"Luck, more than anything" said Federal Reserve Board Chairman, Arthur Burns in talking to a Newsday reporter in late 1974 after describing having just averted a worldwide financial panic. "We were sitting on a volcano. People were concerned in this country, but they were really scared abroad. We can't let it happen again, because we might not be so lucky the next time."

Franklin National Bank opened as the Franklin Square National Bank – with $50,000 in shareholder capital – in 1926. After the Second World War, with Arthur T Roth as the new president, the bank began its growth. Roth developed new, more consumer friendly styles of banking; pioneering drive-in facilities, bank credit cards, instalment loans and longer term mortgages. By 1950 or so, Franklin was the largest bank in its area of Long Island.

In 1961, seeking further aggressive growth, Franklin's directors successfully applied for permission to establish a branch office in New York City. With the new branch adopting a liberal lending policy in pursuit of growth, Franklin's assets doubled from one and a half billion dollars in 1964 to $3 billion by 1969. But the earnings and quality of the loan portfolio suffered somewhat as the growth proceeded. Noted Joan Spero, who authored a major study of Franklin Bank in 1980 (page 26): "In order to establish a position and to continue its rapid growth in the highly competitive New York market, Franklin made loans to companies which had low credit ratings and which found it difficult to obtain credit from the major New York banks. Despite the lower quality of these loans, Franklin charged rates other banks were charging prime customers and required lower compensating balances than other major banks."

In an era – the late 1960's and early 1970's – of aggressive bank growth, further major changes were afoot for Franklin. In July of 1968, after an Annual General Meeting where shareholders were upset with growing bad loan debts and a declining stock price, president Arthur Roth was ousted. Then, in 1972, a little known Italian financier, Michele Sindona, paid $40 million for a controlling interest in the bank. The purchase was not unrelated to what had been developing in international markets in these years, in particular the Eurodollar and Petrodollar markets.

These new dollar markets were allowing US banks to dramatically upscale their operations by opening foreign branches – internationalizing where the money was now collecting – thereby increasing the scale of their borrowing and lending. A number of banks, Franklin included, developed into multinational corporations in these years. Noted Spero (page 25): "Franklin's move abroad can be explained in part by its pursuit of growth and profit. These traditional economic motives took on a special character and intensity in American banking in the 1960s. The emergence of a new generation of bankers, the growing needs of a dynamic economy, and the encouragement of the Comptroller of the Currency led to a significant change in US commercial banking. The twin goals of high earnings and rapid growth replaced the conservative emphasis on safety and asset quality; bank structure changed through mergers, acquisitions, and the creation of bank holding companies; banks expanded activities such as real estate, municipal and consumer finance, and foreign operations (which were often more risky); and these new activities were financed not by traditional sources of lendable funds such as checking and savings deposits but by the issuance of short-term liabilities such as negotiable certificates of deposit, Federal funds, and Eurodollar placements and by greater leveraging through long-term debt of the new bank holding companies. Franklin National Bank, one of the fastest growing American commercial banks in the 1960s and early 1970s, was part of this revolution in banking. Franklin's growth policy and quest for higher profits were the necessary, though not the sufficient, condition for Franklin's move abroad."

In particular, the move abroad enabled such banks to circumvent regulation Q. Regulation Q, explained Spero further (page 45): "prevent(ed) American banks from paying interest on domestic demand deposits and establish(ed) ceilings on interest rates paid on domestic time deposits of less than $100,000, but (did) not apply to deposits held in foreign branches of American banks. Thus American banks with such branches could attract demand deposits by paying interest and could use foreign branches to attract time deposits by paying higher interest rates than those allowed at home."

The Fed did not disapprove of these developments (Spero page 48); indeed, the Fed's authorization for foreign expansion was in fact required beforehand and seldom refused. Under Sindona, the new Franklin owner, the banks expansion overseas and into foreign exchange operations went into overdrive.

Sindona was a shadowy character, nobody could actually work out where he got his money. After Sindona's (and franklin's) downfall, authorities tracked 125 corporations in 11 countries and a good many real estate operations and foreign exchange speculation vehicles, all connected via a very complex group of holding companies in the tax haven sites of Liechtenstein and Luxembourg. There was also his control of SGI, Societa General Immobiliere, a giant Italian real estate development company which counted the financial arm of the Vatican as an important shareholder. Said Sindona himself: "Banking is a matter of connections. . . . I have personal connections in all important financial centres. Those who do business with Michele Sindona will do business with Franklin National."

Importantly, and perhaps due to connections, Sindona's holding company Fasco International, and Fasco AG were not, under US law, declared bank holding companies, despite what looked like a controlling interest in Franklin. This meant Sindona could avoid US regulation and surveillance. A crucial development given the newly burgeoning area of foreign exchange operations under the new floating exchange rates. Previously, banks bought or sold foreign currency mostly for the needs of customers. Now, whole new bank departments opened up to trade their own accounts under the developing and irresistible temptation to speculate in the currency movements. When it mattered most though, several things went against Franklin in the year before its demise as the bank stepped up its currency trading.

Explained Spero, page 70: "Over a decade of rapid growth and poor management had left Franklin with a number of domestic problems, most importantly an excessive reliance on short-term financing, a dismal earnings record, and illiquidity of its assets. Franklin National Bank was heavily dependent on short-term borrowed money. Instead of financing growth through increased bank equity capital or increased demand, savings and time deposits, Franklin National like many other banks used funds borrowed short-term from other banks or from large lenders." In other words, relying on certificates of deposit with maturity of less than 90 days or using overnight federal funds to finance loans of several years of more. When interest rates were put up in 1973 and '74, Franklin's operational costs went up with them. (The funds rate went from about 12% to 20% over 1973.)

Franklin's entry into foreign exchange trading occurred as a result of the bank's search for profits to compensate for losses in other areas. The resultant exchange trading losses ultimately bankrupted the bank. In a now familiar story, poor accounting procedures, mis-posting, unrecorded contracts and trader bets the wrong way – gambling and losing – were to blame. The worse the positions became, the more the traders gambled to try and recover losing positions. Informed and knowledgeable domestic money market participants began a withdrawal of deposits, if they had money lodged with Franklin. (Spero, page 86.) C Arnholt Smith's bank US National had already folded in October of 1973, so depositors and shareholders everywhere were now alert to the fact that yes, a US bank could indeed collapse.

Franklin collapsed October 8, 1974, though the onset of the crisis dated back to May 8 of that year. With the collapse, Sindona's connections unravelled. Sindona was found to have 'loaned' $18 million from his Italian bank Banca Unione and $22 million from Banca Privata Finanziara in Italy, the money used to buy the controlling interest in Franklin. Sindona had used $200 million of Franklin's money – without approval – to underwrite a $1 billion notes issue of another Sindona bank in Italy. All of which unravelled as the market lost confidence when Franklin failed, causing losses of confidence and losses of deposits in all connected Italian banks.

Franklin's failure was, at the time, a huge threat to the proper functioning of the world financial system. The Fed pumped an unprecedented $1.7 billion into Franklin to prevent its collapse, taking measures as it did so not to alert the public to what was going on, for fear of starting a general panic. (Spero, page 148.)

By 1983, Sindona was a man very much in demand. There was an on-going American investigation into a helicopter attempt to free him from his US prison cell. There was also a July 1981 Italian Government indictment charging him with having ordered the murder of Giorgio Ambrosoli. (Also named in that arrest warrant were his son Nino Sindona and his son-in-law Pier Sandro Magnoni.) There was a January 1982 indictment from Palermo, Sicily, in which Sindona and 65 members of the Gambino, Inzerillo and Spatola Mafia families were charged with operating a 600 million dollar per year heroin trade between Sicily and the United States. Further Sicilian indictments followed which charged Sindona with illegal possession of arms, fraud, using a false passport and violating currency regulations. More indictments were issued by the Italian government in July 1982 charging Sindona and others, including the Vatican's Massimo Spada and Luigi Mennini, with a long list of criminal offences connected with the fraudulent bankruptcy of Banca Privata Italiana. (Yallop, page 304.)

Eventually, 12 Franklin employees were indicted for falsifying records. Sindona himself was indicted and convicted under US law, then extradited to Italy, where he was convicted not only of fraud, but of murder as well. Michele Sindona's knowledge of his bank's shadowy and illegal dealings with the Mafia, the Vatican bank and other well connected Italian bankers would have given him much of which to be fearful. He died in prison in 1986. Some say he was poisoned, others suggested suicide by swallowing cyanide.

Further Reading:

Cornwell, Rupert. God's Banker: The Life and Death of Roberto Calvi, Unwin Paperbacks, 1984

Spero, Joan. The Failure of the Franklin National Bank: Challenge to the International Banking System, Columbia University Press, New York, 1980.

Yallop, David A. In God's Name, Johnathon Cape Ltd, 1984.