Banks and Seals

In Palermo in the 1880s the Bank of Sicily was run by the Marquis Emanuele Notarbartolo, a former mayor of the city, a man of principle and, as we’d say today, politically inconvenient. He was fighting, in Dickie’s words, a hopeless battle. The bank served “its own”: it financed friends and bought votes. Large sums went out as loans to fictitious people—children, watchmen, boatmen and even the dead. The loans, naturally, were never repaid. The dead are poor payers at the best of times. Watchmen aren’t much better.

Two thirds of the bank’s board were politicians. In 1889 Notarbartolo secretly sent the government a report on the bank’s affairs and set a condition: back my reforms or I go. The documents were stolen right out of the minister’s office and a few weeks later laid before the bank’s council while the governor was away. The council voted no confidence in him. Suspicion fell on a board member, Raffaele Palizzolo, who trailed links to mafia clans behind him. The government thought it over for several months and chose the council. Notarbartolo was asked to leave. He left.

And then began what he’d been removed for. The new governor made loans to front men so they could buy shares in the Florio family’s shipping company, and the bank took those same shares as collateral. Who was really borrowing was never established, but among the borrowers were the bank’s governor himself and Ignazio Florio. A lovely scheme. If the shares rose, the borrower revealed his name, asked for the paper to be sold and pocketed the profit. If they fell, the bank was left with worthless shares and no one to answer for them. The anonymous borrowers, Dickie sums up, always won, and the Bank of Sicily always lost.

In 1893 Notarbartolo was murdered. Palizzolo was later tried, but that’s another long story. The bank itself is enough for us.

What a Bank Is

A bank is other people’s money in the hands of its own people. Depositors bring in money they don’t need yet, and the bank lends it to people who need it now and lives on the difference in interest. As long as the borrowers pay back and the depositors don’t all turn up at once, everything is wonderful.

Now look at what got broken in Palermo. Three things every bank stands on.

The first is who gets the loan. A bank lives by checking a borrower better than the depositor could have checked him himself. Lend to “one of your own” without looking—that’s not credit. That’s a present at someone else’s expense.

The second is what you lend against. You take collateral so there’s something to sell if it goes wrong. And if the collateral is shares whose price is propped up with the same bank’s money? Then the collateral is worth exactly as much as the belief that the bank will go on buying them.

The third is who answers for it. If the borrower takes the profit and the loss stays with the bank, the borrower will bet on the riskiest thing going. Economists call this moral hazard. The Sicilians called it the good life.

A Bank for Ghosts

The first banks in Italy grew out of need, not greed. In 1472 the Monte dei Paschi opened in Siena, a charitable lending house that made small loans to the poor against pledged goods, so they wouldn’t go to the moneylenders. It only became a commercial bank in the seventeenth century, and to this day it’s reckoned the oldest bank in the world still operating. The bank started where a man needed money and there was nobody to give it to him.

Five hundred years later Saviano saw what happens when a bank can’t see the borrower. In the outskirts of Naples there are clandestine sewing workshops making clothes for the best Italian fashion houses. The fashion houses pay only for finished work and only after inspection. But the workshops need money up front: to buy cloth, pay people, move the goods. Their credit comes from the Camorra, in cash, at a low rate—two to four per cent. The workshops don’t go to the bank. Officially they don’t exist, Saviano writes, and ghosts don’t book appointments with bank managers.

See? The bank’s function hasn’t gone anywhere. Where a legitimate bank can’t make out the borrower, in comes someone who can. And his interest rate isn’t necessarily daylight robbery. The robbery comes differently. When he collects.

The Run

A bank stands on belief, and belief breaks faster than money.

Critchley tells a story from 1906 in a footnote. In Little Italy the fourteen-year-old son of a private banker, John Bozzuffi, was kidnapped and a ransom of twenty thousand dollars was demanded. A rumour went round that the kidnapping had been staged, and the depositors very nearly rushed to pull their money out of Bozzuffi’s bank. Nothing had been proved yet, but the depositors reasoned: a banker who stages a show himself will stage a show with their money too. Ten years later Bozzuffi was convicted of grand larceny. So the depositors weren’t so far wrong.

A bank doesn’t need to go broke to collapse. It’s enough for the depositors to believe it might go broke and all turn up at once. There’s never enough cash in the till for everyone: it’s been lent out. We’ll talk about this in detail when we get to the bank of banks.

One of Ours on the Signature

And the last weakness. The simplest.

Pistone recalls Lefty boasting that he had access to the cheques of an obscure little bank in the back streets of New York. The vice president, as Pistone tells it, was supposedly their man, and if anyone called, he’d give the nod to cash them. The plan was simple: buy goods with cheques the bank would confirm, sell the goods and vanish.

A bank can check, sign and follow the rules as much as it likes, but it all breaks at one point if one of “ours” is sitting there. At the Bank of Sicily there were two thirds of the board’s worth of such points. At the back-street bank one vice president was enough.

Don Vincenzo chose his bank in his own way. He kept the laundries’ money in a dull bank on the other side of town whose manager had once turned him down for a loan because the Don hadn’t brought the right papers. The Don was angry at the time. And a week later he moved all his accounts there. I asked him why. “If he turned me down,” the Don said, “he’ll turn down anyone who wants to borrow my money without papers.” A bank you couldn’t talk round was the best reference there was.

The Bottom Line

When you choose a bank, ask about three things: who it lends to, against what, and who pays for the losses. If some take the profit and others pay the losses, the feeding trough is only a matter of time.