A Lesson from Detroit

No city suffered more from the Depression-era bank failures than Detroit. Only two banks survived those grim days. The city learned its lesson, and even now its banking community is proud of its reputation as possibly the most cautious and conservative in the nation. It was therefore all the more shocking to Detroiters when last week the Public Bank of Detroit went insolvent in the biggest U.S. bank failure since the 1930s.

Public Bank was set up in 1957 with an eye toward the fast-growing consumer-loan business. In 1965, the bank's stock peaked at $34 a share; at year's end it had $117 million in deposits, ranked 340th among the nation's 14,000 commercial banks. But despite such apparent success, there were signs of shakiness. Its president resigned last December; his successor left a scant two months later. When President James A. McGuire arrived in March, the bank was already in deep trouble.

The Administration's current tight-money policy had no part in those troubles. They began in 1962, when the bank began backing home-repair work, peddled on the installment plan by a number of Detroit building concerns to lowincome, high-risk customers. In all, Public had committed $66 million to such risky loans--a dangerously high amount for a bank of Public's size. Too many of the loans turned sour. McGuire admitted that $1,000,000 alone was lost in defaulted commercial paper bought from four local building outfits; as it happened, Public Bank Director Harry Granader was a part owner of all four companies.

By mid-1966, Public was operating well in the red, and state banking officials began casting around for a merger partner to save what was left. Early last week, a proposed merger with Detroit's solid, $498 million Bank of the Commonwealth unraveled when Public's accountant up and quit over "disagreements" with his bosses. Michigan State Banking Commissioner Charles Slay called it all "the damnedest mess I've ever seen."

The bank's end was quick and clean. Despairing of achieving a successful merger, Slay went into a Wayne County circuit courtroom at 6:45 one evening last week. The judge declared Public insolvent, put it in receivership with the Government's Federal Deposit Insurance Corp. FDIC quickly moved to safe guard Public's depositors by selling Public to Commonwealth, and provided the new owner with a $10 million guarantee against any further bad debts owed to Public. Six hours later, at 12:45 a.m., McGuire was informed of the deal by telephone. At 2 a.m., Commonwealth officers began telephoning their own staffers, with orders to get Public's offices ready to open in the morning. At 10 a.m., Public's eleven banking offices opened for business as usual.

What could be salvaged for Public's 3,000 stockholders, whose shares had dwindled in value to about $1 last week, would not be sorted out for months. For his part, Commonwealth President George W. Miller, 41, whose bank was one of the two Depression survivors, declared only a "Boy Scout's" interest in the debacle. "We didn't want to see Public go down the drain," he said. "It isn't good for banking."

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