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Statements to the Congress.

Financial General Bankshares, as First American was originally called, was one of a very few multistate bank holding companies that was exempted from the provisions of the Bank Holding Company Act by virtue of its registration under the Investment Company Act. When it became subject to the Bank Holding Company Act in 1966, it controlled banks in Virginia, Maryland, Tennessee, New York, and the District of Columbia.

Other Federal Reserve officials have discussed the attempts by the Middle Eastern investors to obtain approval of the Board of Governors for the acquisition of Financial General Bankshares, and I shall not review this effort. I would like to point out, however, how the Federal Reserve Bank of Richmond participated in the application process that led to the Board's approval of the second application to acquire Financial General on August 25, 1981.

The Federal Reserve Bank of Richmond shared the same concerns as did many others about the possible involvement of BCCI in the takeover attempt. We participated in the hearing the Board of Governors conducted on the application during which the testimony presented both by individual investors and by their counsel (Clark Clifford and his partner, Robert A. Altman, of the firm of Clifford & Warnke) stated that BCCI would not be involved in the acquisition other than as investment adviser to the individual investors and, in particular, that BCCI would not fund the acquisition. The senior representative of our Reserve Bank specifically asked about BCCI's current and future role and was provided unqualified assurance by Mr. Clifford that BCCI was not involved in the takeover other than as investment adviser and that no other role was contemplated for the future. Similar representations were made to the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the banking commissioners of the states of Maryland, Virginia, and New York where First American's subsidiary banks were located. Despite the assertions of the shareholders and their counsel, the Board conducted thorough investigations of the investors and, in this process, solicited information from the Central Intelligence Agency, the Departments of State and Commerce, and a foreign bank supervisor. None of the background checks uncovered any adverse information regarding the investors. In addition, neither the Board nor any other federal or state regulator received any evidence that the representations made to them were false.

On the basis of the record of the application, the Federal Reserve Bank of Richmond saw no legal basis for recommending denial of the application to the Board. On August 25, 1981-after having considered the hearing record, the recommendations from the Board staff and the Reserve Bank, as well as the views of the federal and state agencies-the Board approved CCAH's acquisition of Financial General. The acquisition was consummated on April 19, 1982, and Financial General was renamed First American Bankshares in August 1982. Mr. Clifford was named chairman of the board of First American Bankshares, former Senator Stuart Symington became chairman of the board of CCAH, and Mr. Altman was elected president of another First American holding company and secretary and managing director of CCAH.


Once the acquisition was consummated, the supervision of CCAH and First American fell to the Federal Reserve Bank of Richmond, which also had been responsible for supervising Financial General. In such supervisory work, the Reserve Banks perform their bank holding company inspection duties under authority delegated by the Board and thus work much more closely with the staff of the Board on an ongoing basis than is true in the case of many of our other responsibilities. An inspection, the primary supervision tool for bank holding companies, is designed to ascertain whether the strength of the bank holding company is being maintained and to determine the impact or consequences of transactions between the parent holding company or its nonbanking subsidiaries and its subsidiary banks. The scope of those inspections includes, among other factors, a review of intercompany receivables and payables, earnings, capital, asset quality, and dividend payments to the parent company. In measuring financial strength of a bank holding company, the inspection process focuses on financial indexes of both the consolidated entity and its component parts. With respect to the component parts of a bank holding company, Reserve Banks review the reports of examination of its subsidiary banks prepared by the banks's federal and state regulators. The ability of a bank holding company to maintain an adequate level of capital, as well as to preserve its overall ability to act as a source of financial strength to its bank subsidiaries, is a primary consideration and focus of the inspection. Besides the regular inspection of a parent holding company, our Reserve Bank monitors the condition of the entire holding company through the review of regulatory reports filed quarterly, semiannually, or annually with us or other regulatory authorities.

Since the acquisition of the First American banks by the Middle Eastern investors, the company has been inspected by the Federal Reserve Bank of Richmond eight times. The Federal Reserve Bank of Richmond does not examine any of the company's subsidiary banks since none are state member banks. These inspections have included the review of the reports of the other bank supervisors to verify the condition of the individual First American banks and, most important, to determine whether the FDIC, the OCC, or respective state bank supervisors uncovered any improper or illegal BCCI connection concerning actions taken by either the investor group or BCCI.

In the years immediately after the acquisition, there was no evidence developed through the supervisory process to suggest that CCAH and First American were functioning other than in accordance with the statements made to the regulatory authorities at the time of the application. During this period, the Reserve Bank's inspections found compliance with the conditions and commitments of the original application and no violations of the law. The examiners in charge of these inspections, I should emphasize, were well aware of the Federal Reserve System's concerns about the investors and the possible involvement of BCCI. The examiners regularly discussed the relations between the investor group with various members of the company's senior management team, both to determine compliance with the commitments and to probe for involvement of the BCCI group. In addition, numerous discussions were held with other bank regulatory agencies responsible for supervising First American's subsidiary banks, and no adverse information surfaced about the banks from them.

The examination and inspection record between 1982 and late 1988 is clear. Neither the reports of our First American inspections nor any of the reports of examination prepared by other federal and state regulators contained comments or criticisms regarding involvement of, influence by, or improper payments to BCCI. On the contrary, since the acquisition in 1982 there were no dividend payments by the First American holding companies to the investors and capital injections into the First American organization totaled more than $500 million.


In October 1988 indictments of BCCI and its officers were announced, and Federal Reserve Banks with supervisory responsibility over BCCI agencies in Florida, New York, and California initiated extensive examination of those agencies. Since our Reserve Bank did not have supervisory responsibility for any BCCI agencies, we did not participate in those examinations.

In early 1989, after BCCI's indictment for money laundering and the emergence of allegations that BCCI and CCAH were linked, the Federal Reserve Bank of Richmond conducted a special inquiry into the relationship between CCAH and BCCI. The inquiry included questioning First American senior management on the relationship to BCCI, reviewing records of the organization, and requesting each First American subsidiary bank to report on any transactions with BCCI. The report on our findings of the inquiry, dated February 8, 1989, presented no evidence of irregular or significant contacts between the First American banks and BCCI or any indication that CCAH had failed to adhere to its commitments. Our report disclosed that First American senior management represented to us that the relationship between CCAH, First American, and BCCI was no different than at the time of the original application and that BCCI did not exercise a controlling influence over CCAH. While we found that the degree of common ownership between CCAH and BCCI had increased since the original acquisition of Financial General, the Bank Holding Company Act does not prohibit such common ownership of banks and nonbanks by individuals as it does for companies. Thus, this common ownership, while significant, did not provide grounds for any action on the part of the Federal Reserve Bank of Richmond or any recommendation by us for action by the Board.

During this period, examinations of First American's banks conducted by the states of Maryland, New York, Virginia, the OCC, and the FDIC also found no irregularities or relationships between First American and BCCI. Consistent with these examinations, our two inspections of First American in 1988 and 1989 found continued compliance with application commitments, including finding no linkage between CCAH shareholders and BCCI other than the common shareholder interests, which were not illegal.


In December 1990, a senior member of the Board of Governors's staff was permitted to review a copy of BCCI's external auditors' October 1990 report, which detailed substantial loans made by BCCI to CCAH shareholders secured by CCAH shares. The existence of these loans was later confirmed at a meeting with representatives of the investors held on December 21, 1990, at the Board. As it became increasingly clear that an unauthorized relationship existed with BCCI, an in-depth inspection of the First American organization was initiated in early January under the direction of the Federal Reserve Bank of Richmond and Board staff. This inspection was coordinated with examinations of all of First American subsidiary banks to assess the general safety and soundness of the organization. At the same time, extensive discussions were begun with senior staff members at the Board, the Federal Reserve Banks of Atlanta, San Francisco, and New York, and the agencies participating in the coordinated examinations of all the banking subsidaries of First American, including the FDIC, the OCC, and the banking departments of Maryland, New York, and Virginia.

A significant part of this examination included a review of bank records for any deposits of, payments to, or exposures to individuals or companies related to BCCI or CCAH. The examination is seeking to determine if the resources of First American's banks have in any way been utilized improperly, either directly or indirectly, for the benefit of its owners. To date, a total of fifty-two examiners from all twelve Federal Reserve Districts with an average experience level of approximately eight years have expended in excess of seven man years on this examination. While this examination is ongoing, results to date have not disclosed any abuse of the subsidiary banks or any lending practices that are widely at variance with other area banks, and no additional evidence of BCCI ownership has been uncovered in First American records. Simply put, no connection between the banks' lending practices and their unauthorized ownership by BCCI has been uncovered.

Besides this ongoing examination process, the Federal Reserve Bank of Richmond has been monitoring compliance with CCAH's February 1, 1991, cease and desist order, which, among other things, prohibits transactions between CCAH, subsidiary banks of First American, and BCCI except for capital injections into the banks and certain clearing transactions in the ordinary course of business. In this role, on March 1, 1991, the Federal Reserve Bank of Richmond informed the First American Bank of New York that its clearing transactions for BCCI should be wound down and terminated before the end of 1991. As a result of this action, the transactions between BCCI and the First American Bank of New York were liquidated in an orderly manner so that by July 5, when BCCI was closed, the correspondent relationship had been reduced substantially.


The Federal Reserve Bank of Richmond will continue to keep examiners on site to monitor the situation and to continue to review transactions of First American and its subsidiary banks for any possible irregularities connected with BCCI. We are working with the staff of the Board to sever any improper connections between BCCI and the First American banks so that the banks will be free of any tarnish that they may be suffering from their association with BCCI.
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Title Annotation:statement by Robert P. Black
Publication:Federal Reserve Bulletin
Article Type:Transcript
Date:Nov 1, 1991
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