'Nightmares' Taught State Important Lessons Financial Status of Commonwealth, Franklin - Nov 3, 1993 - Omaha World-Herald
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Nov 3, 1993 'Nightmares' Taught State Important Lessons Financial Status of Commonwealth, Franklin - Omaha World Herald - Robert Dorr
Nebraska has learned important lessons from the two largest collapses of
financial institutions in the state's history, two experts on the
Commonwealth Savings Co. of Lincoln was closed on Nov. 1, 1983. Franklin
Community Federal Credit Union of Omaha failed on Nov. 4, 1988.
"Both have been nightmares for the state," said former State Sen. Vard
Johnson, an Omaha lawyer who headed the legislative investigation into
the Commonwealth failure.
The failures prompted state and federal officials to pass tighter laws
and to adopt better rules for regulating financial institutions, said
State Sen. Jerome Warner of Waverly, who served on legislative committees
that looked into the Commonwealth and Franklin insolvencies.
This week marks the 10th anniversary of the Commonwealth collapse and the
fifth anniversary of the Franklin failure.
Recoveries from loan repayments and sales of properties owned by
Commonwealth produced $ 27.9 million, falling $ 40.1 million short of the
$ 68 million needed to repay its depositors. Franklin's assets, totaling
$ 3.5 million, fell $ 37.5 million short of repaying its depositors. Only
in Franklin's case did insurance come close to repaying depositors.
Those losses of $ 40.1 million and $ 37.5 million, while small when
compared with some of the losses from savings and loans and bank failures
in Texas, California and other states in recent years, make Commonwealth
and Franklin Nebraska's largest financial-institution failures.
Commonwealth has been a nightmare for one reason, and Franklin for an
entirely different reason, Johnson and Warner said.
With Commonwealth, it has been the struggle of depositors - so far
unsuccessful - to get all of their money back after realizing that it was
not fully insured.
With Franklin, there was little outcry from depositors, whose money was
largely protected. The turmoil instead stemmed from allegations of child
sexual abuse that surfaced during a two-year investigation by a special
While Franklin is fading, Commonwealth remains a sore subject to some
Nebraskans, Warner said. "People who lost financially are understandably
bitter," he said.
Every Commonwealth account supposedly was insured up to $ 30,000 by a fund
that some depositors mistakenly believed was backed by state government.
The fund, the Nebraska Depository Institutions Guaranty Corp., was
authorized by state law.
"The state ought not to lend its name to something unless it is fully
prepared to stand behind what it has done," Johnson said.
The insurance fund was financed by Commonwealth and the state's other
industrial loan and investment companies, sometimes called industrial
banks. When Commonwealth failed, the fund had only $ 3 million to pay off
$ 59 million in supposedly insured Commonwealth losses.
Johnson said he supports state government in refusing to prop up the
insurance fund, but he also understands why many depositors felt
Over the last decade, Commonwealth depositors have picketed the
governor's mansion, repeatedly lobbied state senators and filed lawsuits
in a struggle to get all of their money back.
Counting $ 1 million in undistributed assets, depositors will get about
$ 39.4 million back. That amounts to 58 cents on the dollar although
inflation has eroded the value of repayments.
Commonwealth was chartered and regulated by the state. Nebraska Banking
Department regulators knew for years before Commonwealth failed that it
was having problems. The regulators, however, were unaware of the extent
of the difficulties, and their efforts to correct the problems failed.
State banking laws were tightened after the Commonwealth failure, giving
regulators more authority, Warner said.
"The problem was that before Commonwealth, the regulators had no real
disciplinary authority short of closing something down," he said.
In personal style, the leading figures at Commonwealth and Franklin were
S.E. Copple, president and main owner of Commonwealth, lived modestly,
hadn't taken a vacation in 50 years and fumed over a $ 50 roof-repair
Lawrence E. King Jr., the head of Franklin, chartered jets, rented
limousines and bought $ 25,000 ostrich-skin coats.
Franklin, a federally regulated credit union, kept two sets of books -
one to show examiners, the other maintained in secret.
The credit union's public records showed $ 2 million in deposits. The
secret records listed another $ 39 million taken in from depositors. When
federal authorities closed Franklin, the $ 39 million was missing.
Except for one order of Catholic nuns, all depositors were fully covered,
or nearly so, by the $ 100,000 per-account federal credit union insurance.
The turmoil from Franklin began when three young adults told a
legislative committee's investigator that prominent Omaha men attended
parties in the mid-1980s and sexually abused them and other underage boys
and girls. Some of the abuse supposedly took place at sex and drug
parties at King's apartment just west of downtown Omaha.
Those allegations were discredited.
Two grand juries indicted the main accuser, Alisha Owen, now 25, on
perjury charges. A District Court jury convicted her of lying under oath.
She is appealing that conviction.
Two young men who at first supported Miss Owen's story recanted that
support. They said they had told their stories of sexual abuse because
they thought they could sell rights to books and movies and win big
lawsuits. One of the two, Troy Boner, recently changed his story again,
saying he originally recanted under pressure from the FBI. The FBI
declined to comment.
One other man who made similar allegations, Paul A. Bonacci, 26, was
indicted on perjury charges. Bonacci was in prison on an unrelated
conviction and never was tried on the perjury charges.
During the Franklin legislative committee's investigation, the names of
some prominent men wrongly accused of sexual abuse became public
knowledge, Warner noted.
"The legislative branch is simply not a good investigative arm when
confidentiality should be maintained," he said.
The Commonwealth and Franklin failures had different causes, Johnson
The assets that served as collateral for Commonwealth's loans consisted
of real estate - empty lots for residential developments, shopping
centers, office buildings. That real estate turned to quicksand in the
late 1970s and early 1980s when Lincoln's real-estate market collapsed.
At the same time, rising interest rates forced Commonwealth to pay more
to attract deposits.
Some of Commonwealth's loans were insider transactions, Johnson said.
That money financed real-estate developments in which Copple family
members sometimes had an interest. But the insider Copple dealings were
less of a reason for the failure than were Lincoln's sinking land prices,
Franklin, he said, "was a genuine scam - it was outright theft."
At Franklin, federal examiners had no idea what was going on. The credit
union's chief accountant, E. Thomas Harvey Jr., established secret
computer files for keeping track of $ 39 million in certificates of
deposit. That money went out as fast as it came in to meet King's lavish
living expenses, to cover losses from his restaurant and catering
businesses and to pay the snowballing interest on existing CDs.
After Franklin failed, the federal regulatory agency - the National
Credit Union Administration - made these changes:
Because of their low-income status, federal credit unions such as
Franklin formerly had broad authority to attract deposits from outside
their geographic areas. Franklin sought deposits from all over the nation
by paying ever-higher interest rates. The National Credit Union
Administration sharply restricted the authority of low-income credit
unions to accept outside deposits.
To increase chances of detecting financial irregularities, a new federal
law gives regulators more authority to demand that credit unions have
their books checked by an outside auditor.
From the start, the National Credit Union Administration has insisted
that Franklin was an aberration and that its failure didn't indicate that
a large number of credit unions had problems. That view has proved
correct, said Allan Meltzer, the agency's associate general counsel, said
"We haven't had any more Franklins."
(graphic chart missing)
Financial Status of Commonwealth, Franklin
Deposits $ 68.0 $ 41.0
Recoveries from land sales
loan repayments, lawsuits...27.9 3.5
Insurance fraud 3.0 34.8
Legislature 8.5 NA
Total paid to depositers 39.4 38.3
Shortfall 28.6 2.7
Commonwealth's shortfall was caused mostly by lack of insurance and lack
of assets. Franklin's shortfall was due to some deposits that exceeded
the $ 100,000 insurance limit.
NA: not applicable
GRAPHIC: Table/1 B&W Photos CLOSED NOV. 1, 1983: State fund had little money for paying off supposedly insured Commonwealth depositers. CLOSED NOV. 4, 1988: Two sets of books were used at Franklin to disguise the theft of credit union funds.; World-Herald/2