, if such a list had existed in 1946. In fact it almost certainly would have failed every financial test of today’s regulators. The institution was poorly capitalized, its assets were concentrated in a single asset class, and it was a sub-prime mortgage lender. It was also a figment of Frank Capra’s imagination and Jimmy Stewart’s beleaguered bank in the Christmas movie classic “It’s A Wonderful Life.”

There are so few movies where the protagonist and hero is a banker, that I am loathe to point out that if George Bailey were a banker in today’s economy, the FDIC would be suing him for negligent management.

Where was FDIC?

It appears that Bailey Building and Loan was one of the few remaining institutions that was not a member of the FDIC’s depository insurance plan. Why else would its depositors have been so desperate to get their cash at the first sign of trouble? In the late 1940s only five banks a year were failing out of the 12,000 nation-wide. In a period of incredible growth and readily available federal insurance, George Bailey ran a pretty dodgy operation.

BB&L must have been a state chartered depository financial institution. They specialized in collecting savings deposits from customers and investing in residential mortgage loans. The bank was mutually held, meaning that depositors and borrowers had the ability to direct the financial goals of the organization. Like many mutual lenders, they lent to local homeowners, in BB&L’s case their loans were concentrated to residences in “Bailey Park.” Bailey Park was a neighborhood made up exclusively of the struggling residents of Bedford Falls who were also George’s customers. With such narrow concentration of the portfolio both geographically and demographically, regulatory alarm bells that would be sounding. (It’s unclear if alarm bells impact angel wing distribution.)

Where the (Alleged) Negligence Lay

George Bailey asks Uncle Billy where the money is

Uncle Billy was not a bonded transport service

The FDIC’s negligence suit would likely have centered on George’s entrusting the cash deposits of the bank to an unbonded transport service – his inebriated Uncle Billy. This would not bode well for George. It appeared that the feckless George also failed to obtain the then-common Banker’s Blanket Bond (already in its 24th revision in 1946). The Bankers Blanket Bond insured against “loss of Property while in transit sustained through robbery, larceny, theft, hold up, and mysterious unexplainable disappearance.”

Happy Ending? Or Lehman-Bound?

In last-minute negotiations with his regulators, George had found new creditors willing to back BB&L, including one Sam Wainwright, with a line of credit for $25,000. With virtually no equity and a new debt of $25,000 the institution would have been more leveraged than Lehman Brothers every dreamed. It’s clear George had never heard of Basel-compliant. His institution was seriously undercapitalized and must have lacked even the most rudimentary of compliance manuals.

By seeing a world without him in it, George learned that “no man is a failure who has friends.” He should have also learned about the basics of insurance. That and the FDIC is ready to bring suit against those that negligently manage their financial institutions. After all how do you think regulators earn their wings?

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This post originally appeared as “It’s a Miserable Bank” in American Banker, 19 December 2011, and in WillisWire that same month.

About Richard Magrann-Wells

Richard is a Executive Vice President with Willis Towers Watson’s Financial Institutions Group based in Los Angel…
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