Rhode Island banking crisis facts for kids
The Rhode Island banking crisis happened in the early 1990s. During this time, about one-third of the people in Rhode Island couldn't get to the money in their bank accounts. This crisis started because a bank in Providence, called Heritage Loan & Investment, failed. Its president had been secretly stealing money for a long time.
When people found out about the problems, they rushed to the bank to take out their money. This is called a bank run. But the bank didn't have enough cash for everyone. Normally, people's money in banks is protected by insurance. However, Rhode Island's private insurance company had many problems and couldn't pay back everyone.
When this insurance company collapsed, Governor Bruce Sundlun quickly closed 45 credit unions and banks. This happened just hours after he became governor. It was the first banking emergency in Rhode Island since the Great Depression. About 300,000 people lost access to their money. Some banks reopened quickly after getting federal insurance, but many stayed closed for a long time. The state government created a special group to help. They sold bonds worth $697 million to pay people back. They also filed about 300 lawsuits against the closed banks and other companies involved.
The bank closures led to protests. People were also upset by hearings that showed some bank leaders and public officials took out their money just before the banks closed. The search for Joseph Mollicone Jr., the bank president who had run away, took nearly 18 months. He was eventually caught and received a very strict sentence for his "white collar" offense. Even though everyone eventually got their money back, most people had to wait months or even years. Many large banks stayed closed for over a year, and some never reopened.
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Heritage Loan & Investment Problems
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Heritage Loan & Investment was a bank in Providence. In 1990, state inspectors found $13 million in fake loans in the bank's records. These loans were supposedly given to 128 people and businesses who never asked for or received any money.
The bank president, Joseph Mollicone Jr., had made up these loans. He started stealing money from the bank in 1986. He even set up over 90 fake businesses to hide where the money was going. News reports said he was very good at avoiding questions about missing bank records.
In October 1990, the bank's insurer, RISDIC, took control of Heritage. This happened after they saw how bad the bank's situation was. When Mollicone realized he was caught, he ran away. He disappeared on November 8, 1990, after flying from Logan International Airport in Boston.
A few days later, on November 13, an investigation began. As customers learned what was happening, they rushed to withdraw their money. They took out $13 million from the bank's total of $22 million. On November 18, Governor Edward D. DiPrete temporarily closed the bank. Officials wanted to figure out what was going on and stop more damage.
On November 26, Mollicone was charged with embezzlement, which means stealing money from a company you work for. He was considered a fugitive, meaning someone running from the law. Prosecutors said he had stolen more than 80% of the money people had put into the bank. The state's attorney general believed he stole $15.2 million in total. The bank briefly reopened on December 4 to let people take out the rest of their money, then closed again.
Rhode Island's Insurance Company Problems
What was RISDIC?
Heritage Loan & Investment bank was insured by a company called the Rhode Island Share and Deposit Indemnity Corporation (RISDIC). This was a private company created by the state. It insured 45 of Rhode Island's credit unions and banks.
RISDIC started in 1971 to insure only small banks. In 1972, it insured $134 million. But it grew very fast, insuring $761 million by 1980. It kept growing through the 1980s because state and federal laws became less strict.
Between the mid-1970s and early 1990s, several state-run private insurance companies in other states failed. This happened in Mississippi, Nebraska, California, Ohio, and Maryland. Because of these failures, many banks and credit unions started switching to federal insurance. Federal insurance is provided by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
However, RISDIC did not learn from these mistakes. Instead, it even increased the maximum amount it would insure. When it started, it insured up to $40,000 per account. But by late 1985, this went up to $500,000, and some accounts had no limit. When RISDIC lost some of its most stable banks, it started insuring more weak ones. By the late 1980s, RISDIC had many problems. It mainly insured banks that couldn't get federal insurance, promising large amounts of money at risky banks.
Warnings About RISDIC
People had been worried about RISDIC for years before it collapsed. Federal regulators and the Federal Reserve Bank of Boston warned about it as early as 1985. The state attorney general, Arlene Violet, tried many times to show how weak RISDIC was, but without success.
When Violet became attorney general, she noticed that the group overseeing the state's banking system seemed to give special favors to politically connected people. After seeing problems in RISDIC's financial reports, she asked her team to investigate. Their report, finished in December 1985, showed financial risks and conflicts of interest in how RISDIC was managed.
This report led to a proposed law in 1986. It would have made all RISDIC-insured banks get federal insurance, which would have effectively closed RISDIC. The governor at the time supported it, but the state's lawmakers did not pass the bill. The report was not made public then. But after the bank closures, it was leaked to a newspaper, which printed it all.
A big problem was that RISDIC wasn't watched closely enough. Most people on RISDIC's board of trustees were managers of the banks it insured. There were no rules requiring outside board members. This meant only three members represented the public, while fifteen had conflicts of interest because they worked for insured banks.
In the late 1980s, government budget cuts meant RISDIC itself became responsible for checking its own finances. This made outside oversight even weaker. RISDIC also didn't follow normal industry rules. Even though it said it followed national standards, it didn't actually do so. The board failed to review reports from inspectors and outside auditors. Experts said RISDIC didn't fail earlier because it had political power and could hide its financial problems. They believed the law to end RISDIC failed because of bad relationships between lawmakers and the banks.
RISDIC Collapses
The Heritage Loan and Investment collapse happened months after another RISDIC-insured bank, Jefferson Loan and Investment Company, failed due to fake leases. Jefferson used up a lot of RISDIC's money. This left RISDIC in very bad shape when the even more costly Heritage collapse happened in November 1990.
The $13 million bank run at Heritage in November used up a large part of RISDIC's $25 million reserve. At the same time, worried customers at other RISDIC-insured banks started taking out their money faster. Because its money was draining away, RISDIC became insolvent, meaning it couldn't pay the insurance claims.
Several RISDIC-insured banks then tried to get federal insurance. Some were delayed, and many others changed their minds. They realized federal insurance would mean stricter rules for their banks. The outgoing governor's team prepared a plan to switch RISDIC-insured banks to federal insurance. But they didn't act on it, thinking it was not their place in their last days in office.
The new governor, Bruce Sundlun, planned to act on it soon after he became governor. But things sped up after RISDIC's board of directors sent a letter. On December 31, 1990, the day before Sundlun's inauguration, the RISDIC board voted to ask for conservatorship. This meant they wanted the state to take control because of "extraordinary demands for money" in recent days.
Experts later found similarities in the failures of insurance systems in Ohio, Maryland, and Rhode Island. These included the insurance companies having too much influence with lawmakers, not acting on warnings, and not being able to control risks. In Rhode Island, banks were also affected by losses in real estate loans, which was a problem across New England from 1989 to 1992.
Bank Closures and What Happened Next
By state law, banks and credit unions cannot legally operate without insurance. Hours after he became governor on January 1, 1991, Sundlun held a press conference. He announced a "banking emergency" and ordered the closure of all 45 RISDIC-insured financial institutions. About three-quarters of these were credit unions. Police were placed at all closed banks to keep order.
The closed banks were told not to accept deposits, allow withdrawals, pay out money, or make new loans. However, they were allowed to pay their own employees. They also had to submit plans for how they would continue to operate. Bank customers were still expected to repay their loans.
This was the first banking emergency in Rhode Island since the bank holidays of the Great Depression in 1933. Over 300,000 people, about a third of the state's population, lost access to their money. This totaled about $1.7 billion. People were told they couldn't get their money, but their loans would still gain interest. The state set up a phone hotline, but it was overwhelmed with calls.
By January 2, almost all the closed banks had applied for federal insurance. Those that were approved reopened quickly. Seven reopened the following Monday. However, the FDIC and NCUA refused to insure some banks that didn't meet their standards. The FDIC chairman said they would not provide extra help or repay depositors if their accounts could be saved another way. The seven banks that reopened quickly held only about ten percent of the total money. Most of the larger banks remained closed. But these events worried the federal government, which sent millions of dollars in cash to help protect larger national banks from similar bank runs.
A spokesperson for Governor Sundlun said that even though the state didn't own or back RISDIC, they felt a "moral obligation" to protect depositors. Sundlun's team created the Depositors Economic Protection Corporation (DEPCO). This group sold bonds to raise money to repay those who had lost funds. The state sales tax was increased from 6% to 7% to help pay for these hundreds of millions of dollars in bonds. The state was already facing a weak economy and a large budget deficit, which made the crisis even harder to manage.
Even though the state worked to get people their money back, it was slow. The Governor announced a plan to let people withdraw up to half of their money, but repayments didn't start until six months after the initial closures. Eight months in, 200,000 customers at 13 banks still couldn't get to their $1.2 billion. After a year, only 36 of the 45 banks had reopened. Most of the biggest ones, like Rhode Island Central, the state's second-largest credit union, were still closed. By then, people with small accounts (under $2,500) had been fully repaid. But others with money in the nine still-closed banks had only received about 10% of their funds. Two and a half years after the closures, a small number of people still couldn't access their money.
Public Reaction
Local newspapers regularly printed lists of which banks were open or still closed. Some people lost their homes through foreclosure or had other property taken away. Some businesses failed, while others had to lay off workers. State representatives worked with federal agencies to make sure people who received government checks directly deposited would still get their money. The number of bankruptcies in the state increased by 62% between 1990 and 1991. The Rhode Island Community Food Bank had to give out 30% more food than in 1990. Some businesses tried to help. Grocery stores like Almacs and Stop & Shop continued to accept checks from closed banks, to be cashed later.
One of the cities hit hardest was Woonsocket. It already had high unemployment, and more than half of its residents were customers of one of the larger closed credit unions. Businesses had less income, and over 30 closed by the end of February. Group therapy sessions even started for elderly residents who relied on the closed credit union.
People started protesting soon after the announcement. Groups formed, like Citizens for Depositors' Rights. One event brought hundreds of protesters to the Statehouse a few weeks into the closures. Some protests were about specific issues, like when the governor's office released a list of all depositors with at least $100,000 stuck in closed banks. This was done to encourage discussion about a new plan to pay back up to that amount. People on the list were surprised and angry about this unusual privacy breach.
News reports described the protesters as unusual. One article noted there were more elderly people than expected at most protests. Another said the demonstrators included people in "fisherman's hats to three-piece suits and full-length fur coats." Sheldon Whitehouse, who helped manage the crisis for the governor, said people were so angry they even damaged his car and caused problems at the State House.
Hearings and Protests
The state lawmakers formed a nine-person group to investigate the collapse of RISDIC. They especially wanted to know how some "insiders" managed to withdraw hundreds of thousands of dollars just before the crisis was announced. These hearings began in July 1991 and were shown on TV. News reports said the hearings "transfixed the state" and gave Rhode Islanders a focus for their frustration.
Among those questioned about their suspicious withdrawals were a mayor, a state senator, credit union leaders, RISDIC's former president, and a state representative. This representative had also helped stop a bill that would have forced credit unions to get federal insurance.
Even though people had been protesting since the crisis began, several big events happened after the hearings. In August 1991, about 250 angry depositors protested outside a credit union, blocking traffic for about two hours. The protest turned into a march, blocking an interstate highway entrance. Seven people were arrested for disorderly conduct, including a retired couple whose savings were frozen. They became a symbol of the public's anger.
Two days later, 200 people marched from the Statehouse to the DEPCO offices. In September 1991, over 500 chanting protesters gathered at the Statehouse. They dumped teabags in front of the Governor's office, symbolizing a revolt, like the Boston Tea Party. Another protest happened the next month. It was in response to a new repayment plan that didn't directly pay back depositors. Demonstrators even hung a doll representing Governor Sundlun from a lamp post outside the capitol.
News reports said the banking crisis was a major reason for an "ethics movement" or even a "citizen revolt" against corruption in Rhode Island. Governor Sundlun later said that 1991 was the year when "the dishonesty, greed and corruption that rotted our system was exposed for all to see." Several non-profit groups formed to fight for citizens' rights and demand accountability.
How the Crisis Ended
In the end, 25 of the 36 banks and credit unions got federal insurance and continued to operate on their own. Two other financial institutions stopped operating. For the remaining banks, customers at six were repaid by the end of 1991. Six others were bought by other businesses. Six still remained closed with some customers unpaid.
For people waiting to get their money back, progress was slow. At the end of the first year, most of the big banks were still closed. Plans were made to pay back small amounts first, like accounts with $2,500 or less. Larger accounts were only paid back up to 10% at first. Some depositors waited for many years to get their money back. However, eventually, all of it was returned with interest.
Even though Governor Sundlun received criticism and some people called for his removal, he was elected for a second term. He continued to stand by his decisions years later.
In total, DEPCO sold $697 million in bonds to handle the crisis. It filed about 300 lawsuits against the failed banks and other groups that played a role in the crisis. A big legal win came in September 1997 against the financial company Ernst & Young. This company had checked RISDIC's records in 1990 and found no major problems. DEPCO claimed Ernst & Young failed to do its job, missing risks that led to the crisis. The company denied wrongdoing but agreed to pay $103 million. This was one of the largest payments ever by an accounting firm to a government agency at that time. The money was used to help pay down DEPCO's large debt. Another large payment came from Fleet Bank, which paid $15.5 million. It was accused of setting up loans that helped two banks trick regulators.
After the crisis, all banks in Rhode Island are now insured by federal groups. DEPCO's debts were paid off by August 30, 2000, and it stopped operating in January 2003. The sales tax increase that was supposed to be temporary was never removed.
Mollicone's Trial and Repayment
The Search for Mollicone
Joseph Mollicone, Jr.'s name became closely linked to the banking crisis. He started the whole chain of events by stealing between $12 million and $15.2 million from Heritage Loan & Investment. He was called the "state's most wanted fugitive." Law enforcement looked for him for nearly a year and a half without finding him.
There were rumors he had gone to Italy because of his alleged connections. But it was later found that he had been hiding in Salt Lake City, Utah. After he was caught, Mollicone said he chose Utah simply because he had traveled there briefly before. He used the name of someone who had died just before he ran away. He lived as if he were a jewelry maker from Boston who had come to Utah to ski and relax.
In 1992, Mollicone's wife and four children in Rhode Island lost their home and had to declare bankruptcy. At that point, in April 1992, after almost 18 months in hiding, he turned himself in. He had been living with a girlfriend in Utah who didn't know his real identity. When he returned to Rhode Island, he left her in debt and almost bankrupt.
The Trial
Rhode Island's attorney general, Jeff Pine, took office in January 1993, just a few months before the trial. He appointed Kevin Bristow as the new lead prosecutor. The trial began in March 1993. Mollicone admitted to his crimes and apologized. His lawyer described him as "a sucker." But the judge said Mollicone had "considerable talents and persuasive manipulative abilities through the use of charm and guile." The judge also said he had a "conscious, systematic scheme of plundering bank assets entrusted to him."
Witnesses for the prosecution included the former vice president of Heritage Loan & Investment, someone who knew about Mollicone buying a Ferrari, his girlfriend from Salt Lake City, and another friend from Utah. Even though they didn't know his true identity, his Utah connections testified about his life and how he lived while on the run. The prosecution also had surveillance video from the bank.
On April 23, 1993, he was found guilty on 26 charges, including stealing money from the bank and making fake bank documents. He was sentenced to 30 years in prison and ordered to pay $420,000 in fines and $12 million in restitution. The $12 million was the amount the judge decided had been proven stolen, which was less than what the prosecution claimed. At the time, it was the longest sentence in the state for a "white collar" offense.
Release and Repayment
Mollicone was released on parole in 2003, after serving 10 years of his sentence. When he was released, he told a reporter that the money he stole was "gone."
Mollicone's parole ended in 2023, but he will remain on probation until 2025. When he was released, he was ordered to start paying back the fines and restitution. At first, payments came from his wages. But then he retired and started making payments from his social security income. Another condition of his release was that he had to talk about business ethics with students.
In 2009, a judge allowed the Internal Revenue Service (IRS) to take legal action against Mollicone. They could seize any money or property he had to pay $33 million in taxes and penalties from when he worked at Heritage Loan & Investment. The IRS has not confirmed if they have taken these actions.
As of December 2017, Mollicone, then 74 years old, was still living in Rhode Island and working two jobs. He was paying $300 each month towards the debt. Since his release, he had paid $33,947.50. At this rate, it would take thousands of years to pay back the full amount.
