A Shocking Drama

Banking activities rarely make gripping theater, but current events at New York's Franklin National Bank are a striking exception. All last week the bank staged a drama of conflict among officers, mystery about how it happened to suffer heavy losses in foreign-currency trading, and suspense about just how big the losses were. Though the bank's depositors seemed safe, the performance was a shocker.

It began thunderously. Franklin New York Corp., the holding company for the nation's 20th largest commercial bank (assets: nearly $5 billion), announced that it would skip its quarterly dividend because earnings in the first quarter had plunged 83% from a year earlier, to a sickly 2-c- a share. It was believed to be the first time that a major bank had passed a dividend since the Depression. The Federal Reserve Board felt called upon to make two highly unusual announcements: that the Comptroller of the Currency had guaranteed that the bank was "solvent," and that the board stood ready to advance funds to Franklin.

The bank's poor performance at first was blamed largely on losses in bond trading--not unusual at a time of slumping bond prices. But then Chairman Harold V. Gleason disclosed that Franklin also had lost $14 million in foreign-currency trading since March 31--later it was revealed that other losses were incurred before that date--and that the total loss could climb to $39 million by the time all trading contracts are fulfilled. He blamed the losses on unauthorized trades made by an unnamed employee who, he said, had been fired.

To competing bankers, the statement raised more questions than it answered. To incur losses that huge, they said, the employee would have had to risk approximately $250 million in currency trades, and at most banks no one could position such immense sums without having his activities come quickly to the attention of supervisors. The Securities and Exchange Commission began an investigation of another puzzling matter: that 9,500 shares of stock were purchased by about 65 bank employees just before the dividend was passed.

A management upheaval promptly followed Gleason's disclosures. President Paul Luftig, who came to Franklin two years ago from Bankers Trust, was let go (Gleason took over his job).

H. Erich Heinemann, vice president for corporate planning, who called the chairman's statement about the currency-trading losses inaccurate--he did not say in what respect--was fired. Peter Shaddick, head of the foreign-exchange department, resigned, as did the law firm of Kaye, Scholer, Fierman, Hayes & Handler, attorneys for Franklin National since the 1940s.

At the request of Franklin's directors, the SEC suspended all trading in Franklin stock until after Memorial Day, giving the bank time to sort out its management and possibly to revise its financial statements. Franklin announced plans to raise money by selling $50 million of new stock to present shareholders, and Michele Sindona, an Italian financier who bought 21% of Franklin's stock for $40 million in 1972, offered to buy any of the new shares that could not be sold to others.

Absurd Touch. Despite these plans, and what appeared to be heavy loans from the Federal Reserve to Franklin, there is a strong feeling in both New York and Washington that the best solution to the bank's problems would be a merger. Sindona tried to arrange one between Franklin and Talcott National Corp., Inc., a financial and factoring firm in which he also holds a large interest, but it was denied by the Federal Reserve. Luftig is said to have recently favored a merger with another bank.

Gleason, however, continues to hold out for independence.

Franklin's individual depositors took the whole affair calmly, secure in the knowledge that their savings are insured by the Federal Deposit Insurance Corp.; the bank experienced only minor withdrawals. But New Yorkers began withdrawing enough money from the Franklin Savings Bank to move managers of that institution to take out newspaper ads declaring, correctly, that it has no connection whatever with Franklin National, thereby giving the banking drama a touch of the theater of the absurd.

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