FAILURE ANALOG: A CASE STUDY IN RELATABLE ERROR
Tell me where I’ll die, so I can be sure to never go there.
On January 16, 2009, the Office of the Comptroller of the Currency closed a two-branch bank in a suburb of Chicago after the bank couldn’t plug a fifty-five million dollar hole in its balance sheet that had been torn open four months earlier.
The nadir of the financial crisis had arrived. This would be the first of one hundred forty banks to fail that year — one hundred fifty-two went down a year later.
Yet, this failure was different. It had nothing to do with subprime mortgages or arcane derivatives that promised to eradicate risk. The bank hadn’t gorged on brokered deposits to finance condo construction in Miami. Nor had it reoriented its securities portfolio to wager on rising or falling rates.
And because the catalyst was so unusual, it would have struck unexpectedly. No one would have seen it coming. Not investors. Not regulators. Not bankers. Not even Jamie Dimon.
It was the first bank in history to fail for this reason. But it wouldn’t be the last. Nine months later the forty-third biggest bank in the United States was scuttled by the same ordinance. And two more banks would have succumbed if they hadn’t been acquired by deeper-pocketed peers.
What was causing so much turmoil? Had a novel species of risk contaminated the laboratory? Or were the origins of this affliction peculiar to this time and place? And, of course, what bank are we talking about?
It’s a rare, remarkable story. One that every banker and bank investor should know. It teaches about risk and return. About the perils of chasing yield. About banking in Chicago. And you’ll discover that the biggest risk a bank faces is the one that is unknown. But before getting to all that, we need to start building a common foundation of knowledge. That’s how we’ll advance together at an accelerating pace. So that’s where we’ll begin.