Monasteries, Mutuals and Investment Banks
Brenner, Albert J., Real Estate Issues
I RECENTLY FINISHED READING C.J. SANSOM'S HISTORICAL mystery Dissolution. The book is set in England in the early years of the 16th century at the time of the dissolution of the monasteries. The monasteries were dissolved by Henry VIII as part of an ostensible reform of the English church. The motivations behind and the purposes of the dissolution were many, some noble and some not. The stated purpose was to root out the corruption and vice that--according to Henry and his advisers--had become endemic throughout the monasteries (a view subject to considerable disagreement among modern historians). The dissolution of the monasteries was also intended to eliminate the influence of Rome over the newly established English church with the king as its head.
A less noble motivation behind the dissolution was the expropriation by the Crown of the wealth of the monasteries--their lands and accumulated treasure. Even in the early 16th century, many of the monasteries were centuries old. Through generations of bequests, many of the monasteries had accumulated considerable wealth; and it was no inconvenient consequence of their dissolution that this wealth flowed to the Crown and its supporters.
While I was reading Sansom's historical postscript to the book, I was reminded of a much more recent phenomenon with odd parallels to the dissolution of the English monasteries five hundred years ago: the wholesale conversion of mutual savings institutions to publicly owned stock institutions. The mutual savings industry, a relatively small component of the American banking system but a larger component in certain areas such as New England, has been around since before the Civil War. Many mutual savings banks in New England were established in the 1840s. These institutions, established to serve the small saver within their communities, provided banking services to the general public for more than a century and survived some of the most severe financial crises in American history. In the process, they made money, and their accumulated earnings were stockpiled as capital. By the late 20th century, many of the mutual banks had strong capital ratios--although some did not.
The mutual savings bank industry survived for more than a century until the management of the industry realized that they could tap into the accumulated capital of the mutual banks. Under the guise of raising capital to be more competitive, many mutual savings banks converted to stock ownership. Two things happened as a result.
Many people, and management in particular, made a lot of money. Through the grant of stock purchase rights (flowing ostensibly from being current "owners" of the bank by being current depositors or bank employees), bank managers essentially cashed out the accumulated capital of the institutions. One hundred years of stockpiled earnings were distributed in one fell swoop to the folks in the corner offices. The wealth of these community institutions, intended to serve the general public, was effectively expropriated by management. Unlike the dissolution of the monasteries, however, which led initially to a significant uprising, the conversion of the mutual savings banks had little opposition. Current depositors were able to join in the plundering, and few voices were left to speak out in opposition to the expropriation.
Ironically, the second consequence of the wholesale conversion of the mutual savings banks--at least in New England--was the ultimate failure of many of the institutions. So much capital flowed into the region, and banks were so eager to put the capital to work, that a boom in commercial real estate followed as project after project got funded without anyone asking how all of the projects could be supported. Just like the more recent national housing bubble, all of the building couldn't be supported. Commercial real estate prices dropped, buildings sat vacant, and banks failed--even those that hadn't raised new capital. …