Oh My Fraud

Warning: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

Caleb Newquist: Hey, podcast listeners, Caleb here. Just a quick word about this episode. And that is it is set in postbellum America, in other words, after slavery and the Civil War. So while this episode isn't about slavery per se, the events we discuss happened in the immediate aftermath of slavery. And it goes without saying that slavery, the antebellum era, and the postbellum era can be difficult topics to discuss and hear about, and that's putting it mildly. Anyway, [00:00:30] that's all we wanted you to know. Here's the show.

Earmark CPE: If you'd like to earn CPE credit for listening to this episode, visit earmark Cpcomm. Download the app, take a short quiz, and get your CPE certificate. Continuing education has never been so easy. And now on to the episode.

Caleb Newquist: This is on My Fraud, a true crime podcast where the criminal masterminds are undone because [00:01:00] they made a typo on an invoice or decided to take a long weekend. I'm Caleb Newquist and I'm Greg Kite, back from a long weekend. Was it a nice, long weekend? It was. Well, you know, the Christmas, Christmas holidays had some had some days off. Right, right. This this this is our first show of 2024. So I guess happy New Year is in order. Yeah. Happy happy new year. Let's make sure that for our first episode of the new Year we took, we just pick a very [00:01:30] serious topic for our for our yuk yuk show about, uh, about about fraud. Yeah. Yeah, exactly. Yeah. Well, um, should we, uh, read a review? Yeah, I know you like. Let's do it. I know you like it, I love listening. Is this a one star or a five star? Just. This is a five star. Ooh, nice. It's five star. Yeah. Nice. Um, and this comes from stars and reviews on Apple Podcasts. And they write, quote, fun and interesting. I love listening to this podcast. [00:02:00] It quickly became my go to podcast, beating out the true crime ones. I'm still working toward my CPA, and in the phase of getting those extra 30 college credits, this podcast has saved me when I have nothing left to say. On the umpteenth discussion board post of the day, I rehash something I learned on the podcast, loosely tie it back to the classwork, and then tell all my classmates to listen to oh my fraud works every time.

Caleb Newquist: And of quote that is, um, that's a okay review, wouldn't you say, Greg? I'd say that's a great review. But [00:02:30] also, uh, I just want to check with you to make sure it's not just me, but are they saying that they use the content from our fraud podcast to cheat on their homework? It kind of sounds like they're using a fraud podcast to commit fraud in their, uh, discussion board homework. I'm not. I don't feel comfortable speculating, but, um, since you pointed out, I kind of want it to be to be that. Yeah. Yeah, yeah. Gotcha. Well, well, regardless, [00:03:00] uh, I do dig it. Whenever people tell their classmates or coworkers or friends or family members to listen to the show. So thanks, uh, stars and reviews for getting the word out. Also, uh, listeners just want to make sure you knew that, uh, Caleb and I, we do speaking engagements. So if your firm wants us to do some in-house training and it will be clean in-house training, we know how to. We're pros. We know how to turn it on and shut it off. Uh, or if you want us to give a keynote [00:03:30] presentation on ethics or fraud at your conference, uh, just send us an email at oh, my fraud at earmark Cpcomm to get more information about pricing and availability.

Caleb Newquist: And like I said, we do that stuff clean. As a matter of fact, if you want us to swear at your fucking event, it's going to cost more. It's a goddamn upcharge. Yeah, you gotta pay a premium for the fucking swears you got. Damn right you do. Yeah, yeah. So, Greg, I have a question. Yes. Are [00:04:00] you a history buff? Oh, I yeah, Caleb, I am categorically not a history. Okay. But not I mean, uh, listen, the only History Channel show that I've ever watched is Pawn Stars. Uh, and I'm, and I'm pretty sure it's it's it's light on historical content. I'm just going to say, is that really on the history channel that I don't have. I don't have cable anymore, so I don't even. Yeah. Yeah. No, that's a, that's one of the big shows on the History [00:04:30] Channel and that which is why that's the one that I've watched. Um, but, but I have to say, I mean history buff, I'm not like anti history. Uh, because that's not a thing to be anti history, is it not? I guess that'd be a weird thing to be against. I don't think that you're going to find anybody that says, you know, what I hate is the past. So uh, and even even hearing about it here right.

Caleb Newquist: I don't and again because I think because you asked if I was [00:05:00] a history buff. Yeah. Do I do I enjoy history? Sure. One of my, one of my top items that I asked for, uh, on my Christmas list just this past Christmas was a book on the history of Hawaii. Uh oh. So, so I, I mean, I, I will delve into it, but. I can't say that I'm a history buff. I'm curious about stuff, and I love a good story. And history has a lot of good stories. Uh, I mean, I'm not trying to give too much away, but I'm pretty sure history is nothing [00:05:30] but stories. So, you know, so I like I like good story. Yeah. Historical or otherwise. So. Yeah. Today's episode is a story from a time in US history that was a time of progress and rapid change, but also fraught with violence, civil unrest, racism and even a disputed presidential election. And no, I am not talking about present day. So I kind of gave that away in the opening race, but it is kind of spooky how much everything you said could be applied to, like, [00:06:00] right now it's all very cyclical. Yeah. Uh, this story is from a long time ago. Uh, but not that long ago. When you think about it, today's story is from the reconstruction era. Abraham Lincoln, the 16th president of the United States.

Caleb Newquist: Potus, if you like. Issued the Emancipation Proclamation on January 1st of 1863. And what did that do? I'll tell you what it did. It changed [00:06:30] the legal status of more than 3.5 million enslaved African Americans in the Confederate state, from slave to free. And just for clarity, Abraham Lincoln had been killing vampires for over 25 years at this point. Uh, and like I said, I'm not a history buff, but I watched the 2012 documentary Abraham Lincoln Vampire Hunter, so I'm not an idiot. Anyway, this was the middle of the American Civil War, mind you. And [00:07:00] so it's not as though slave owners throughout the Confederacy were all like, oh, Abe said to let these guys go free. Okay. Hey, everybody, uh, get out of here. Uh, no. The Confederacy obviously was fighting the Civil War because they wanted to keep slavery. But what the Emancipation Proclamation did was it allowed any escaped slave that made it to the Union states to be permanently free. The states in the rebellion obviously weren't going [00:07:30] to abide by that. So the actual literal end of slavery was more of a process rather than just a single moment in time. Yeah. So, Greg, I don't know. This seems obvious, like when in the course of doing the research for this show, this became obvious to me. Like, oh yes, I knew that. It wasn't like, ah, today is the day. Like slavery ended.

Caleb Newquist: It was definitely like a series of things that had to like wind it all up. But I think in the, in like in, in our, in our cultural imagination, like our collective cultural [00:08:00] imagination, I think a lot of people just have to think, oh yeah, one day it was just over. Like, I just don't know how well people understand how long and what it took for slavery to, like, be kind of eradicated in the country, you know what I mean? Oh, absolutely. Well, I can I mean, speaking from personal experience, uh, the, the whole idea of, of Juneteenth, which is now a federal holiday, yes, was something that I didn't even know was a thing [00:08:30] till just the last few years. Because for me, like you're saying, I think when all this stuff was presented in school, they're like, yeah. So there was the Civil War. Lincoln gave the Emancipation Proclamation, slaves are free. Uh, let's. And then and then let's talk about the North defeated the South and yeah, everything was fine. But that's the thing. I think even that's blurred up where it's almost like the I think in my mind, the Emancipation Proclamation, I didn't I don't think I realized that was mid civil war. Right. And which again, [00:09:00] like you said, obviously with that being the case, there's a whole lot that needs to kind of fall in line before this. Even though freedom was proclaimed, when freedom was actually, uh, enjoyed by those who were freed.

Caleb Newquist: Right, right. But speaking of Juneteenth, uh, which just became a federal holiday recently, uh, that's the holiday where we celebrate, uh, the the commemoration of the end of slavery, [00:09:30] uh, which was June 19th of 1865. That was the day that Major General Gordon Granger ordered the final enforcement of the Emancipation Proclamation in Texas. But also another layer to the whole emancipation story was the 13th amendment to the US Constitution, the amendment that abolished slavery except as a punishment for crime. Uh, that took quite a bit of time. Also, the 13th amendment [00:10:00] was first passed by the Senate in April of 1864, but then it didn't pass the House of Representatives until nine months later. And then it was finally ratified at the end of 1865, which means that took a full 18 months for no more than that, 20 months for this thing to go from, from the beginning to ratification. So again, this is a process that we're talking about. And and all that was nearly three years after [00:10:30] Abraham Lincoln issued the Emancipation Proclamation, and over eight months after he was assassinated by John Wilkes Booth. With the end of slavery in 1865, the Reconstruction era had begun. This marked the period of time after the Civil War where America had to rebuild and reunify the nation. This included rebuilding its infrastructure. There had been a pretty.

Greg Kyte: Big war [00:11:00] after all, right?

Caleb Newquist: There's probably probably, probably some damage to some infrastructure. Yes, yes, plenty.

Greg Kyte: Of fire, as I recall. Yeah. Um, re-integrating the southern states into the Union and addressing the social, political and economic impacts of slavery and American government and institutions. Now, that last bit, specifically the economic impacts of slavery, that is where our story lies today. And when you think about it, three and [00:11:30] a half to 4 million people who had virtually no rights now had the freedom to do anything, to do whatever they could. But where would you even start? Right. Like that's kind of a, you know, one one minute you're, you're property of someone else and the next minute you have to fend for yourself. Right? Um, that's a very I don't know, obviously, freedom is better than not. [00:12:00] Okay. Let's just let's state that out at the outset. Like, freedom is better than not. But you would you all of a sudden all of these people are navigating the world in a completely new way.

Caleb Newquist: Right.

Greg Kyte: And that is I think that is incredibly hard to kind of imagine, like what that must have been like. And that's what these emancipated people had to do, is like they had to figure out how to live in, in the world. Yeah.

Caleb Newquist: And they were. And I mean, again, and this is probably a very, uh, simple, oversimplified [00:12:30] way to think of it, but the way, the way that my brain, uh, makes sense of it is that the, the slaves who were emancipated, they were given theoretical freedom. It's like, because like you said, when you're saying they had the freedom to do whatever they wanted, it's like, no, they didn't though, right? True. So so it was more it was theoretical. But then but but just like anything else, like here's the theory and here's how it works in real life. And I think that's what you're that's what you're talking about is it's like, okay, you now now [00:13:00] things have completely changed for you in theory. But but but there's there's so much that you have that you don't even, you haven't experienced before, so much that wasn't available to you. There's a huge learning curve that has to be figured out. And there's stuff that just is only theory and not in reality, right? To the to the freedom that, that, that those people were experiencing.

Greg Kyte: Right. So for example, they virtually had no economic resources or capital. Right? Right. And so [00:13:30] like the options that were made available to them, like for example sharecropping. Not great. Nope. Right.

Caleb Newquist: Yeah. Pretty I mean, I mean some of the way and again my limited not a history buff but my understanding of sharecropping is it was kind of like it was almost like, let's, let's try to reinstitute slavery to some extent. Right? Right.

Greg Kyte: Essentially. But they had but by, by virtue of the law, they had to give them something. Right. But it wasn't much. Yeah. But still so, [00:14:00] so, so but that small amount of that was, it was still money. Yeah. And and and then also African Americans that served in the Union Army, they had earned they earned wages serving in the army. So they put, you know, the ones that serve in the army, they would put those wages in military savings banks. Okay, okay. And it was those military savings banks that inspired a guy by the name of John W-2 Alvord. I think it's Alvord. Alvord.

Caleb Newquist: Yeah, [00:14:30] that's how I that's what it looks like.

Greg Kyte: Yeah, yeah. He was a Congregational minister, and he established the Freedmen's Savings Bank to help alleviate some of this socioeconomic stress. Okay.

Caleb Newquist: Because and again, tell me if I'm wrong, but because you did, you did the, the the the bulk of the research for this episode, uh, my understanding is that there just wasn't a place for freed slaves to deposit their money.

Greg Kyte: Right. So, I don't know, [00:15:00] I think. Well, what they. So what happened was Congress established this thing called the Freedmen's Bureau, okay? And the Freedmen's Bureau did all kinds. And again, I'm not a historian, but like in the research that I did, the Freedmen's Bureau did a ton of different things, including like establishing schools and establishing resources and services for all these emancipated people. And one of the other things that they did when they established the Freedmen's Bureau is they also incorporated the Freedmen's Savings Bank, which [00:15:30] was also known as the Freedmen's Savings and Trust Company. So they did establish this bank as a part of the Freedmen's Bureau. And there's a whole you know, there's like I said. There's all kinds of different stuff that was instituted through this Freedmen's Bureau.

Caleb Newquist: Right. And and it was.

Greg Kyte: Oh, yeah.

Caleb Newquist: Go ahead. Well, it just I mean, again, it thinking back to just how shitty everything was back then for for the freed slaves. Uh, [00:16:00] and and, I mean, like, I'm, I'm torn between two things to go. Well, that's cool that somebody was at least honest going, hey, there's some there's services that the freed slaves need that aren't being given to them, even though they're they're now freed people and should have access to them. But then also it's I've got to assume that it's it's just because even, you know, like we said at the beginning, even though, uh, the slaves were freed, people [00:16:30] were still being plenty shitty to the freed slaves. Oh, yeah. So, you know, of course. So. So, like I said, feeling very conflicted about this, where it's like, well, that's nice. That's a good thing that this was set up, but then it's like, it's a bad thing that this had to be set up. Right. Right. If that makes sense.

Greg Kyte: Because you there was plenty of conventional banks just around. Yeah.

Caleb Newquist: And there were school and there were school.

Greg Kyte: There were schools and there were places for them to work and all those kinds of things. But like you say, you know, with, with the era of reconstruction, like, [00:17:00] it's not like it's kind of like what we talked about earlier. It's like it's not like slavery ended in one moment where somebody's like, like they they threw their arm. Now it's like it's done. It's like. Right. And so same thing with in the post slavery world. It's like it's not like racism just stopped in, in, in, in one fell swoop. It's like, okay, everything is fine now. No. Like there was all kinds of things at work to work against, to, to con, to continue to marginalize these emancipated, the emancipated slaves. So. [00:17:30] So yeah, the Freedmen's Bureau was something that that was that was that was something that the government did that the federal government did. Right.

Caleb Newquist: And that's and that's the the tragedy of this, just to make sure that it's that that it's clear where we're coming from. Also is is by no means is is what you just said us saying. Oh yeah, but racism solved now. So. Because. Right, which, which is weird that that even has to be said because there, there are prominent politicians right now who are making that case as [00:18:00] like, yeah, racism is done and. Yeah. And I and and for you know, the two the two uh, podcast hosts of this show, you and me, we're definitely not arguing that by any.

Greg Kyte: No no no no no. Anyway, Freedmen's Savings Bank was to provide banking services, specifically taking deposits through its branches for the newly emancipated people and communities across the nation. Freedmen's Bank opened for business on April 4th, 1865, [00:18:30] in New York City.

Caleb Newquist: Freedman's Bank quickly became a success. Within just a few years, the bank had 19 branches and 23,000 depositors, virtually all of whom were Black Americans. Uh churches and other institutions, such as Howard University, which was established in 1867, uh, had accounts with Freedman's Bank as well. Ultimately, 37 branches were established and over 100,000 people opened [00:19:00] accounts with Freedman's Bank. Uh, according to a history of Freedman's Bank, uh, on the US Treasury Department website, most of the deposits at the bank were small, less than $60. But keep in mind 60 bucks way back then is equivalent to about 1200 bucks today. So small, but not tiny, right? Because, I mean, how many times have you heard recently that whole thing that, uh, you know, 60% of American households can't [00:19:30] handle a $400 emergency.

Greg Kyte: Emergency expense?

Caleb Newquist: Yeah. Right. So so again, not it wasn't not it sounds like nothing but but if you if you adjust for inflation, it's still still not not humongous deposits but not, not uh immaterial also. Right. Um, here's, here's a quote from that from, from the US Treasury Department website. It says, uh, people could open an account with as little as $0.05 and accounts with at least $1 earned interest. People [00:20:00] would often put their money in the bank during the summer and autumn, and take it out in the winter and spring, when their supplies would be running low. People also use their savings to buy bigger items such as homes, land, farm animals and tools. So it sounds.

Greg Kyte: To me, if I may stop you, it sounds to me like it's having it is. It is doing what they wanted it to do.

Caleb Newquist: Sounds like a bank. Working like a bank.

Greg Kyte: Working like a bank, right?

Caleb Newquist: Yeah. You put your money in there to make sure it's safe and [00:20:30] take it out when you need it.

Greg Kyte: Yep.

Caleb Newquist: Like banks do. So also, by 1874, nearly half of the bank's employees were African American. Uh, most were cashiers, uh, which at that time cashier was actually the top official at a branch. Uh, interestingly enough, as for Freedmen's Bank's governance, it was similar to many conventional banks, [00:21:00] uh, in that all of its original trustees were white men. Uh, in this case, uh, there were 50 of them, 50 white dudes running the bank. Uh, so not a lot has changed in 150 years.

Greg Kyte: It's gonna say it feels, feels, feels.

Caleb Newquist: Probably pretty close. Corp is, uh, very similar in their boardroom today.

Greg Kyte: Oh, man. We're gonna hear from. We're gonna hear from some, uh, from from some [00:21:30] banking, banking trade groups. It's like I'll have you know. Yeah, we'll hear from some banking trade groups. The American Bankers Association will be up our ass, right?

Caleb Newquist: Uh, one big way that Freedman's Bank governance was a little different from other banks. Its charter said that it would be allowed to invest the deposits in, quote, stocks, bonds, treasury notes or other securities of the United States, but it was forbidden from [00:22:00] making loans. So, yeah, it was a bank working like a bank instead of but just not in the one way that all of us think of banks working as bank. Just a it was just off by one one offering.

Greg Kyte: Yeah, yeah. Which was I think this really I don't recall this being made explicitly clear in the, in the research, but they really just did want to focus on taking deposits. [00:22:30]

Caleb Newquist: Right.

Greg Kyte: And that I don't know, they were there were some concerns about. You know, loans that, you know, they may be. Maybe their heads were in the right place about not wanting to offer loans. But as you're about to tell us.

Caleb Newquist: Yeah, it.

Greg Kyte: Didn't last long.

Caleb Newquist: Yeah. The that but the prohibition on loans didn't last very long. In 1867, Freedman's Bank moved its headquarters from New [00:23:00] York City to Washington, DC, and new trustees were quickly installed. In 1868, trustees, including John Alford, who we already mentioned, and Henry D cook, the head of the bank's finance committee, started pressuring Congress to amend the bank's charter to allow them to make loans, and they got their wish. A couple of years later, Congress passed an amendment to the bank's charter in 1870, and [00:23:30] from then on, Freedman's Bank could make them loans.

Greg Kyte: Despite its early success, there were some activity happening at Freedman's Bank that was definitely not in the best interest of its depositors. A lot of this, uh, a lot of the stuff that we found for this episode comes from a book published in 1976, written by a historian by the name of Carl Osterhaus, uh, who [00:24:00] I tried to contact. Actually, I was surprised to find that he was still. He's a professor emeritus at Oakland University. Okay. And I wrote him a very nice email. But since he's an emeritus, maybe he doesn't check his email very often.

Caleb Newquist: Maybe not. But in any case, maybe not every day.

Greg Kyte: Yeah, yeah. Anyway, he wrote a book entitled Freedman Philanthropy and Fraud A history of the Freedman Savings Bank, and that's where a lot of these details come from. For example, the book describes how trustees were not required [00:24:30] to give, quote, any security for the faithful discharge of their trust and of, quote, many trustees had little to no involvement with the bank, some even denying that they had agreed to join the board. Okay, and the charter.

Caleb Newquist: That strikes me as very weird. Weird, yeah.

Greg Kyte: And the charter lacked any penal clauses to hold trustees personally liable for bank solvency. Now, one thing that's, you know, I think in kind of contemporary business, everybody knows [00:25:00] that a board of directors is ultimately where the buck stops with a business, right? When especially when you think about big business, right? People think.

Caleb Newquist: Oh, the CEO.

Greg Kyte: Is the person in charge. And I'm like, yeah, the CEO works at the pleasure of the board. Okay. So like, you know, the board is really where, you know, that that is the group of people who who run A and govern a, a business, a corporation, if, if you like. In this case, it is very [00:25:30] strange to me and oh, by the way, and that board, you know, they they are they are liable for their decisions should things go terribly, terribly wrong. Like, you know, boards of directors get sued all the time, right? Um, for, for doing things that people don't like anyway. Right. Um, it is very strange to me that these trustees virtually had no liability.

Caleb Newquist: Yeah. No exposure, no.

Greg Kyte: Exposure.

Caleb Newquist: Bad decisions.

Greg Kyte: For bad decisions and running this bank. So, uh, red flag, red [00:26:00] flag. Yeah, probably even in the 1860s, that would have been a red flag, I think. So maybe. I don't know. Again, Greg and I aren't historians, but in any case, there was also evidence that the bank's management misled depositors about a supposed government guarantee, interest payments and the use of deposit funds. Quote, during its initial years, the bank marketed itself widely to attract deposits, distributing bank pamphlets at churches and Freedmen's Bureau [00:26:30] schools, advertising in local newspapers, and holding public meetings at churches, beneficial societies, and the bank's branches. Its advertisements often depicted the bank as having the banking, excuse me, the backing and guarantee of the federal government, but as a private corporation it had no guarantee. For example, an article in the Semiweekly Louisianan stated quote, there is no possibility for loss of loss. Excuse me for the reason that the government of the United States is responsible for every dollar deposited. [00:27:00] Uh, the bank promised its depositors 6% interest, but often paid a lower rate.

Caleb Newquist: I hate that, not good much.

Greg Kyte: That is. That is bad banking, Greg. That is bad.

Caleb Newquist: Banking. Well, and and it's one of those things where you'd go. I mean, so many times when we when we talk about stories of fraud. Yeah. You have these, you have these, uh, promises that are too good to be true. Yes. One of those one promise that seems too good to be true is when someone says there is no possibility [00:27:30] of loss or loss. Yeah, that sounds too good to be true. But then you follow it up by saying, because this bank that was ostensibly established by the United States of America is also backed and guaranteed by the United States of America, then you go, oh, yeah, that makes sense. So yeah, there's no kind of like is that this is I'm sure this was before FDIC was a thing, but it's kind of way before, oh, we got FDIC. It's basically FDIC insured. So good. Let's, [00:28:00] uh, let's throw our money in there. Yeah. It'll be safe. Yep.

Greg Kyte: Just for the record, FDIC was founded in 1933.

Caleb Newquist: There you go.

Greg Kyte: Quite a bit later.

Caleb Newquist: A lot later. Right. Thanks. Thanks. Great depression. You bet.

Greg Kyte: So beyond these questionable operational practices, there were some questionable related party transactions to. Your favorite and. Yeah, right.

Caleb Newquist: Everyone's. [00:28:30] Yeah. Again. Red flag. Uh, absolutely.

Greg Kyte: For example, Henry De cook, one of the guys we mentioned earlier who helped pressure Congress into changing the bank's charter to allow loans. His brother was Jay Cook, the founder of Jay Cook and Company, a prominent investment bank. Henry was also a partner at Jay Cooke and Company. Okay, okay.

Caleb Newquist: So he was so he was on the board for Freedman's Bank and and he was a partner in [00:29:00] this other bank. He was a.

Greg Kyte: Trustee and he was a partner at Jay Cooke and Company. Jay Cooke and Company was notable because it helped underwrite the Union war effort. So that turned out to that turned out fine for them. Yeah. Um, it sold hundreds of millions of bonds during the war. Jay Cooke had a lot of influence in establishing the national banking system that came about in the 1860s, including a branch in Washington, DC [00:29:30] and another in Philadelphia. And since Henry Cooke was the head of the finance committee for the Freedman's Bank, he decided to put a lot of Freedmen's Banks deposits in the First Washington National Bank, where he was ostensibly the president.

Caleb Newquist: Okay.

Greg Kyte: That bank paid Freedman's Bank 5% interest on its deposits, while Freedman's was paying its depositors 6%.

Caleb Newquist: Which, uh, you know, for [00:30:00] the uninitiated, that is unsustainable. Yeah. Not good. Yeah, that other 1% just doesn't magically materialize.

Greg Kyte: Yeah, yeah. That is, uh, yeah, that's bad banking. Yeah, yeah. And that's not all. After the bank charter was amended to allow loans, one of the loans made was for $50,000 to the Seneca Sandstone Company, which was owned by the Seneca Quarry. This [00:30:30] loan was secured by the company's, quote, worthless bonds and quote, according to Osterhaus's book, who approved that loan? Henry Cooke, who also was a board member of the quarry.

Caleb Newquist: After the Civil War, Jay Cooke and Company invested heavily in railroads. Uh, railroads back then were kind of in the same status as high flying tech companies are nowadays. [00:31:00] And in 1870, the Northern Pacific Railroad made Cooke and Company its exclusive bond agent. But Cooke and Company was shitty at being a bond agent and had trouble selling Northern Pacific railroads bond, and therefore wound up owning about 75% of those bonds that they had a hard time selling. Uh, to make matters only slightly worse, [00:31:30] because that was already pretty bad. Cooke also issued notes against its expected return on the sale of the Northern Pacific bonds, so it made loans based on their performance of selling bonds that they couldn't sell. And so therefore, it's no surprise that they couldn't raise enough money to meet their obligations. As word got out about Cooke's increasingly leveraged position, investors [00:32:00] began pulling their money, uh, as did Cooke's depositors, which caused a run on their bank in September of 1873, and this in turn caused stock prices to drop, which in turn caused more bank runs and business failures, and hence the panic of 1873 began. And everyone remembers the panic of 1873, right? It was right after the terror of 1872 and the pant [00:32:30] shitting of 1874.

Greg Kyte: So we've got railroad projects failing left and right and wouldn't you know it? Freedman's Bank had some exposure to that. In Professor Osterhaus's book, he noted that Freedman's Bank invested in the bonds of the Union Pacific and Central railroads via Henry and Jay Cooke and Company, of course, in violation of its charter as early as 1869. This [00:33:00] exposure led to runs on some of the Freedmen's branches in 1873. Following the panic in an attempt to restore confidence in the bank among the African American community, there was a significant change in the leadership of the bank. Freedmen trustees replaced the founder and president, John Alvord, in March 1874 with Frederick Douglass. Yes, the Frederick Douglass. Douglass even invested $10,000 of his own money in [00:33:30] the bank. But when Douglass discovered the true condition the bank was in, he quickly resigned, saying he, quote, was married to a corpse. In June 1874, he recommended that Congress shut down the bank. Freedman's Bank closed officially on July 2nd, 1874, and the process of winding the bank down. Officials found that the actual value of its assets were far lower than what its book said. The report of the commissioners of the Freedman's Savings and Trust Company reported that they amounted to less [00:34:00] than 2% of the bank's total liabilities. That is bad.

Caleb Newquist: So basically, if they collected all the money that was owed to them, they would have 2% of what they owed to everybody else. I guess that's that's that's beyond. That's beyond horrible banking. Yeah, that's I don't think that can be accounted for by lending your money at 5%. Yeah. Or borrow you know, and.

Greg Kyte: Paying five and earning six. [00:34:30]

Caleb Newquist: Yeah.

Greg Kyte: Yeah. Or earning six.

Caleb Newquist: Earning five and paying six. Yeah. Yeah. We're we're bad bankers too. Yeah. That's what it is.

Greg Kyte: Not are we. Only only not only are we not historians, we are not bankers.

Caleb Newquist: Not bankers. No I listen, that seems that's that's amazing. It's amazing historical note that Frederick Douglass. Yeah. Was created, was put in as the president of the Freedman's [00:35:00] Bank.

Greg Kyte: Yes.

Caleb Newquist: Uh, but also the the way the story reads, it sounds like he was bamboozled into taking that position.

Greg Kyte: He was, by all accounts, that I that I saw that is, he was misled into taking that job like he knew that the bank was in some distress and he wanted it to succeed. Okay. But they they hid a bunch of the problems from him. Oh, and so that's so he he was [00:35:30] he took the job, I think, under false pretenses. And so yeah, just fantastic. Right. And like one of the things I read is a lot of what a lot of the trustees wanted is they, they because they knew the bank was going to fail. They wanted a black person to be at the head of the bank so they could scapegoat them.

Caleb Newquist: Oh, Jesus. Yeah.

Greg Kyte: Oh, yeah. Yeah.

Caleb Newquist: So we'll so we'll trick Frederick Douglass. Yeah. In becoming. Yeah. The face of the bank. Yeah. So that when it [00:36:00] fails, we can point at him for the failure of the bank.

Greg Kyte: Yeah, yeah, but it didn't work. I mean, like, it's clear. It's clear that he's like, yeah, yeah, he found out and he's like, uh, no, I quit. And, um, by the way, shut it down. It's. Yeah, it's a lost cause. So. Yeah. Yeah. Pretty, pretty, uh, unsavory stuff. Yeah. Depositors suffered more than $3 million in losses. That's over 80 million in today's money. Uh, [00:36:30] depositors who receive payouts got far less than they were owed. Small depositors. The majority of the more than 60,000 depositors at the time of the bank's failure received little to no funds at all. As for any accountability for the bank's failure, there was none. A congressional investigation recommended that Henry Cooke and others be indicted for their role in the failure of Freedman's Bank, but no one was ever charged. In his book Black Reconstruction in America, 1860 to 1880, W.E.B. [00:37:00] Du Bois, the historian and civil rights activist, wrote, quote, no more extraordinary and disreputable venture ever disgraced American business disguised as philanthropy than the Freedman's Bank. A chapter in American history which most Americans naturally prefer to forget. Greg Kite. Did we learn everything?

Caleb Newquist: Yes we.

Greg Kyte: Did. We learned a.

Caleb Newquist: Lot. [00:37:30] We did know this is, uh. Yes, I learned tons, uh, because everything in this episode is brand new to me. I, I, I mean, the, the quote that you read from W.E.B. Du Bois. Yeah. Uh, yeah. That Americans naturally prefer to forget. Yeah, they did, and so they never taught me about this. I, I feel neither I feel the same way about this story because. Yeah, I mean, again, that that quote was the that [00:38:00] was the that was the cherry on top of this story where it was like it was disguised as philanthropy. Philanthropy. Yes. But it ended up hurting, drastically hurting all the people that it was supposed to be assisting in this great time of need. Right? That they had. Right. Uh, and and the fact that that's just been extracted from history is bizarre to me. And I feel I feel the same way, [00:38:30] uh, that because and we talked about this briefly before we started recording, it feels the same way when I was watching, uh, Watchmen, the the series on HBO. Yes. And and that series starts with a reenactment of the the Tulsa, Oklahoma massacre of Black Wall Street. Yes. And I was like, what? What is what is this fantastical story that they're inserting into American history? And what what the fuck that actually happened? Yep. And I [00:39:00] feel the same way. I felt weird then going, how did I not know about this? Why is this completely foreign to me? And I feel the same way about this story where it's like, this is this is shocking that this isn't part of part of our education. Yeah. And part of part of just what we know, uh, as what happened, at least, at least as people who spent a significant part of our, uh, advanced education learning about, uh, accounting and finance stuff. Why didn't why [00:39:30] why is why is this why are we just learning about this now?

Greg Kyte: Yeah, I, um, I yeah, I don't know, I, I will say that, you know, this this. We discussed fraud in this episode because this is a show about frauds. It's not a history show. Uh, but in the aftermath of the panic of 1873, you know, things did not get better. Right. Yeah. Clearly, for all these, for all the emancipated people, um, you know, and not just those for the depositors [00:40:00] of Freedman's Bank, but all over the country. And, I mean, this all came to a head. I mentioned, you know, early in the show that there during reconstruction, there was a disputed presidential election that was the presidential election of 1876. It was it was very, very close. It was disputed, as I said, uh, it was the one of the most contentious elections in American history. So if you think things are bad today, if you think things are bad. They have been bad before. Very bad.

Caleb Newquist: And we made it. Is that the. Is that the, uh, [00:40:30] the inspirational message? I don't.

Greg Kyte: Know if it's inspirational or not, but I'm just saying.

Caleb Newquist: Like, hard to feel inspired by here's.

Greg Kyte: And here's just to tie this up in the in the end Rutherford B Hayes, he's a Republican from Ohio. He he defeated Samuel Tilden, a Democrat from New York. And it was it was because of this infamous political deal. It's known as the compromise of 1877. Um, and that is the only reason that Hayes became the president, because it gave him the presidency [00:41:00] in exchange for the removal of federal troops in the southern states.

Caleb Newquist: Right? Right. Yeah. And see, I'm pretty. That's ringing a bell. Yeah. Pretty sure I learned that one in my history class.

Greg Kyte: And it and this this is what ended reconstruction. So the reconstruction era really was like what we talked about at the beginning. Near the beginning, it was like it was it was trying to reunify the nature. Uh, it was trying to reunify the nation, rebuild its infrastructure and address all of the impacts of slavery in American [00:41:30] institutions, both in government and but also in business, the social, political and economic impacts. Right. That's what that was, what reconstruction was going to do. But because of this presidential election. Because. Rutherford B Hayes wanted to be president. He's like, you give me the presidency. We'll get we'll we'll get out of your way south.

Caleb Newquist: We'll get out of your hair. We'll get out.

Greg Kyte: Of your hair. And that that was it. That was that that ended in reconstruction. And so and and it got [00:42:00] it, got it got bad after that.

Caleb Newquist: Things got things got bad after one.

Greg Kyte: That's there is a silver lining that was pointed out and a lot of the research I did, the silver lining was noted in a lot of places. Uh, the silver lining is that Freedmen's Bank. Uh, is that the records of Freedmen's Bank are the largest single source of lineage linked African American records known to exist. Okay, more than 480,000 names. And those records have been indexed by The Church of Jesus Christ of Latter day Saints, which [00:42:30] is because they they do all that genealogy stuff there in your backyard, Greg. And so they they indexed all that stuff. And so that, um, that is one of the silver linings, because a lot of, you know, prior to that time, those kinds of records weren't kept. Sure. Yeah, absolutely. So in any case. Anything else, Greg?

Caleb Newquist: Well, I mean.

Greg Kyte: Anything else that you learned?

Caleb Newquist: I feel like we pointed out the fraud while we were telling the story. Yeah. Where it's the, you know, it's it's [00:43:00] the dealing dealings with your bank where you're you're you're giving favorable terms to people and not not doing your diligence in terms of your collateral for loans and, and and again, like even the it it wasn't just gross negligence. You can't you can't get to where your your assets are 2% of your liabilities just by negligence. You're, you're you're intentionally screwing that if you're if you have any experience [00:43:30] in any kind of banking, meaning do you have a, a checking account, then you could do a better job, right, than having 2% of your liabilities covered by your assets.

Greg Kyte: What's pretty fascinating to me is that like. I guess. I guess banking regulation, as we understand it today didn't come for like 60 more years after that. Like the the failure was in the 1870s and like the Great Depression essentially started in 1929. [00:44:00] And like the Securities and Exchange Act was like 1933, 1934 and like, that's that was at the same time when, like the FDIC was established and like modern bank, like it took an almost three quarters of a century for the government to get around saying, so maybe we should put rules around these banks so people don't get screwed right when they go out of business.

Caleb Newquist: So. Right. Well, and another thing that comes to my mind from the story, just a [00:44:30] like an, like a modern day echo of the Freedman's Bank story. Yeah, is when, when the Pptp loans were, were going out and all of that stuff was you, the news was everyone's struggling with COVID. The government is making money available to you there through these Pptp loans. Go to your bank, talk to your banker. They'll help you. They'll they'll get you the they'll walk you through it and get you the money. [00:45:00] And and then the the story that I remember coming out after that is that communities of color had a hard time accessing those funds. Yes, because communities of color generally had less had didn't have as strong of banking relationships.

Greg Kyte: Yeah. They were underbanked.

Caleb Newquist: Yeah. Underbanked. That was what it was called. And and then looking at this story as part of the history of people of color in this country. No, no shit. [00:45:30] Yeah. They're yeah they're underbanked. They got they got fucked hard. Yeah, yeah yeah. The the first time. Yeah. That, that, that they got to have a banking relationship. So maybe they're going to be. Yeah maybe banks aren't for us that, that there's going to be echoes of that through your family where it's like, I don't put my money in a bank because. Because I did that once. Yeah. And and and it all just disappeared.

Greg Kyte: Yeah. And one of the other things I found in, in the research was there's, there's scholarship around [00:46:00] this, precisely that communities of color, like, because of the Freedmen's Bank failure. There were generations of distrust in banks because of that banking failure. Yeah. And so like it's been it's been established in the scholarship that this is why. And here we and here we are 150 years later. And you're talking about. And. Yeah. And it showed it, it of course it showed up in PGP loans and [00:46:30] Eidl loans and all the rest that the communities that needed it didn't get it because they didn't have banking relationships or like you say, they were underbanked. Why didn't why were they underbanked? Well, you can probably trace it back to Freedmen's Bank.

Caleb Newquist: You for sure can trace it back. Yeah. You'd see I'm, as has been well established. I am no historian, and I can I can connect those dots. Yeah. Pretty fucking easy. Yeah. Well, that's it for this episode. Uh, remember to share [00:47:00] this episode with anyone you know in Florida because they won't learn about this stuff in their public education system.

Greg Kyte: And also remember, Abraham Lincoln hunted vampires, which is nice. Uh, but some of his other accomplishments were more important.

Caleb Newquist: Much more important, much more important. If you want to drop us a line, uh, please do send us an email at omai. Fraud at earmarks. Com and Caleb, if you want to reach out just directly to you, where can they do that?

Greg Kyte: They can find me on LinkedIn. I, you know, uh, why [00:47:30] do I even bother? I hate it when I can't, I can't even I have nothing clever to say. Uh LinkedIn. Forward slash forward slash Caleb Newquist or just a slash LinkedIn. Linkedin is the best place to find me, Greg. Is LinkedIn a place where people can find you?

Caleb Newquist: You know, we've been telling people that for a lot of these episodes, and I haven't been on LinkedIn for probably 2 or 3 weeks now. So good for you. Likely there's a lot of DMs in there that people like going, you said I could get a hold of you here and now. [00:48:00] Where are you? Uh, so I'm fine. Send me an email. Greg. Greg. Kite comm. Really easy. I'm. I'm good with that.

Greg Kyte: Oh, my fraud is written by Greg Kite and myself. Our producer is Zach Franc. Rate review and subscribe to the show wherever you listen to podcasts. And if you listen on earmark, you can earn CPE. It's a new year. Might as well get started it.

Caleb Newquist: Seriously, why not get some CPE? Jump on.

Greg Kyte: That. Get a jump on that shit. Join us next time for more avarice, swindlers and scams from stories that will make you say oh my.

Caleb Newquist: Oh my fraud. [00:48:30]