Bank of New England
Encyclopedia
The Bank of New England Corporation was a regional banking institution based in Boston, Massachusetts, which was seized by the Federal Deposit Insurance Corporation
(FDIC) in 1991 as a result of heavy losses in its loan portfolio and was placed into Chapter 7
liquidation. At the time, it was the 33rd largest bank in the United States, and its federal seizure bailout was the second largest on record. At its peak, it had been the 18th largest bank and had over 470 branch offices. The liquidation company was named Recoll Management Corporation and its bankruptcy estate has continued to exist to pay out claims against the company.
The Bank Holding Company Act of 1956
prohibited interstate bank holding companies (although some existing companies were "grandfathered"). The 1966 Douglas Amendment to the Act permitted interstate bank holding companies as long as the individual states also permitted it. Connecticut and Massachusetts were among the first states to implement reciprocal legislation and in 1984 New England Merchants National Bank and CBT Corporation attempted to test this legislation by applying for permission to merge. Citicorp challenged the merger under the constitutional concept known as an "illegal compact between states". Despite a new federal law creating a New England regional interstate banking zone, the case continued and was appealed to the Supreme Court
in Northeast Bancorp, Inc. v. Governors, FRS, 472 U.S. 159 (1985), which found the interstate compact
was not illegal. This paved the way for the merger of the entities in 1985 and several subsequent mergers of other banks.
In 1987 the new Bank of New England Corporation acquired the Conifer Group of community banks and in 1988 was listed on the New York Stock Exchange
under the symbol NEB. However, the bank swung from a 74 million dollar profit in 1989 to a 1.2 billion dollar loss in 1990. This loss is attributed to poor investments in the real estate market and was part of the larger savings and loan crisis
engulfing the banking industry at the time. These investments were the result of CEO Walter Connolly's aggressive growth and acquisition strategies throughout the mid-1980s and in 1989 he was forced to resign by the board of directors and replaced by Lawrence Fish. At the same time as his resignation, the federal government issued a cease and desist
order to the bank to restrain its lending practices, which were considered a risk to its solvency.
which was a subsidiary of the Bank of New England was not taken over and was instead sold off as part of the liquidation process.
s were set up to oversee the assets of the Bank of New England, Connecticut Bank & Trust Company, and Maine National Bank. These bridge banks were transferred to Fleet/Norstar Financial Group and Kohlberg Kravis Roberts and operated by Fleet, and later Bank of America
, as the Recoll Management Corporation, collecting loans owed to the defunct banks. Major payments were made in 1998 for $140 million in claims and in the end secured creditors received 100% of their money while unsecured creditors received 34 cents on the dollar. However, , creditors were still disputing the allocation of the final 101 million dollars that the bankruptcy trustee had to distribute.
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) in 1991 as a result of heavy losses in its loan portfolio and was placed into Chapter 7
Chapter 7, Title 11, United States Code
Chapter 7 of the Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States...
liquidation. At the time, it was the 33rd largest bank in the United States, and its federal seizure bailout was the second largest on record. At its peak, it had been the 18th largest bank and had over 470 branch offices. The liquidation company was named Recoll Management Corporation and its bankruptcy estate has continued to exist to pay out claims against the company.
Formation and interstate growth
The Bank of New England Corporation was formed as the first interstate regional bank in the United States in 1985 as a result of a merger between the Bank of New England Corporation and CBT Corporation. The CBT Corporation was better known as the Connecticut Bank and Trust Company and traced its roots to the Union Bank of New London (founded in 1792), as well as the Connecticut Trust and Safe Deposit Company, the Hartford Trust Company, and the Phoenix State Bank and Trust Company. The Bank of New England Corporation traced its roots to the Merchants Bank (founded in 1831) and was for a time known as the New England Merchants National Bank and the New England National Bank of Boston.The Bank Holding Company Act of 1956
Bank Holding Company Act of 1956
The Bank Holding Company Act of 1956 is a United States Act of Congress that regulates the actions of bank holding companies.The original law , specified that the Federal Reserve Board of Governors must approve the establishment of a bank holding company, and prohibited bank holding companies...
prohibited interstate bank holding companies (although some existing companies were "grandfathered"). The 1966 Douglas Amendment to the Act permitted interstate bank holding companies as long as the individual states also permitted it. Connecticut and Massachusetts were among the first states to implement reciprocal legislation and in 1984 New England Merchants National Bank and CBT Corporation attempted to test this legislation by applying for permission to merge. Citicorp challenged the merger under the constitutional concept known as an "illegal compact between states". Despite a new federal law creating a New England regional interstate banking zone, the case continued and was appealed to the Supreme Court
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
in Northeast Bancorp, Inc. v. Governors, FRS, 472 U.S. 159 (1985), which found the interstate compact
Interstate compact
An interstate compact is an agreement between two or more states of the United States of America. Article I, Section 10 of the United States Constitution provides that "no state shall enter into an agreement or compact with another state" without the consent of Congress...
was not illegal. This paved the way for the merger of the entities in 1985 and several subsequent mergers of other banks.
In 1987 the new Bank of New England Corporation acquired the Conifer Group of community banks and in 1988 was listed on the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
under the symbol NEB. However, the bank swung from a 74 million dollar profit in 1989 to a 1.2 billion dollar loss in 1990. This loss is attributed to poor investments in the real estate market and was part of the larger savings and loan crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
engulfing the banking industry at the time. These investments were the result of CEO Walter Connolly's aggressive growth and acquisition strategies throughout the mid-1980s and in 1989 he was forced to resign by the board of directors and replaced by Lawrence Fish. At the same time as his resignation, the federal government issued a cease and desist
Cease and desist
A cease and desist is an order or request to halt an activity and not to take it up again later or else face legal action. The recipient of the cease-and-desist may be an individual or an organization....
order to the bank to restrain its lending practices, which were considered a risk to its solvency.
Crisis and decline
Despite efforts to restore the company's financial health, such as selling the credit card unit to Citigroup and laying off 5,600 employees, the bank continued to experience large losses. The Federal Reserve's Boston branch loaned the bank $478 million as temporary financing, however real estate related losses for the year of nearly 6 billion dollars overwhelmed the bank's solvency. Part of the problem involved large loans made between bank entities in the holding group that distorted financial results, as well as embezzlement by a vice-president of the bank, which was discovered at the height of the crisis in late 1990. In January 1991 the FDIC seized the bank and placed it into Chapter 7 bankruptcy liquidation. To avoid an expected bank run due to panic, the FDIC insured all accounts, even those above the $100,000 insurance limit, with the total cost of the bailout estimated at $2.3 billion. The FDIC indicated that a panic at the Bank of New England would have created a systemic risk to the entire financial markets. Even with the additional assurance, over a billion and a half dollars were withdrawn from the bank in the days leading up to the seizure, compounding the effect of withdrawals that had taken place over the prior year of turmoil at the bank. These withdrawals occurred in long Depression-era lines that were widely reported in the press. The Bank of New England Trust Company in West Palm Beach, FloridaFlorida
Florida is a state in the southeastern United States, located on the nation's Atlantic and Gulf coasts. It is bordered to the west by the Gulf of Mexico, to the north by Alabama and Georgia and to the east by the Atlantic Ocean. With a population of 18,801,310 as measured by the 2010 census, it...
which was a subsidiary of the Bank of New England was not taken over and was instead sold off as part of the liquidation process.
Liquidation
Subsequently three bridge bankBridge bank
In the United States law of banking regulation, a bridge bank is a temporary bank organized by federal bank regulators to administer the deposits and liabilities of a failed bank...
s were set up to oversee the assets of the Bank of New England, Connecticut Bank & Trust Company, and Maine National Bank. These bridge banks were transferred to Fleet/Norstar Financial Group and Kohlberg Kravis Roberts and operated by Fleet, and later Bank of America
Bank of America
Bank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
, as the Recoll Management Corporation, collecting loans owed to the defunct banks. Major payments were made in 1998 for $140 million in claims and in the end secured creditors received 100% of their money while unsecured creditors received 34 cents on the dollar. However, , creditors were still disputing the allocation of the final 101 million dollars that the bankruptcy trustee had to distribute.