Observations

Looking Out for Your Financial Future

18 - Dec 2019

It’s a wonderful life… as long as you’re liquid

One of my favorite holiday traditions is watching holiday movies. By many measures (including movie rating site Rotten Tomatoes), the most popular Christmas movie of all time is the 1946 classic, It’s a Wonderful Life. (Sorry, Die Hard fans!) It is a moving story with many lessons: The idea that one person can make a difference; that there is strength in community; and that the bad guys sometimes get away with it.

Turns out there are some financial lessons in the movie, too.

As you’ll remember, George Bailey (played by Jimmy Stewart) takes over a small building and loan in his hometown of Bedford Falls after his father passes away.

Building and loan associations (BLAs) were the precursor to what we now know as federal savings and loans. Members of a BLA subscribed to a certain number of shares of the association, then they could borrow against those shares and purchase homes. For example, someone with a $2,500 interest in the BLA could borrow up to that amount to purchase a house. (The median home price in the U.S. in 1940 was $3,000.) BLAs typically had more stringent rules related to withdrawing earned interest than regular banks, and it commonly took 30 to 60 days for a member to withdraw their interest in the BLA. Regulations also required BLAs to keep their own deposits at a different financial institution. 

Enter our antagonist, Mr. Potter (Lionel Barrymore); he owns the competing bank in Bedford Falls. When George’s Uncle Billy (Thomas Mitchell) loses the Bailey’s Building and Loan deposit, it creates an illiquidity issue for the BLA, as well as creating the look of fraudulent activity by the Baileys.

What happens next in the story was something that played out quite often in the 1920s and 1930s—there was a run on the bank. Panicked members of Bailey’s Building and Loan wanted their interest, worried that the bank would close and they’d lose all of their savings. And because the deposit is now lost by Uncle Billy, there is no way of providing this liquidity. Even though George does not have to return any member’s interest because of the governing rules, he agrees to do so with the money he and his wife Mary had saved for their honeymoon. All the while, the dastardly Mr. Potter is waiting to buy shares from current Bailey Building and Loan members for 50 cents on the dollar, essentially putting the Baileys out of business.

However, by the end of the story — and after George Bailey’s all-important discovery of how many lives he has impacted — the community comes together to bail out the building and loan, keeping the institution open and George and Uncle Billy out of jail.

Today, many regulations provide governance for financial institutions.  Most importantly, the creation of the Federal Deposit Insurance Corporation (FDIC) in 1933 meant that there was now a federal backstop for the consumer to prevent the situation in which Bailey Building and Loan found itself.

Still, the story should serve as a stark reminder that nothing can take the place of liquidity. Financial systems, whether they are national, corporate, or personal, are much more efficient when there is plenty of liquidity available.

We hope you have enjoyed this financial perspective on a true holiday classic. From all of us at Telarray, we wish you the happiest of holiday seasons!

Owen Keith

Author:

Owen Keith joined Telarray in 2010. He is a Member and Senior Advisor with the firm. He also sits on Telarray’s Executive Investment Committee. His industry experience began 23 years ago as an advisor at Prudential Securities.

He earned both Bachelor’s and Master’s degrees in Business from the University of Memphis and served as past Treasurer and board member for the Highland Hundred, the booster organization for University of Memphis football. A Memphis native, Owen has volunteered for the AutoZone Liberty Bowl for more than 20 years and serves on the bowl’s Board of Directors.

He and his wife Amy have three children: William, Nicholas, and Emily.