I once learned a very costly lesson in the art of banking. Talk about alligators! It's a long story, but here is a very short version:

We bought the bank for no money down as a friend was effectively being kicked out of it by the regulators, the FDIC. So we took over not realizing how bad the bad loans were and then had a good loan turn bad on us. Local banks have to maintain cash ratio to loans and we were behind from the get-go.

About the only money we made was on a position in Long Island Light and Power bonds that were way below par with expiration coming soon. In an election year we bought a bunch of them; I did not think the government would let them default on the bonds and I was correct.

The FDIC flagged that as one more risky move on our part. More capital was called for, and it became clear they wanted us out of the business.

The good news was the bank was a small bank so we only lost 'small' — a few million.

Lesson learned: don't buy on margin, or if you do take just a small position. Also, best to stick to what you know with people you know.


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