1974: Franklin National Bank goes under

Long Island Business News, Apr 11, 2003 by Natalie Canavor

Before its sharp decline and spectacular crash in 1974, Franklin National Bank had been one of the most profitable banks in the country, and its founder, Arthur T. Roth, was one of Long Island's most revered business and civic leaders.

Born in the Bronx to Bavarian immigrants and with only a high school education, Roth built Franklin National into the nation's 20th largest bank by investing in Long Island's growth. Along the way, he helped transform the industry with innovations such as credit cards, installment buying, the "full-service bank" concept, giveaways, attractive landscaped branches, parking lots and drive-up windows.

When industry rules were disadvantageous, he fought to change them, often successfully - in one instance going all the way to the U.S. Supreme Court. For most of its life, Franklin National earned more per dollar invested than any bank in the country.

Yet in 1968, Roth's own board and protg pushed him out of the picture. Six years later, the Franklin National Bank became the biggest bank failure at that point in American history. It took billions of dollars in federal money to avert international disaster. Franklin's demise changed the face of Long Island banking and altered U.S. bank regulation and global financial practices.

What brought Franklin down? Explanations range from dry statistical analyses of the economy and Franklin's own books to charges of autocracy, over-ambition, personal betrayal and international skullduggery.

Roth began his career as a 17-year-old bank messenger in the city and worked his way up to administrative duties at Manufacturer's Trust. Wanting to move to Long Island, he became the cashier at Franklin Square National Bank in 1934, joining four other employees.

He later described it as "an almost perfect example of what was wrong with American banking in the 1920s." It was located in a tiny village with no industry, little commerce, no railroad station, by "founders ignorant of professional banking." His challenge was to rescue the nearly insolvent bank.

Roth began by "saving" many near-default loans with an early form of installment buying. He took the role of community banking seriously and provided neighborhood meeting rooms, a speaker's bureau, annual reports, internships for high school students, Christmas pageants, lollipops for children. His was one of the first banks to introduce consumer and FHA-backed loans. Roth created credit cards for local shopping, so small merchants could compete with the department stores that were offering charge accounts.

In the 1950s, when banks were still confined to their own counties, Franklin financed much of the region's new commercial development, says Jerry Kessler, who then worked for Meadow Brook National Bank and is now president of Friends for Long Island's Heritage. Roth introduced aggressive promotion techniques to the stodgy world of banking.

"He once hung a Grumman Goose airplane in the bank lobby," accompanied by a card that explained how the bank would finance the purchase, Kessler recalls. Ahead of his time in many ways, Roth banned smoking in Franklin buildings, refused to sell lottery tickets and hired the handicapped.

Roth started expanding as Long Island grew, ultimately merging with 19 other banking chains to operate more than 100 domestic offices, including one third of all Nassau County commercial banks. But in 1960, despite Roth's fierce opposition, the state passed a law allowing banks to open branches in other counties, and New York powerhouses promptly invaded prosperous Nassau. Roth riposted by opening New York City branches. In 1967, Franklin merged with the 13- branch Federation Bank & Trust, setting the stage for disaster.

The mid-60s were tough years for the American economy, and Franklin had become less profitable. Harold V. Gleason, a PR executive who'd risen to become president under Roth, the chairman and CEO, led a group of board members in a palace revolt. Roth was made a powerless figurehead for two years, and in 1970, his name was omitted from the directors' nomination list. He was out.

"He was crushed," recalls Kessler. "He said, 'I always treated Harold like a son.'" To support the bank, Roth put a positive face on events and announced a slightly premature retirement.

Soon the bank was heavily invested in overseas ventures, and its fortunes began to slide. In 1972, Michele Sindona, an Italian financier with reputed connections to the Mafia and Vatican banking, bought controlling interest in Franklin. Sindona siphoned off money and led the bank into massive losses in the foreign exchange markets and ever-riskier attempts to recoup.

When other banks refused to deal with Franklin, the Federal Reserve Bank kept the bank afloat with $2.8 billion in credits. Finally, in October 1974, the desirable assets were sold to the highest bidder: European American Bank, a consortium of powerful banks centered in the Netherlands. The FDIC took a $2 billion load of loans and receivables, and the stockholders, Roth included, lost everything.