Rhode Island banking crisis

The Rhode Island banking crisis took place in the early 1990s, when approximately a third of the state of Rhode Island's population lost access to funds in their bank accounts. When a Providence bank failed due to long-term embezzlement by its manager, Joseph Mollicone, Jr., it triggered the collapse of the Rhode Island Share and Deposit Indemnity Corporation (RISDIC) and the subsequent closure of the 45 credit unions and banks it insured. 300,000 depositors lost access to their money. Though some of the institutions reopened relatively quickly after obtaining Federal insurance, many could not and remained closed for an extended period of time. Though everyone was eventually repaid, most had to wait months or years for compensation.

The shutdown sparked demonstrations and protests. Corruption hearings added to public frustration, when several executives and public officials were called to testify about their last minute withdrawals from banks just before their closure. The manhunt for Mollicone, who had fled to Utah, took nearly 18 months before he turned himself in. He was convicted, and given what at that time was the state's most severe sentence for a "white collar" offense.

Heritage Loan & Investment failure

Heritage Loan & Investment was a bank in the Federal Hill neighborhood of Providence, Rhode Island. In 1990, examiners with the state's Department of Business Regulation (DBR) discovered $13 million of fraudulent loans in the bank's records that had purportedly been made to 128 people and businesses that never asked for or received a loan.^[1] The loans had been fabricated by bank manager, Joseph Mollicone Jr., who began taking money from the bank in 1986 and had set up more than 90 businesses to funnel the money through.^[2][3] The Providence Journal reported that "he became legendary for dodging questions about missing bank records, once suggesting to a bank examiner: 'Let's have a muffin'."^[3]

When Mollicone realized authorities had caught on, he fled the state. By the time he left on November 8, 1990, Mollicone had taken more than 80% of the money people deposited at the bank, according to prosecutor Kevin Bristow.^[4][2] The state attorney general's office estimated that he stole $15.2 million overall.^[3] In November 1990, Heritage Loan & Investment closed.^[5]

Rhode Island Share and Deposit Indemnity Corporation failure

The Heritage Loan & Investment bank was insured by the Rhode Island Share and Deposit Indemnity Corporation (RISDIC), a state-chartered private enterprise which backed 45 of the state's credit unions and banks. When Heritage customers learned of Mollicone's crimes, there was a bank run in which they withdrew $13 million of the bank's $22 million, using up a large part of RISDIC's $25 million reserve.^[1] The state ordered the bank to close temporarily, but it reopened in December and customers started to take out all that was left, leaving RISDIC with almost nothing, insolvent.^[6]

The nonprofit insurance enterprise got its start in 1971, but although it was intended to insure only small institutions, it increased from $134 million insured in 1972 to $761 million in 1980.^[7] It continued to expand through the 1980s, enabled by more lax state and federal laws. When it was founded, the per-account maximum to be insured was $40,000, but that number had increased to $500,000 in 1985, with no limit on some accounts.^[7]

The 1980s saw a trend of banks and credit unions shifting to federal (FDIC or NCUA), rather than state and private insurers. The trend became particularly pronounced after Ohio and Maryland ran into bank crises of their own in 1985, similarly due to the collapse of private insurance entities. Banks that qualified for federal insurance would no longer take the risk of being insured by a strictly local, private insurer. Instead of learning from the mistakes of the other states, RISDIC responded to the loss of its most stable banks by increasing maximums and insuring more weak institutions. By the late 1980s, RISDIC was riddled with problems, insuring primarily those institutions that were unable to secure federal insurance, insuring large sums of money at weak banks.^[7]

Rhode Island Governor Bruce Sundlun closed 45 banks and credit unions on the day of his inauguration.

Another risk concerned lack of oversight. Members of its board of trustees were primarily managers of the institutions it insured, and had no formal rules requiring any outside members, resulting in conflicts of interest. In the late 1980s, government budget cuts moved the responsibility for conducting examinations of the insurer from the Department of Business Regulation (DBR) to RISDIC itself, further reducing outside or independent oversight.^[7] In addition to being poorly regulated, it failed to abide by standard industry practices and although it formally adopted the standards of the National Association of Share Insurance Corporation, it did not actually implement them effectively.^[7]

Concerns had been raised about RISDIC for years before the Heritage scandal.^[1] According to Pulkkinen and Rosengren, "Rhode Island Attorney General, federal banking regulators, and others privately counseled Rhode Island government officials on the perils of RISDIC as early as 1985 and 1986. [...] That RISDIC did not fail earlier was attributable to its political clout and its ability to mask severe financial difficulties within its underlying membership."^[7]

The Heritage collapse came just a year after Jefferson Loan and Investment Company, another RISDIC-insured bank, folded because of fraudulent leases.^[7] Jefferson used up a great deal of RISDIC's resources, leaving them in particularly bad shape when the even more costly Heritage collapse came about.

The day before Bruce Sundlun was to be inaugurated as Governor of Rhode Island, replacing Edward D. DiPrete, he was notified that RISDIC would fail.^[5]

Bank closures and aftermath

Sheldon Whitehouse, now a U.S. Senator, oversaw much of the banking crisis while working in Sundlun's administration.

By state law, banks and credit unions cannot legally operate without insurance. Sundlun posted state troopers at RISDIC-insured banks and, hours after his January 1, 1991, inauguration, ordered the indefinite closure of the 45 RISDIC-insured financial institutions, about three quarters of which were credit unions.^[5][8][6]

Over 300,000 people, about a third of the state's population, lost access to their money, totaling about $1.7 billion.^[5][6][7]

Some of the banks reopened relatively quickly, after obtaining federal insurance.^[6] The Federal Deposit Insurance Corporation (FDIC) declined to provide insurance to some of the institutions that did not meet its standards and, shortly after the announcement of the closure, its chairman stated that it would not burden itself by providing extra help for the crisis or by repaying depositors if their accounts are salvageable.^[6] But the events worried some in the federal government, who sent millions of dollars in cash to help protect against the consequences of bank runs on the larger national and regional banks that had not closed.^[5]

According to a Sundlun spokesperson, although the state neither owned nor backed RISDIC, "it was decided that the state had a moral obligation to protect depositors".^[9] Sundlun's administration set up the Depositors Economic Protection Corporation (DEPCO), which sold bonds in order to repay those whose money had been lost.^[9] State sales tax was increased from 6% to 7% to help pay for the hundreds of millions of dollars in bonds.^[10][9] The state's troubles were exacerbated by a weak economy and a significant budget deficit at the time of the closure—$162 million on a $1.5 billion budget—legally obligating lawmakers to close the budget gap at the same time as it looked for funds to compensate depositors.^[11][6][9]

Though the state persisted in taking measures to ensure people recouped their losses, progress was slow. The Governor announced a plan to allow depositors to withdraw up to half of the funds in their accounts up to a certain amount, bu repayments to clients of still-closed banks did not begin until six months after the initial closure.^[7][12] Eight months in, 200,000 customers at 13 institutions still could not access their deposits worth about $1.2 billion.^[11] After a year, only 36 of the 45 institutions had reopened, and most of the biggest remained closed, including Rhode Island Central, the state's second largest credit union.^[8][7][13] By that time, depositors with small accounts of $2,500 or less had been repaid in full, but others with money at the nine still-closed institutions had only received about 10% of their funds.^[8] Two and a half years after the closure, a small number of depositors still did not have access to their money.^[14]

Hearings and public reaction

Local newspapers regularly printed lists of banks that had been opened or remained closed. Some depositors had houses foreclosed or other property repossessed; some businesses failed, while others had to lay off workers.^[8] The number of bankruptcies in the state increased by 62% between 1990 and 1991.^[8] Some businesses tried to adapt with an eye towards the crisis' resolution. Grocery chains Almacs and Stop & Shop arranged to continue taking checks from closed banks, to be cashed later.^[12] The Rhode Island Community Food Bank nonetheless had to distribute 30% more food than it did in 1990, totaling 4 million pounds.^[15]

The state Legislature formed a nine-person panel to look into the collapse of RISDIC and, in particular, how certain insiders managed to withdraw hundreds of thousands of dollars just before the announcement of the crisis, exacerbating the problem.^[13][16] The hearings began in July 1991, and were televised. According to The New York Times, the hearings "transfixed the state" and, although the last minute withdrawals was not itself the cause of the closures, it gave "Rhode Islanders a focus for their frustration."^[16] Among those questioned about their suspiciously timed withdrawals were the Mayor of North Providence, a state senator, credit union executives, RISDIC's former president, the former president's family, and a State Representative who also helped to kill a bill which would have forced credit unions to be federally insured.^[16]

Affected citizens held regular protests and demonstrations from the beginning of the crisis, but several noteworthy events occurred in the weeks following the hearings.^[5] In August 1991, about 250 angry depositors left a meeting and converged on an Interstate 95 on-ramp, blocking traffic in protest.^[15][13] Seven people were arrested, including husband and wife Donald and Raymonde Wolstenholme, recent retirees whose savings were frozen at a credit union in Woonsocket. The Wolstenholmes were profiled by local and national media following their arrest as a symbol of unrest and the crisis' continued effect of regular citizens.^[13][15][11] Two days later, 200 staged a march from the Statehouse to DEPCO offices.^[13] In one event in September 1991, more than 500 chanting protesters gathered at the Statehouse and dumped teabags in front of the Governor's office, symbolizing being on the verge of a revolt by referencing the Boston Tea Party.^[8][11] Another protest the following month, staged in response to an announcement revealing the next phase of the administration's repayment strategy, which focused on a small number of institutions and included financial actions that did not directly repay depositors.^[17] Demonstrators hanged an effigy of Sundlun a lamp post outside the capitol.^[17][11] Dedicated activist organizations formed, such as the Warwick-based Citizens for Depositors' Rights Organization.^[11] Speaking of the unrest, U.S. Senator Sheldon Whitehouse, who at the time worked in the Sundlun administration, handling the crisis as Director of Policy, said "My car was keyed. My tires were slashed. People came through the State House literally smearing excrement on the walls."^[5]

According to The New York Times, the banking crisis was the major catalyst in an "ethics movement" or even "citizen revolt" against corruption in Rhode Island. Sundlun, reflecting on the events of 1991, said it was the year when "the dishonesty, greed and corruption that rotted our system was exposed for all to see."^[18] Several non-profits and NGOs formed to advocate for citizens rights, demand accountability, or otherwise fight corruption.^[18]

Resolution

In total, 25 of the institutions obtained federal insurance and retained their status as independent banks or credit unions. Two nondepository institutions became inactive. Of the other depository institutions, customers at six were repaid by the end of 1991, six were acquired by other businesses (one by Coventry Credit Union, one by First Bank and Trust, and four by Northeast Savings), and six remained closed with at least some customers still unpaid.^[7]

Eventually, according to Sundlun, all of the money was returned with interest.^[5] Though he received criticism at the time from affected depositors and other segments of the public, some of whom called for his impeachment, Sundlun continued to stand by his decisions years later. Likewise, Whitehouse said it "without a doubt" could not have gone better.^[5][11]

Following the crisis, Rhode Island banks are now insured by federal entities, not just local institutions.^[10] The sales tax increase which was intended to be temporary was never repealed.^[10]

Possible connections to organized crime and corruption

There had been questions about RISDIC's stability for some time, but nothing was done. In an interview with The New York Times, Lee Blais, former director of investigations for the state Attorney General, said that in 1985 he told then-Governor DiPrete (who, years later, would guilty to 18 counts of racketeering, extortion, and bribery unrelated to the bank crisis) about connections between Heritage and organized crime, and gave to him a report detailing problems with RISDIC, but nothing was done.^[1][19]

According to Jim O'Neil, then the state's attorney general, cronyism, corruption, and connections between RISDIC and politicians were major concerns in the time before RISDIC's collapse: "The paramount problem ... was the inside game and inside people getting loans. They were scratching each others' backs."^[10] Audits had not been carried out at Heritage on the schedule required by RISDIC; the insurer did not notify the Attorney General of problems it found at Heritage when it did conduct an audit; Mollicone himself had been vice chairman of RISDIC; Mollicone as well as others at RISDIC were well-connected to politicians; Heritage's board comprised Mollicone's friends and family; board members did not attend regular meetings; Mollicone even had a family connection, through his father, to Raymond L. S. Patriarca, head of the Patriarca crime family.^[1]

Police Captain Brian Andrews told the New York Times that the previous year, Mollicone had reported that vandals had entered the bank illegally, but that he would "take care of it myself," citing his connection to Luigi "Baby Shacks" Manocchio, a major figure in the Patriarca network.^[1] Manocchio had been seen entering the bank on multiple occasions.^[1]

Throughout the Heritage investigations, law enforcement tried to connect Mollicone and the bank to organized crime. One anonymous official told The New York Times that the bank may have been used to launder money for members of organized crime, obscuring the true identities of the people who owned the money.^[1] Among the people's names Mollicone used for the fake loans were members of his family, golfing partners, and Buddy Cianci.^[1] Cianci was Mayor of Providence until convicted of felony assault, then re-elected years later, only to be sent to prison on racketeering charges. He and Mollicone had several dealings regarding real estate, permits, and banking.^[1]

Mollicone trial and repayment

References