Like it says in the Bible, this, too, shall pass.
— Larry Swanson, president, Fidelity Federal Savings Bank, Jan. 4, 1991
By David Tulis
A personal attack against a banking professional caused the most most violent bank run in the Chattanooga area in at least 25 years. The one-day panic in January 1991 caused depositors to rush to Fidelity Federal Savings Bank in Dalton, Ga., to convert their holdings into cash.
No bank has faced a run in the region since then. The 2008 banking meltdown came and went with no panics affecting the Chattanooga local economy, even though several lenders were so weak they were propped up with federal Tarp funds and ordered to submit to stricter supervision.
A review of the crisis that swamped Fidelity Federal’s three branches is a preview of how bank runs will hit Chattanooga. Bank runs are inevitable because of the way lenders are set up, having only shavings of cash upon which they build their ballooning loan portfolios. Federal and state law allow lenders to operate with two sets of books and without practical solvency, promising that taxpayers will pay out depositors if the bank collapses.
In local economy, a lender unable to meet obligations to his neighbors goes out of business and injures people who trusted it. Thanks to national economy and risk socialization, such lenders are propped. They join the world of zombie banks. Today’s banking system is choked with an extraordinary amount of leverage so that even federally chartered guarantors are in the red or running on empty. Ours is a cautionary tale.
Crowds fill lobby after closing hours
Clerks and officers at Fidelity branches in Dalton and Chatsworth were startled Friday afternoon Jan. 4 when parking lots filled and members of the public streamed in, their faces anxious. They had heard rumors that the bank was in trouble, and were acting on what they feared were distinct possibilities. Traffic was jammed on Walnut Avenue, one of Dalton’s biggest boulevards.
As the lines grew longer, managers at major grocery and department stores refused to honor the bank’s checks. Signs telling shoppers of the ban went up at Kmart, Winn-Dixie and other stores as managers sought to assess whether the bank was about to fail and checks drawn on its accounts worthless.
“The rumor started before I left on vacation,” said Larry A. Swanson Jr., the president. “It started Friday, Dec. 14, about 2:30 in the afternoon when it was created by one of my competitors. So I’m not surprised at how people were willing to believe something that was totally untrue.” The day of the stampede was the day of his return to town.
Another rumor reported by people waiting to liquidate their accounts was that Mr. Swanson had been named in a federal indictment. “I’ve never been to jail in my life,” he protested. Another rumor was that he was under investigation by the FBI.
So strong was the conviction among the depositors (the real lenders in the banking relationship) that they refused to believe assurances by the staff.
Though no radio station was known to have broadcast anything about an unstable bank in Dalton, the people said that their rushing away from their routines to Fidelity had been prompted by phone calls and conversations indicating a radio report was responsible.
Statements by Mr. Swanson that the lender was solid swayed very few. A depositor in line for routine business assured people near her that Fidelity was sound and had been good to the town. She urged them to go home, but her words had little, if any, effect.
“These people are listening to unfounded rumors about things they don’t understand,” the executive told a reporter.
As Friday afternoon wore on, officers spoke to area residents whose stony expressions slowly softened. The bank employees said deposits were guaranteed by the Federal Deposit Insurance Corp. up to F$100,000 and made statements to allay the customers’ fears.
“There is absolutely no — zero — truth to anything I’ve heard so far,” Mr. Swanson said about the stories underlying the panic. The bank president said he was surprised at how willing people are to believe fabrications.
The panic hit Chatsworth at 5 p.m., later than at other branches. “The bank is not going to close,” Eddie Miller, a branch vice president declared. “It is very sad that there was such a vicious rumor. I’m sad for the customers.”
Armored car roars up from Atlanta Fed
So severe was the meltdown that the Federal Reserve System branch in Atlanta rushed up F$3 million in Federal Reserve notes to cover withdrawals.
The bank said it was proud that not a single person who wanted cash was turned away.
“What did we do when we closed? We cried,” Mr. Swanson said. “We just cried. *** Personally, I’ll never get over it. The bank will get over it in a very short period of time. That’s the way a corporation is organized to begin with, to have an endless life.”
Board chairman Jim Gowin said bank traffic was up 50 percent from a normal Friday from a body of about 25,000 customers. Normal Friday traffic was 3,000, and 5,000 showed up. In seeming contradiction, officials said 250 customers closed their accounts, pulling out F$2 million. “We have talked to most of the local banks, and the customers who are leaving here are being honest with them,” Mr. Swanson said. “As soon as things are straightened out, they’re coming back to Fidelity,” he boasted the Monday after.
The next week it was reported that Fidelity had hired the Washington, D.C., law firm of Elias and Matz to investigate the incident. A third of those customers who fled had returned, Mr. Swanson said. The bank ran a full-page ad in the Dalton Advertiser with a “notice to all our friends.”
National malaise over banking was strong when Fidelity was hit. A continuing savings and loan crisis requiring billions in bailouts and the collapse of the bank credit union sector in Rhode Island contributed to the crisis in confidence. In that meltdown, 300,000 depositors were denied access to their funds after the failure of one bank from embezzlement and failure of a state guarantor, the Rhode Island Share and Deposit Indemnity Corp.
While the federal government props up the system, it is careful not to give false assurances about the “soundness” of a bank. In the case of Fidelity the U.S. took an unusual step of giving its blessings upon the company. The Office of Thrift Supervision sent a fax to the bank Friday stating that media had asked if the bank faced closure.
“The OTS as the primary regulatory agency of Fidelity indicated that no such action is contemplated,” the regulator said. “The OTS stated that Fidelity was in full compliance with regulatory capital requirements and was operating profitably.” One of the officers of the bank called the statement about the bank’s good reputation “historic.”
Lesson for tomorrow
The bank run that struck Fidelity in 1991 is old-fashioned. Bank runs today are electronic and invisible, as Gary North, our favorite economist on Lewrockwell.com, has pointed out. Big account holders pull out their money via wire. Their assets are not recorded in checkbooks held in fretful hands by people waiting in line at a counter. Runs of the massive electronic varietywere involved in numerous national players that collapsed in the 2008 meltdown, starting with Bear Stearns.
➤ The financial system is sustained by fiction. As long as people believe their deposits are safe, they will leave them in forms of credit in their accounts. Belief and confidence aren’t based on any set of facts about solvency. A whiff of rumor or a hint of doubt will impel a depositor to liquify. A wad of F$100 Federal Reserve notes in an envelope in your briefcase is better than any statement telling of a recent balance.
➤ Tiny number of people cause crisis. If the lower figure given by banking officials is true, the actions of 250 people caused the panic. Two thousand people showed up at Fidelity Federal, but apparently only 250 yanked their cash. Again, a few people can devastate a bank’s tiny margin of reserve and threaten open insolvency.
➤ Panic feeds itself. This point is obvious, but allows one to say that perhaps it is better to be out of a bad bank a year too early than an hour too late.
➤ Rumor can destroy a bank. Malicious rumors, offhand rumors, misunderstandings passed along by Facebook, Twitter or smartphones are able to ignite a crisis of confidence. Instant and supple means of spreading rumors are more available today than in 1991, putting banks in the hands of whisperers, backbiters and insensate panic-stricken commoners acting on a tip. One category of savers will stand aloof from this danger. People whose liquid savings in physical gold and silver don’t depend on the cajolery or good faith of other people as to the availability of cash assets.
➤ Damage of reverse multiplier. Depositing F$1,000 in a bank lets it create dozens of dollars in credit via lending. Pulling F$1,000 from a bank in cash has a powerful reverse effect against its assets. Deleveraging causes a crisis that bites even borrowers, as we’ll relate in Part II of this essay in the next day or two.
➤ Inevitable backstop: Uncle Sam. In the Fidelity Federal crisis, the banker’s bank, the Fed, came to the rescue with pallet-loads of federal reserve scrip. That satisfied the skeptical hoi polloi — people like you and me. We wanted our cash, and the Fed made sure Fidelity looked rich enough to pay us out. The FDIC promised to make good any depositor in a failed bank up to F$100,000. Now it’s double that amount.
If America is so rich, why only a fractional reserve?
You may consider yourself very smart in the ways of the world. But if you don’t account the purely ideasphere nature of modern banking and ignore the role of inflation in your investment decisions and asset management, you are letting yourself in for a fall.
Modern banking, I suggest, is a form of well-deserved fleecing of the simple, a slow and deliberate abuse of the commoner which government allows to continue under franchise as long as the people care so little about honest weights and measures and practical advice from holy scripture. The world of credit involves everyone, and appears impossible to reform externally or by any new law or enforcement of the rules against fraud.
The counterfeiting scam of modern will finally come to an end with a catharsis called “debt aversion.” Fewer will borrow, fewer will lend. Cash will be king, as it is in every depression. Debt aversion will emerge when people’s religious convictions about being servants to lenders become clearer. Clearly, this is a work work is Holy Spirit’s and only one aspect of Christian revival and reformation. As people take local economy steps, the happiness — the glow — of ideasphere money will fade.
The explanation of how Fidelity Federal operated, and how every single bank in Hamilton County and across the U.S. operates today, is due. I will tell this open secret in my next post with the help of America’s most remarkable political figure.
‡ Mr. Swanson’s tribulation that weekend in January was perhaps less injurious to his peace of mind than a 1993 conflict with federal regulators. In that spat, he was accused by the Office of Thrift Supervision of insider dealings over pay and shares. Regions took over FFSB in September 1995, according to the Federal Reserve System.
“Rumors cause run on Dalton bank [;] Regulatory bodies quick to assure public Fidelity Federal is sound,” Bob Beavers, Chattanooga Times, Jan. 5, 1991
“Dalton Bank Opens Following Run,” Chattanooga News-Free Press, Jan. 5, 1991
“Dalton Savings Bank Reports Some Redeposit Their Money,” Tom Turner, Chattanooga News-Free Press, Jan. 6, 1991
“Fidelity sure of customers’ return,” AP, The Chattanooga Times, Jan. 8, 1991
“Bank Hit By Run Hires Washington Law Firm,” News-Free Press, Jan. 16, 1991