With friends like these, who needs loan officers? With a little greed and a lot of logrolling, D.C. powerbrokers like Brent Scowcroft and Thomas Boggs destroyed the National Bank of Washington.

• Author: Edwards, Lynda

With Friends Like These, Who Needs Loan Officers?

The photograph shows a room with a silver chandelier and a gilded ceiling, pale light filtering through high windows, and balconies festooned with flowers. At the bottom of the photo, five thin, elderly men in frayed suits cluster together like a poorly dressed choir. One man is missing a leg, another has a scar running from his nose to his chin. In the background one can discern a laughing crowd and a banner reading "Bank of the Working Man."

The men are survivors of the Battle of Blair Mountain, a two-day war in which hundreds of poorly armed miners fought the Kentucky mineowners' private militia, which was equipped with machine guns, mortars, and even a bomber. The miners lost. But in 1949, their union, the United Mineworkers of America (UMW), was rich enough to buy the National Bank of Washington (NBW), the bank that rebuilt Washington after the War of 1812 and erected the Washington Monument a few years later. John L. Lewis, the UMV president, had the Blair Mountain survivors shipped in for good luck, to show that the bank could survive anything.

NBW did survive plenty, from the Depression to union corruption to the Latin American debt crisis. What it didn't survive was a takeover by Washington's self-dealing power-brokers. As bank failures go, the $330 million that NBW's 1990 collapse will cost the shaky taxpayer-backed FDIC insurance fund isn't grand. Given the grim state of the economy, even the fact that 900 NBM employees lost their jobs and pensions seems to merit barely a footnote. But the story behind the NBW failure is important, because it encapsultates all that went wrong with so many banks and S&Ls during the Reagan years: From serving as a reliable, if troubled, lender to small city business, NBW was transformed into a cash cow for investors drawn from the ranks of the city elite.

Because the city in question was Washington, these investors weren't the faceless Kiwanis types you're used to seeing assailed in banking stories, but people with national influence and reputations, men like Brent Scowcroft and Thomas Boggs. These investors knew little about banking but a lot about doing favors for their friends--local developers like Conrad Cafritz and politicians like Gary Hart.

As NBW's early history demonstrates, getting a major loan from an American bank has always been as much a matter of who you know as how balanced your books are. But the Reaganauts injected two new elements into this insider culture: an almost messianic faith in growth and a disregard for oversight. NBW became one of the more than 500 banks in the past three years to overdose on this lethal mix of old and new banking attitudes, of country-club chumminess and free-market fever.

Hodge's podge

Today, the management of NBW is the subject of investigations by the FDIC, the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), and the FBI--not to mention numerous suits and counter-suits. At the center of this furor sits Luther Hodges, Jr., the bank's former CEO, ousted at the end of 1989 after the once-chubby directors--"They were my friends," Hodges emphasized in the course of several interviews--turned on each other like drowning cats in a burlap sack.

Hodges was originally recruited for the directorship of NBW by yet another friend, John Heimann, the comptroller of the currency, to rescue the bank from an earlier crisis. Back in 1980, the comptroller had taken over NBW and was investigating it for dubious director-related loans, undue influence from the UMW, and charges of director kickbacks. With his Harvard degree, a resume that included the chairmanship of the North Carolina National Bank, and a stint as Jimmy Carter's number-two man in the Commerce Department, Hodges looked like the right man to clean house. Furthermore, Hodges was a Democrat whose father, a North Carolina governor and self-made millionaire, had served as John Kennedy's commerce secretary--all of which appealed to the union, still the owner of NBW. Hodges appealed to the OCC and the Federal Reserve for a different reason: He shared the Reagan administration's vision of banking's future.

The great inflation of the late seventies sent banking--a business whose secrets to success had previously been common sense and good golf skills--into a tailspin. Depositors began deserting the banks in droves, embracing innovative investments like money market funds. By the early eighties, "deregulation and globalization" were the buzzwords of the banking industry; cutting the banks loose from the rules that used to protect them now looked like the only way to keep them alive. Wealthy customers demanded a supermarket of investment opportunities and competitive interest rates. The ultimate goal became the creation of huge regional banks linked to international financial centers. To keep up, banks begun gobbling each other like candy. Meanwhile, overhead costs were increasing: A first-rate computer system, for instance, cost $150 million per year. Small banks couldn't compete. The number of independent banks fell from 12,700 in 1980 to 9,800 by 1988. Bank owners, always prosperous, were suddenly becoming very, very rich indeed.

Hodges believed that, with a little work, NBW could fit right into this new money order, not as predator but as prey. In 1980, the bank didn't look like much; in fact, to Hodges, it looked like a step down. "To tell you the truth, I would have preferred taking charge of a bigger bank," he says. "I told them I would take the position if I were paid a salary equivalent to what I would earn at a more important bank"--$400,000 per year. According to Hodges's reasoning, NBW had no hope of ever running with the big boys. "There was a limit to what the National Bank of Washington could accomplish alone. With all the work in the world, it could never be anything more than a small, efficiently run local bank."

And, with the fortunes then being made in banking, who would be satisfied with that? Hodges had a more ambitious plan: "If we cleaned it up, instituted standard loan procedures, built a good international loan department and real estate department, we could sell NBW to a big international bank, a Madrid bank, a London bank, a Japanese or Arab bank. And I was convinced that Washington would be an international financial center. Everyone was." Hodges drew up a timetable, with 1992 as the target date, for making NBW appealing to an international buyer.

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