Banking agencies have been fast tracking applications for new banking charters, with a particular emphasis on crypto and crypto-adjacent firms. This approach calls to mind an episode from early in my career. In that case, a banking agency ignored some clear red flags, providing yet another hit to its already tarnished image. Moreover, the situation could have been much, much worse.
The Fast Track
Since January 2025, the OCC has received 28 applications for new national bank charters and has already approved 12. That’s more applications and as many approvals as in the previous four years. Some of these applications have been quite controversial. Consider Erebor Bank. Erebor’s application for a full-service national bank charter received preliminary approval in just four months, compared to 12-18 months typical of de novo bank charters. According to a Business Insider report, a Erebor circulated a memo to potential investors that (accurately) predicted the charter’s approval by the end of 2025, because investor Palmer Luckey’s “political network will get this done” due to “unique connectivity to banking regulators.” A tweet from Comptroller Jonathan Gould included a photo op with the Comptroller presenting the national bank charter to Erebor. Apparently, Gould couldn’t resist the temptation to extol.
Another proposed bank has even closer political connections. World Liberty Financial has also applied for a national bank charter. President Trump’s sons are listed as co-founders and the president himself is listed as co-founder emeritus. It’s hard to see a clearer conflict of interest. But how likely are senior regulators to just say no? And how much damage will they do to their agency’s (and their own) reputations if they say yes? We have some history on the latter.
The Southwest Plan
By 1988, the thrift industry was beset by large credit losses and capital shortfalls that made many of these institutions insolvent. Texas had an especially large concentration of insolvent institutions. The industry’s insurer, the FSLIC (later merged into the FDIC) devised the Southwest Plan to resolve insolvent Texas thrifts as quickly and efficiently as possible. The idea was to bring in new capital, new managements, and achieve economies of scale.
The Southwest Plan included 15 separate deals. In an all-hands-on-deck spirit, FSLIC enlisted the top supervisors from the District Federal Home Loan Banks (FHLBs) to assist in negotiating and assessing the deals. (The FSLIC and FHLBs both fell under the umbrella of the Federal Home Loan Bank Board (FHLBB)). My immediate supervisor and I were invited to help our District Director with one of the deals since we had recently worked on a peer review of the Federal Home Loan Bank of Dallas and were more familiar with the thrifts there. Our package, code named Pard, was the biggest dog’s breakfast of the lot. It consisted of 15 small, insolvent thrifts sprinkled throughout Texas.
The structures of the deals were broadly similar. FSLIC would issue an interest-earning note to fill the negative net worth and would also pay Texas cost of funds plus a yield maintenance guarantee on nonperforming assets. In exchange, the acquirer would kick in capital and provide expertise in running the bank and resolving problem assets. We were operating under a strict deadline, with all the deals supposed to be completed by year-end 1988.
The leading contender for the Pard package was Weston Edwards, a mortgage banking executive with a doctorate from Harvard. Edwards would cover the management side, while the money would supposedly come from a prominent billionaire. (More about that later.) However, the money guy pulled out. Edwards scrambled to come up with other financing schemes, but the FSLIC Director considered the proposed structure too complicated. We were also replaced on the deal with a DC-based team. FSLIC decided to go with the next best alternative, or so they thought. Enter James M. Fail.
A Fail-Safe Plan?
Mr. Fail owned a line of insurance companies as well as a small bank. Buthis application also raised some red flags. His planned capital contribution exceeded his net worth. We speculated (correctly, it turns out) that Fail would rely on funds provided by the policy holders of his insurance companies to supply the capital contribution. Fail was also previously indicted by the State of Alabama for insurance fraud. As a result of a plea bargain, Alabama dropped the personal criminal charges against Fail, but his company pled guilty. Fail was also barred from selling insurance in Alabama.
The FHLBB disregarded these red flags and approved the deal on December 23, 1988, just in time for Christmas. The deal received a lot of scrutiny and was subject to Senate hearings in 1990. The hearings focused on Mr. Fail’s checkered past and his paltry cash contribution. The Senate committee indicated that while Fail received at least $1.8 billion in FSLIC assistance, his actual cash contribution was only $1,000 (not a typo). He financed the rest by debt. Although the resulting bank (Bluebonnet) became profitable, one of Fail’s insurance companies that lent him some of the money went bankrupt.
The hearings were led by Sen. Howard Metzenbaum (D-OH), but some of his Republican colleagues, including Orrin Hatch and Arlen Specter, joined Metzenbaum in criticizing the deal. There were also hints of improper political influence as Fail hired a politically connected consultant to help close the deal. (This charge was never really proven.) Former Bank Board officials were put through the wringer at the hearing, as was Mr. Fail himself. I received my own fifteen minutes of fame, when a memo I wrote questioning the deal made it into the Committee record as Exhibit 10A.
Mr. Fail received a more sympathetic audience in the federal courts. Legislation passed in 1989 created more stringent capital and accounting standards. For example, Congress phased out the use of goodwill in meeting regulatory capital requirements. Many of the affected thrifts, including Bluebonnet, sued the federal government for breach of contract on the grounds that these new restrictions constrained growth opportunities. The case was tied up in the courts for more than a decade, but Fail eventually won $97 million in damages.
Bluebonnet self-liquidated in 2003. The bank’s strategy mainly consisted of investing in mortgage-backed securities. While such a strategy would have been disastrous in the 2020s, it proved quite profitable in the 1990s. Mr. Fail eventually mended fences with the State of Alabama. He donated generously to his alma mater, the University of Alabama. In gratitude, the university named the opponents’ locker room after him. While the decision drew some criticism given Mr. Fail’s checkered past, university officials probably liked the idea that the Crimson Tide’s opponents would prepare for football games in The Fail Room.
The Rest of the Story
The radio broadcaster Paul Harvey used to have a segment called “The Rest of the Story.” The segment would recount an anecdote that usually had a surprise twist at the end, often involving some famous person. The rest of the story involves Weston Edwards’ billionaire investor. That investor was Robert Maxwell, a British publishing magnate.
Maxwell was a highflyer whose financial empire and reputation crashed spectacularly. He died in 1992 after falling off his 180-foot yacht. It soon came out that Maxwell had looted an estimated £460 from his companies’ pension funds to try to stave off bankruptcy. He also engaged in stock manipulation and falsified financial records. Maxwell’s youngest daughter later achieved some notoriety in her own right. While Fail was a bit of a shady character, Maxwell was at an entirely different scale. Handing over the keys to a federally insured financial institution to someone like Maxwell is a frightening prospect. We dodged a bullet when Maxwell’s decided to pull out of the deal.
Perhaps we would also have also identified problems with Maxwell’s ownership before consummating the deal. Even in 1988, Maxwell’s reputation was less than pristine. During a generally friendly 60 Minutes profile, Maxwell “pled guilty” to a characterization of himself as “flamboyant, ruthless, brazen, fiery, humorless, impatient, intolerant, rude.” The British press nicknamed Maxwell, who was born in present-day Czech Republic, the “bouncing Czech.” But whether banking regulators could have uncovered Maxwell’s financial house of cards in the space of a few days seems optimistic.
Concluding Thoughts
Whether Maxwell would have been worse than Fail misses a larger point. Sometimes you need to know when to walk away. And don’t ignore danger signs in the rush to do a deal. One hopes the current crop of regulators take those lessons to heart.
Leave a Reply