Lifelong banker recognized greed when he smelled it

Dave Cleveland, founder and CEO of Riverside Bank until he sold it a decade ago and became a millionaire after 40 years in the trade, was hired by federal regulators in 2008 as the volunteer chairman of troubled Community National Bank of North Branch.

Cleveland found top executives looting the joint, including through a deal that ended up infecting 20 other community banks.

Last Friday, Curtis Martinson, 54, of Eden Prairie, was the third Community National executive to admit that he ripped off the bank. His plea in federal court followed guilty pleas in August from former president Bill Sandison, 65, and his son, Ross, 42, who were charged earlier with siphoning bank funds from the $35 million real estate development deal they led into foreclosure in the Anoka County city of Ramsey.

Cleveland smelled trouble when he saw that the Sandisons were paying themselves $300,000 apiece plus bonuses, country club memberships in Florida, vehicles and much more. Cleveland's board paid him $250,000 a year a to run Riverside, a much larger bank that also was among the state's most profitable.

By the time Cleveland arrived, an investigation was underway. In 2007, an appraiser tied to the Sandisons through kickback schemes left a suicide note that provided a roadmap to investigators, who already were getting complaints from worried community bankers. The bankers had been solicited to take pieces of the $35 million participation loan made several years ago to finance what was supposed to be a 322-acre project in Ramsey full of housing, stores and a transit station.

Only one problem. A project that size wasn't merited by demand. The tenets of diversification and good stewardship that bankers pledge to uphold when they are investing the money of government-insured depositors went out the window.

"Greed, greed, it was all about greed," said Cleveland, 76, now a tree farmer and community volunteer. "It wasn't just this deal. Greed and lack of diversification got our industry into trouble. Maybe we bankers have proven, after all the deregulation, that we need more regulation. We seem unable to discipline ourselves."

Alan Greenspan, then chairman of the Federal Reserve, chose to dismiss warning signs five years ago thanks to his unshakable belief that powerful market players always act in the long-term interest of the shareholders. Sorry, the guys who ran AIG, Citigroup, Merrill Lynch and Lehman Brothers were more focused on their next eight-figure bonus checks.

In 2007, Chuck Prince, since-ousted head of Citigroup, told the Financial Times that there could be trouble at the confluence of excessive leverage, limited capital and heavy bets in real estate: "When the music stops, in terms of liquidity, things will be complicated," he said. "But as long as the music is playing, you've got to get up and dance."

And here I thought the high-buck CEO's job was to avoid the mob mentality.

Citigroup -- the huge financial conglomerate that got Congress in 2000 to free federally insured depositories to dive into all manner of investment banking, subprime mortgages and hedge funds -- plunged into greater risk, abetted by duplicitous bond-rating agencies that put their Grade A seal of approval on securitized junk, and federally chartered Fannie Mae and Freddie Mac, who insured billions in suspect mortgages that were backed by the government.

By the way, the stock of Citi has fallen from about $55 per share to $4.50 since deregulation passed.

"Bankers and investment bankers and short-term greed," the old banker said. "And where the hell were the boards of directors? A lot of millionaire directors weren't doing their jobs. Greed. The regulators used to get after me once in awhile for a 'substandard loan' to some small business that we couldn't demonstrate could pay us back out of profits. But we had plenty of our capital backing those loans. My board always knew what the hell I was doing when we took a risk on a small business. And they knew I wasn't spending shareholders' money on country clubs or Vikings tickets.

"Because of the greed, we got this horrible recession, a lot of good companies laying off workers, small businesses that can't get credit. It irritates the hell out of me.

"I made plenty of money," Cleveland said. "I [might] have made some more, but I always thought that a bank president has to lead by example. And I don't have to duck or hide from anybody. You can go either way in the business world. And people will not soon forget that they are unemployed because of the greed of somebody who was supposed to know better."