Rhode Island Plan to Bail Out Banks a Bitter Pill for All

After 36 mortifying days, about 250,000 scared-out-of-their-wits Rhode Island savers may finally have a way to get at their frozen bank accounts.

But they may not get all their money--soon or ever.

Late Tuesday night, a month of haggling behind them, Gov. Bruce Sundlun and leading legislators announced a bailout plan for 15 banks and credit unions whose accounts were insured by a failed private guarantor.

The compromise has mixed news for all parties. It calls for full repayment of accounts up to $100,000--but much of the money will be released in six-month stages over three years and without earning interest.

Bigger depositors will also be paid, but not in full. Accounts with more than $100,000 will be refunded on a sliding scale: $100,001 to $200,000 gets 90 cents on the dollar, $200,001 to $300,000 gets 80 cents per dollar and so on.

The agreement must pass the state’s full House and Senate, both of which are expected to take expedited action. It will be a distasteful tonic for everyone; bitter for depositors still unable to get their money immediately and bitter, too, for taxpayers who must pay for a bailout estimated to cost at least $200 million--and probably much more.

“Big deal, so I can get all my money in three years. Well, I’ll probably be pushing up daisies by then,” said Beatrice Tschohl, 81, of Pascoag. “It’s too sad to even talk about.”

On Jan. 1, Sundlun’s first day in office, the governor closed 45 banks and credit unions whose deposits were insured not by the federal government but by the Rhode Island Share & Deposit Indemnity Corp. (RISDIC), which had collapsed.

Since then, the state has been reeling. Many people were left with only the currency and coins in their pockets. Their savings were trapped.

Most of the closed banks and credit unions soon qualified for federal deposit insurance and reopened, but 15 did not, including some of the state’s biggest institutions.

Entire communities were cut from their economic tethers. Sandwich shops were empty at lunchtime. Travel agencies locked up.

Bob Archambault laid off two of his five employees at Deslauriers Bakery in Woonsocket. “First time in 27 years,” he said.

Sorrowful stories competed for space in the newspapers. Irony was salve.

Pity poor Joe Hinkson of West Greenwich. In 1987, he had lost half his left foot in a boating accident. When the insurance company finally paid off $180,000 on his claim last December, he was edgy about placing it all in the Davisville Credit Union.

“I told them I was worried because federal insurance is only good up to $100,000,” Hinkson recalled. “ ‘Oh no, don’t worry,’ they told me. ‘We’ve got RISDIC, and that’s better than federal insurance. It’s good up to $500,000.’ ”

Across the state people remember the powerful TV ads they had seen for years. A mighty hand clenched a chisel as a hammer pounded it into stone. Left was the RISDIC logo.

“We set our standards high to keep your money safe,” a voice said. “Because our commitment to you is carved in stone.”

Most savers did not care who insured their money, so long as there was a string of initials on the financial institution’s front door: FDIC, FSLIC, NCUSIF or RISDIC.

“I thought RISDIC was the state,” said Alan Crabtree, a waiter in Providence. “It had that R.I.”

Actually, only Rhode Island and Pennsylvania permit banks to be privately insured. Twenty states, including California, allow credit unions to have a private guarantor.

Private deposit insurance is not necessarily unsafe. In California, 34 of 937 credit unions are privately insured, and state regulators say strict rules prohibit them from overloading their books with precarious investments.

In Rhode Island, this is not the case. Many credit unions function much like banks, offering checking accounts and negotiating commercial loans. They were not required to provide detailed accounts to back up their claims of solvency.

In 1986, the Rhode Island Attorney General’s office prepared a report warning of lax regulation but never issued it publicly. A bill demanding that all financial institutions acquire federal insurance was introduced in the Legislature, but it failed. In the meantime, RISDIC-insured banks and credit unions went on a binge familiar in the 1980s: a lending spree with little tucked away in precaution. There were few safeguards.

Last year, RISDIC was forced to seize two large banks, including one where the president--Joseph Mollicone Jr.--had vanished along with $13 million. The takeovers depleted the insurer’s $25 million in reserves.

RISDIC was broke and Gov. Sundlun stepped in. Few were spared some fallout from RISDIC’s collapse. One-third of the state had accounts in RISDIC institutions. The largest depositor was Rhode Island itself, with $9.6 million.

“The psychological effect of something like this is devastating,” said Mayor Francis Lanctot of Woonsocket, a well-past-its-prime mill town in the north of the state. “Imagine not being able to get your own money through no fault of your own.”

Woonsocket’s population is 46,744, most of them of French Canadian descent. In the 1940s, blue-collar workers used to drink and play cards at the Marquette social club.

In time, a counter at the front of the club was transformed into a desk for a small credit union. Later, there was enough business for an 8-by-10-foot cubbyhole. Finally, a separate building was needed.

Since 1976, Woonsocket’s tallest building has been the Marquette Credit Union, a 10-story structure with glass walls.

Joyce Lavalle, 27, never thought of putting her money anywhere else. “It disgusts me now,” she said Wednesday. “I trusted Marquette and where is my savings now that I need it?”

Times are bad. Rhode Island is in its second year of recession. Unemployment in Woonsocket is over 10%. Lavalle plans to sell her log house and move on, “if I can ever get what is coming to me from the credit union.”