Legality of the Action of the Clearing House Banks

Notwithstanding the undoubted wisdom of the course pursued by Mr. Ridgely and the associated banks of Chicago in thus averting a disastrous bank failure and a serious disturbance to the financial and business interests not only of Chicago but of other sections, the legality of the action of the clearing house banks in entering into an agreement with John R. Walsh and the directors of his bank to pay the creditors of the three banks, was questioned by some, and the Comptroller and the banks were subjected to criticism. But the situation was critical and called for prompt action. There was no time to waste in quibbling over legal technicalities. The Comptroller believed that the national banks that were members of the Clearing House Association had legal right to purchase from the directors of the Walsh banks their pro rata share of the assets of these institutions. The only possible legal objection that could be raised to their doing so was whether any bank in the combination, in assuming a pro rata share of the liabilities of the Walsh banks, exceeded the limitations of law in respect to loans. This question, however, was considered so unimportant compared with the tremendous interests at stake that neither the Comptroller nor the banks gave it any consideration. It would have been inexcusable for the Comptroller to have allowed a question of this nature to have interfered with the consummation of the arrangement agreed upon.

When the magnitude of the liabilities of the Walsh interests to the national bank and the other banking institutions became a matter of public information, the Comptroller was further criticised for having permitted this condition to continue so long before corrective measures were taken. When these excessive loans became known to the Comptroller through the reports of the national bank examiners, he did everything in his power to have them reduced to the legal limit, not only by correspondence with the directors of the bank, as the evidence at the Walsh trial demonstrated, but by personal conference with the officers and directors of the association, without material effect.

The sole power conferred upon the Comptroller of the Currency to enforce a compliance with the law in regard to the limit

of loans was not a corrective but a destructive measure. He could no doubt have compelled the Walsh bank to reduce the excessive loans under a threat of forfeiture proceedings, but he would have destroyed the offending association by instituting such a suit.

The statutory provision authorizing the Comptroller to institute a suit to forfeit the charter of a national bank for violating the law has never been construed as mandatory. It always had been interpreted as vesting in him a discretionary power, and no Comptroller ever felt that he would have been justified in resorting to so drastic a measure without first endeavoring to have the wrong corrected by other methods.

The wisdom of this policy was forcibly exemplified in the case of the Walsh bank. Had the Comptroller instituted a suit to forfeit the charter of the Chicago National Bank when it became known to him that the law had been violated, a receiver would have been the result, as a run would have been started on the bank as soon as it became known that such a suit had been entered, and in order to protect the interests of all depositors alike and prevent a preference of one creditor over another it would have been necessary for the Comptroller to have appointed a receiver for the institution even before the suit to forfeit the charter of the association could have been heard and determined. The closing of this bank would have been followed immediately by the closing of the two State institutions, and three receiverships would have been necessary; the assets of the three institutions would have depreciated in value and the creditors, instead of receiving payment in full and without any material delay, would have had to await the receipt of their deposits through the slow process of installment dividends from the respective receivers, extending over a period of several years, and undoubtedly other business failures would have followed, or at least serious embarrassments would have been occasioned in consequence of the large amount of money that would have been tied up indefinitely in the three banking institutions.

All three difficulties were avoided, however, by the wise course pursued by the Comptroller, aided by the clearing house banks. All of the creditors of the three institutions were paid in full

without delay, and no serious consequences or embarrassments were experienced.

The Chicago National Bank was placed in liquidation by resolution of its shareholders adopted August 12, 1913, to take effect on the fifteenth of the same month. The associated banks which assumed its liabilities to depositors and took over a portion of its assets in payment therefor, returned to the bank in 1907 the remaining assets, amounting in value to about $168,000, from which the board of directors declared a dividend to the stockholders of $15 per share.

John R. Walsh, the president of the bank, and the controlling spirit in the three affiliated banking institutions, was indicted for misapplication of the funds of the national association and other violations of law. He was placed on trial in November, 1907, and was found guilty January 19, 1908. Every legal means known to his counsel was resorted to to have the verdict set aside. Appeal was made to the higher court and finally to the Supreme Court of the United States, consuming nearly two years, but without avail. He was then sentenced to serve a term of five years and entered the Leavenworth penitentiary in January, 1910. After being incarcerated for about a year and nine months, through the efforts of his friends he was paroled on account of failing health, and died in Chicago, October 23, 1911, nine days after his release from prison, at the age of seventy-four years.

The Bigelow Defalcation

On April 24, 1906, the Comptroller's office was startled by the receipt of a telegram from Milwaukee, Wis., stating that Frank G. Bigelow, the president of the First National Bank of Milwaukee, was a defaulter to the extent of one million four hundred and fifty thousand dollars, an amount in excess of the combined capital, surplus and profits of the bank.

Bigelow had been president of the American Bankers' Association, was widely known among the bankers of the country, and had been prominent and active in every movement affecting banking and financial interests.

When the shortage was discovered, a meeting of the board of directors of the bank was called, at which Mr. Bigelow was present. When confronted with the accusation against him he calmly informed the directors that he had a painful confession to make to them and admitted that he had misappropriated the funds of the association. An examination of the books of the bank, he stated, would show that he owed the institution nearly a million. and a half dollars. The money, he said, had been lost in speculation in wheat and stocks, that none of it could be recovered, and all that he could offer the bank in return for the loss was personal securities of the value of about three hundred thousand dollars.

At first some of the directors of the bank were disposed to make good the loss and conceal the defalcation from the public, through fear of the effect of the disclosures upon the bank, but after deliberation they finally concluded, for the protection of the depositors, to make up the shortage and report the defalcation to the Federal authorities. A resolution was therefore adopted by the board removing Bigelow from the presidency of the bank, and a warrant was sworn out for his arrest.

There was nothing novel in Bigelow's method of concealment of his large shortage. He manipulated the accounts with correspondent banks and with approved reserve agents. The collection accounts and balances with reserve agents were made to appear several hundred thousand dollars larger than they were. The defalcation was discovered not by the bank examiner, nor by any officer or director of the bank, but by an employee, whose suspicions were aroused by some questionable entries in the books, and he communicated his suspicions to one of the directors. An investigation was immediately instituted, which led to a discovery of the shortage and the confession of Bigelow.

When the amount of the defalcation was ascertained, the directors heroically came to the relief of the bank and the protection of its depositors by immediately signing an agreement pledging themselves to advance and pay to the bank the sums set opposite their names, as it might be needed for the payment of depositors. The respective sums subscribed by each director varied in amount from ten thousand to six hundred thousand dollars, and aggregated one million six hundred and thirty-five thousand.

Before the news of the defalcation was made public, the directors secured from Chicago one million dollars, thus fortifying the bank against a run and saving the institution from suspension. A run, however, was started as soon as the shortage became known, not only on this bank but upon other banks in Milwaukee, and in about two hours' time nearly a million dollars was withdrawn from the First National. At the same time, while there was a long line of depositors at the paying teller's window withdrawing their money, many friends of the institution manifested their confidence in its officers and the solvency of the bank by making deposits at the receiving teller's window.

Bigelow at one time was rated a millionaire. He was prominent in business and social affairs in Milwaukee, and was a member of several clubs and civic organizations. He freely admitted his defalcation when confronted, offered no apology for his wrongdoings, and was sentenced to and served a term in the penitentiary.

Culpability of the Bank Examiner

The failure of the bank examiner to discover this shortage was the subject of considerable public criticism. He was summoned to Washington by the Comptroller and instructed to bring with him all of the verification returns covering his several examinations of this bank, as it was not understood why this shortage was not discovered, if bank balances had been properly verified. These returns showed a number of discrepancies in the accounts of correspondent and reserve banks, and an attempt to reconcile any one of them would have led to a detection of the shortage. When asked for an explanation as to why he neglected to reconcile these differences, the examiner stated that he relied upon his assistant to do that work for him, and that his instructions to him were that if he found any differences in the returns to call his attention to them and to file all others. He stated that his clerk had neglected to perform this duty and that when the defalcation was discovered, and the manner in which it was effected disclosed, he examined the verification returns of some of the banks whose accounts were reported to have been manipulated and learned for