Franklin National Fizzles Out

The usually understated Arthur Burns, chairman of the Federal Reserve Board, made no attempt to play down the dramatic resolution last week of Franklin National Bank's vault of trou bles. "The entire financial world," said he, "can breathe more easily, not only in this country but abroad."

In fact, Franklin's shocking saga of mistakes and mismanagement had caused fears that the nation's banking system was shaky and that lack of public confidence might lead to a run on many banks. The end came surgically, as U.S. Comptroller of the Currency James Smith declared that Franklin, once the 20th largest of the nation's more than 14,000 banks, was insolvent.

To the relief of depositors and other bankers, Smith announced that Franklin's 104 branches would be taken over immediately by European-American Bank & Trust Co., a little-known consortium of six major European banks.

Thus Franklin's flop, the largest bank failure in U.S. history, had turned into what Burns modestly called a "decent marriage."

The troubles began in 1964, when Franklin National expanded from its home base on Long Island into Manhattan. In the fiercely competitive Manhattan market, established banks had long ago signed up most of the solid corporate customers. Franklin National felt obliged to make many high-risk loans to young companies. Eager to impress, Franklin also saddled itself with some 25% more space than it needed in plush offices on Park Avenue and elsewhere.

Wild Gambles. By 1970 Franklin was beginning to suffer steadily declining operating earnings. Last May the situation had become so bad that its managers concluded that the only way the bank could survive was through a merger. Then Chairman Harold Gleason got devastating news: Franklin had lost some $39 million because of un authorized trading in foreign currencies.

Five weeks later the bank reported that its losses for the first five months of 1974 actually totaled a numbing $63.6 million. The reason for part of these gi gantic losses is still mysterious. Some analysts believe that wild gambles on the swings of foreign exchange rates oc curred in the international department when Peter Shaddick was in charge.

Frightened depositors began making massive withdrawals. In desperation, Franklin National turned to the Federal Reserve System, which bailed it out with loans totaling $1.75 billion, the biggest outlay it had ever made to a member bank.

Problems worsened when reports began to leak that the Securities and Exchange Commission was investigating Franklin's dealings with an obscure Swiss bank called Amincor. The Swiss may have helped to arrange two foreign-currency sales for Franklin that resulted in phony profits of $4 million. This buttressed Franklin's shaky finances and enabled it to pay stockholders their dividends. Somewhere in the picture may have been the shadowy Milan-based international financier, Michele Sindona, who bought 22% of Franklin stock in 1972 and now is in mushrooming legal difficulty with the Italian government.

Meanwhile, Comptroller Smith had been observing the troubles of the beleaguered bank and had alerted the Federal Deposit Insurance Corp. to try to arrange a Government-assisted purchase of Franklin. The FDIC began negotiations with some 16 banks. Finally four of them--First National City Bank, Chemical Bank, Manufacturers Hanover Trust Co. and European-American --offered bids. Franklin National, in turn, waged a last-ditch campaign to remain an independent but smaller institution by retreating to Long Island.

Corporate Accounts. When that plan seemed totally unworkable, the FDIC Invited the four takeover finalists to submit bids. European-American's officers, who had previously served mostly U.S. corporate accounts, were eager to break into such areas as home mortgage loans and checking and savings accounts via Franklin National; they also wanted the lucrative Long Island market. They offered $125 million for Franklin's assets, topping the nearest bid from Manufacturers Hanover by several million dollars. By the time Franklin National's doors opened the next morning, "EA" signs were on the windows.

EA will get $1.6 billion worth of Franklin National's assets. Overnight, EA deposits in the U.S. jumped from $480 million to $1.9 billion. Moreover, it will have its pick of the bank's branch offices and 2,800 employees. Chairman Harry E. Ekblom, 46, a Brooklyn-born lawyer and onetime senior vice president in charge of European operations for Chase Manhattan Bank, promptly made a helicopter visit to Franklin National's Long Island branches. Later, he announced that EA would automatically pick up all Franklin National's consumer installment loans.

The FDIC has given EA the option of choosing whatever it wants from Franklin National's $2.4 billion in commercial and international loans. The rest will be handed over to the FDIC itself, which will trade them or hold them to maturity, probably collecting enough to pay off the Fed's $1.75 billion loan.

EA stands a fab" chance of turning the old Franklin National into a success. If so, it may be one of the few winners in the deal. The 22,000 stockholders in Franklin National, many of whom are New York businessmen and other individuals, will probably lose their total investment. And the FDIC and other federal agencies lost luster in the debacle. In fact, Comptroller Smith conceded last week that "maybe we were unduly secure that a major bank that had prospered for many years couldn't develop big problems."

Faced with the failure of more than 50 federally insured banks in the past decade, the FDIC and other regulatory agencies need to keep a much closer watch not only on the roughly 150 banks on the FDIC'S "problem" list but also on virtually every bank in the nation. That way ailing banks will stand a better chance of being helped long before they reach a Franklin finale.

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