Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Double Liability for Bank Shareholders, Officers and Directors

Politics / Credit Crisis 2012 Feb 06, 2012 - 04:02 AM GMT

By: Chris_Kitze


Best Financial Markets Analysis ArticleMost people don't realize that for about 75 years after Civil War, in the United States, a bank's officers, directors and shareholders had personal liability in excess of the value of their shares.  If a bank were to be declared insolvent by the regulator, they were required to make up the shortfall in an insolvency with their personal assets.  This tends to focus the attention of the bankers to be more responsible in terms of their lending and other business practices and provides an automatic way to self-regulate.  When you have no personal responsibility, other than maybe not getting a bonus next year, why not take big chance for a bigger personal payout?  There is no downside for bankers with today's limited liability and the public is now stuck with these losses because the bankers have shifted their responsibility to the public.

From Yale Law School Legal Scholarship Repository:

For three quarters of a century - between, roughly, the Civil War and the Great Depression-shareholders in American banks were responsible not only for their investments, but also for a portion of the bank's debts after insolvency.  If a bank failed, the receiver would determine the extent of the insolvency and then assess shareholders for an amount up to and including the par value of their stock.

Bank officers, directors and investors took this responsibility very, very seriously.  This article was written in 1994, following the previous worst banking crisis since the Great Depression, the Savings and Loan debacle and outlines the reasons why it should still be in use today:

The regime of bank double liability was rejected and abandoned on three grounds:  (1) that it had failed to protect bank creditors; (2) that it did not maintain public confidence in the banking system; and (3) that depost insurance was a far preferable means for accomplishingg the regulatory objectives.  These arguments have a certain irony in light of recent history, in which deposit insurance itself has proved incapable of protecting the soundness of the banking system or maintaining public confidence in the nation's depository institutions.  Double liability, on the other hand, holds the promise for instilling sound banking practices through the application of incentives and shareholder monitoring, rather than the pervasive regulatory scrutiny necessitated under deposit insurance systems.  History shows that the nation took a wrong turn when it abandoned double liability for a system of governmentally administered deposit insurance.

Think about this in light of today's banking system, which rewards incompetence with taxpayer underwritten bailouts and ignores the responsibility of those paying themselves huge bonuses. 

Under double liability, if there were a run on a bank and it closed, within days of the regulators shuttering the bank, counting all the assets and liabilities, there would be an auction of all the assets of the bank AND that of it's responsible directors, officers and shareholders.  This took place literally on the front lawn of the executive's home, because that home and its contents would also be auctioned off, too.  For the author, there is also a personal story I'd like to share with you.

This is a store that was owned by a long deceased relative of mine from Granton, WI.  It's a postcard from 1912.

The P.J. Kemmeter General Store.  P.J. Kemmeter was one of the leading businessmen in town, owning a heading mill, this general store and a home on one entire city block.  He was also a shareholder in the Granton Farmer's State Bank.

According to the local newspaper:

"The Farmers State Bank probably does the biggest business of any bank in the state with a capital stock of $10,000. The deposits range from $175,000 to $200,000 and the business done for the wealthy farmers in the vicinity would put to shame many an institution which is more pretentious in the larger cities."

Here is a balance sheet, as well as the the roster of the officers, directors and shareholders of the Farmer's State Bank in Granton, WI, where he had invested $200 in the total capitalization at the bank, which was $10,000 (he's near the bottom right).  This is from 1912, long before the collapse.

Unfortunately, it ended badly as this bank was swept up in the depression of 1930 and it was declared insolvent by bank examiners.  The bank building was eventually purchased by Citizens State Bank of Loyal:

Many milestones mark the progress of Citizens State Bank of Loyal. In 1934, the Board of Directors voted to purchase the former Farmers State Bank building in Granton, which folded during the Depression. 

Shortly after the bank went under, P.J. Kemmeter did as well.

From the Clark County News, May 1930:

M. E. Wilding, trustee in bankruptcy, last week disposed of the P. J. Kemmeter property in Granton.  The store building was sold for $3,000 and the home for $2,250, both purchased by John Pietenpol.  

The store, the bank, the mill, his home, everything was lost in that crash from the bank failure, which he and the other shareholders had to personally make good.   Maybe the answer to today's banking crisis is to have more personal liability and Regulator wall clocks to remind the bankers of the responsibility they carry for society.  A Regulator for their heart will no doubt do more good than any new law or government Regulator.

By Chris Kitze

A long career in digital media led to Before It's News, the People Powered News site that is quickly becoming a leading source for alternative news. We've got a great team of very bright and hardworking people with an incredible market opportunity that's been handed to us by a corrupt media and government. We're here to help you get your news out, that's why this site exists.

© 2011 Copyright  Chris Kitze - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in