THE CALAMITY THEORY OF BANKING

Adversity causes some to break and others to break records.

A system [like banking that is] dependent solely on public confidence should itself exhibit confidence. Any doubt thrown upon one member must excite doubt in regard to them all.

The Philadelphia Daily Evening Bulletin
September 28, 1857

“The most important ideas are those that apply to multiple fields,” my friend Morgan Housel once wrote.

Take the calamity theory of growth, from psychology.

“Very often it is the crisis situation . . . that actually improves us as human beings,” Dr. Edith Eger wrote in The Choice: Embrace the Possible about her years as a prisoner in Auschwitz.

“Paradoxically, while these incidents can sometimes ruin people,” she continued, they tend to serve as “growth experiences” as well.

This may seem like an unusual way to begin a post on banking, particularly at a time like this.

But it hits on a fundamental truth that I have only recently discovered after nearly a decade and a half of rigorous study. And it is at a time like the present, with fear coursing through the industry, that this truth is best shared.

Experience of a different variety

Rarely are the best bankers sired by preeminent parents. Rarely do they matriculate at Ivy League colleges. And rarely do they train at the heels of legendary mentors.

They share instead an experience of a different variety.

It is the experience of tragedy and hardship, often appearing early in their lives.

• A.P. Giannini was standing feet away when his father was shot in the face with a shotgun by a disgruntled farm employee.

• Michael “Mick” Blodnick grew up in the federal housing projects in Anaconda, Montana, so poor that his family often didn’t have food to serve for dinner.

• Richard Davis’ father was killed in a hit-and-run accident moments after Davis and his family parted ways with plans to see each other the next day, Thanksgiving.

• Brent Beardall was fifteen years old when, on the night after Christmas, he carried his father’s unconscious body to the car late one night and sped with his mother to the hospital; his father never regained consciousness and died a week later.

• Ross McKnight’s father died in a drunken stupor one morning when McKnight was 15 years old. “Change the channel yourself, you old drunk,” were McKnight’s last words to his father — words he’s regretted ever since.

• Robert Wilmers’ parents were first cousins whose marriage barely survived his birth. His adopted father was later convicted of bribing a government official in Belgium. His eldest son committed suicide by jumping from the window of their New York City apartment.

Herein lies a roster of hardship and tragedy. Herein also lies a roster of greatness in banking.

• Giannini founded Bank of America in 1904 (as the Bank of Italy). By the time he died in 1949, it had become the largest bank in the world.

• Blodnick created more value for shareholders during his time as CEO of Glacier Bancorp from 1998-2016 than all but one other bank CEO in the United States.

• It was under Davis’ time as CEO that U.S. Bancorp emerged from the financial crisis of 2008 with the highest debt rating in the entire banking industry.

• Beardall has overseen one of the most impressive transformations in modern American banking, turning Washington Federal from a monoline thrift into a full-fledged commercial bank that ranks seventh among existing banks based on all-time total shareholder return.

• McKnight paid $5,000 for a failed bank in the mid-1980s and has since grown it into the $4 billion-plus InterBank with exceptional performance based out of a small town in the Texas panhandle.

• Wilmers, as chairman and CEO of M&T Bank from 1983-2017, is the only banker to outrank Blodnick on the list of all-time total shareholder return.

And I would be remiss not to mention Rene Jones, Wilmers’ successor as chairman and CEO at M&T Bank.

Jones was one of six born to a mixed-race household, with his siblings resembling all shades of black to white. Because Jones fell on the lighter end of the spectrum, he was privy to rare insights on race and the disparate treatment of his siblings.

It is to this experience that Jones credits his almost defiantly calm demeanor — the same demeanor, mind you, that enabled him to ignore the siren song of analysts and short-term profits that caused so many of his contemporaries to buy bonds at precisely the wrong time over the past two years.

“You have to be careful not to be too ambitious,” Jones once told me. “Recognizing and embracing that as a fact actually turns out to be a growth strategy because, as we know in the banking industry, typically there's someone around who's going to have a significant misstep.”

The value of adversity

It would be easy to think that I’m connecting dots that shouldn’t be connected. After all, a half-dozen observation points is hardly enough to satisfy statistical significance.

But if I were to be honest with you, which I will be, I would tell you that statistical significance is a weapon wielded by those who lack actual experience and observation.

More to the point, however, I’m not the one connecting these dots. With the exception of Giannini and Wilmers, each of these bankers, or members of their family, have connected the dots themselves.

• It was Blodnick’s experience growing up with next to nothing that enabled him to relate to all members of the rank and file at Glacier Bancorp.

• It was the death of Davis’ father that influenced how he treated employees at U.S. Bancorp, which in turn explains his remarkable popularity as a leader.

• It was the death of Beardall’s father that paradoxically planted the seeds of his infectious optimism.

• And it was the abandonment by his callous mother weeks after his father died that spurred McKnight to ultimately become the billionaire owner of multiple businesses in multiple industries.

McKnight tells the story of the night he connected the dots himself.

It was 1988. He was sitting in the front row of the broadway musical Chess, loosely based on the life of Bobby Fisher.

Near the end comes a song titled Pity the Child that tells the story of a child abandoned by his parents.

The first part is filled with a child’s lamentations.

Pity the child who has ambition
Knows what he wants to do
Knows that he'll never fit the system
Others expect him to
Pity the child who knew his parents
Saw their faults
Saw their love die before his eyes
Pity the child that wise
He never asked, "Did I cause your distress?"
Just in case they said yes

As the song crescendos in intensity it also takes a sharp turn, after which those lamentations are redirected toward the mother.

Pity the child, but not forever
Not if he stays that way
He can get all he ever wanted
If he's prepared to pay
Pity instead the careless mother
What she missed, what she lost
When she let me go
I wonder, does she know?

“It was at that point, sitting there listening to that song,” McKnight recalled decades later as we spoke in Dallas, “that I realized my entire life had been spent trying to prove that I was worthy of my mother’s love.”

It was the most poignant moment of my career, perhaps one of his too.

A system dependent solely on public confidence

I originally intended to explain in this post the origins, status and likely future direction of what I call the Silly Valley Panic of 2023. But that will have to wait until next week.

Instead, I chose this path in part because these are incredible stories that few people have the opportunity to hear firsthand, as i have.

Even more importantly, I wanted to share these stories now because there are people in the banking industry who as I write this are staring into the professional abyss.

Thousands of people will lose their jobs in the coming weeks at Silicon Valley Bank, Signature Bank, First Republic Bank, and probably others.

These are people with mortgages. And medical bills. And children.

In times like this, with analysts and commentators prodded by the media to cast blame and aspersions, it’s easies to fall prey to those same prurient interest than it is to feel empathy for those who deserve it.

For indeed the right thing to do in times like these, particularly for those in the banking industry, is to stick together.

It is to remind each other, as Mick Blodnick did years ago in a commencement speech to graduates of Flathead Valley Community College, that while adversity can cause some to break, it can cause others to break records.