Vernon Hill's financial visions

"Do you know how many times I've been told I'm crazy?" asked the founder of the old Commerce Bank, who is now upending the staid industry across the pond with MetroBank, Britain's first new bank in more than 100 years. "They say it a lot less after I sold Commerce for $8.5 billion, but they still don't get it."
— Vernon Hill, quoted in Larry Platt's "Town Square" column in
the Philadelphia Inquirer, Nov. 28. (For the full column, click here.)




The great bankers of the 19th Century— the Rothschilds, say, or the Morgans, the Lazards or the Lehmans— often started out as merchants who discovered, in the course of doing business, that they could make more money by extending credit to their customers than by buying and selling cotton or hardware or dry goods. But 20th-Century banking, especially in Philadelphia, was largely dominated by stodgy and stolid men who survived by adhering to a few simple rules, like "Know your customer" or the "3-6-3" formula— that is, pay depositors 3 percent interest, invest it at 6 percent, and head for the golf course at 3 p.m.

In this conception, the banker was essentially a fund-raiser— a middleman extracting a fee for matching depositors with borrowers while performing a delicate dance to assure that each party's interests were protected. A merchant's enthusiasm might be his greatest asset, but a banker's greatest asset was his reputation for good character. Thus conventional banking wisdom called for increasing an institution's assets only slowly and carefully.

These rules and their cautious practitioners were properly ridiculed, and in the 1980s such fuddy-duddies were replaced by a new breed of brilliant financiers who devised financial vehicles of such ingenious complexity that the entire banking community lost sight of the basic principles of risk evaluation, ultimately causing the collapse of America's housing market and a global stock market crash in 2008.

Free pens and dog treats

Vernon Hill once fancied himself one such financial visionary, and to judge from Larry Platt's breathless and fawning encomium in Sunday's Inquirer, he still does. His revolutionary insight, as Hill tells it, was his insistence on applying retailing principles to banking.

Thus Hill's Commerce Bank, which he launched in 1973, attracted depositors not by offering competitive rates and services but by offering convenient locations, extended hours and weekend service, as well as free ballpoint pens, dog treats and coin-counting machines— and by flooding his markets with advertising. He amortized these promotional expenses by opening more than 400 branches— he called them "stores"— stretching from New York to Florida.

These notions weren't as revolutionary as Hill apparently believes: As early as 1914, for example, the Franklin Trust Company of Philadelphia offered midnight banking at branches throughout the city, with the slogan, "Wide Awake Until Midnight." But the ambitious Franklin Trust expired in 1930, after a lifespan roughly equivalent to that of Vernon Hill's Commerce Bank, which was subsumed by Canada's TD Bank in 2007.

Crazy clerk

The flaws in Hill's grandiose strategy were apparent to anyone who encountered his empire at ground level. To the obvious question of how to staff branches when you're opening new branches at the rate of more than one a week, Hill's apparent answer was: with retirees and recent high school graduates.

When I opened an account at Commerce in 2006— attracted, like everyone else, by its convenient location and hours— my application was processed by an elderly gent with a crazed look in his eye. When I asked what struck me as a simple question— could I routinely sweep funds back and forth between my Commerce checking account and an online money-market fund?— he leaned back in his swivel chair.

"On matters of this sort," he replied confidently, "my preferred authority is the federal government." He proceeded to tap a few keys on his computer, whereupon his printer spat out about a half-dozen pages of small-type gobbledygook, which he handed me triumphantly.

"That should answer your question," he assured me.

The family that plays together…

Shortly thereafter, I tried to open a joint Commerce Bank account with my brother, who lives in Vermont. No one at Commerce was up to the tricky challenge of accommodating two customers who lived across state lines. I turned instead to Wachovia (now Wells Fargo), where it was a piece of cake, albeit without the free pens and dog treats.

Platt's column in the Inquirer neglected to mention why Hill left Commerce, and why his banking empire no longer exists. Hill was forced out by Commerce Bank's board of directors in 2007 after federal regulators questioned the bank's funneling of more than $70 million in real estate leases and consulting fees to firms controlled by Hill, his wife, his brother and his son, at the expense of the bank's other stockholders. That is, Hill's excesses exceeded even the lax standards established by George W. Bush's laissez-faire regulators. Five months later, to further placate the feds, Commerce Bank was sold altogether and ceased to exist as a separate entity.

Hill and his colleagues have contended that he was an entrepreneurial genius brought down by the jealousy of his lessers. His insider dealings with his family, one Commerce director claimed, were actually the key to Commerce Bank's success— "the hidden secret ingredient, love, which came from this family effort." Similar heartfelt expressions emanated from clients of the Drexel Burnham junk bond king, Michael Milken, before he went to prison in 1990 for insider trading. Visionaries never lack for followers eager to swallow their Kool-Aid.

Lunch with Vernon

I met Hill once, over lunch in the mid-1980s, when I was editor of the Welcomat (now Philadelphia Weekly), which he was then contemplating acquiring. He seemed unclear as to how owning an alternative weekly newspaper would fit into his empire-building plans; he also seemed unaware that I was the Welcomat's editor, not its publisher or owner. He seemed only to perceive that he might be wise to cultivate friends in the media, and that the easiest way to cultivate them was to buy them.

I tried to explain that the Welcomat's affiliation with a wheeler-dealer banker would undermine the paper's most valuable commodity: its reputation for independence. He insisted he didn't want editorial control— "just a fair hearing in your pages if I need it." He wasn't crazy— just clueless.

(Or maybe not so clueless. As Platt's column dutifully reminds us, the former head of Commerce Bank's insurance department, George E. Norcross III, is now an owner of the Inquirer's parent company. Fair hearing, indeed.)

Castle in Moorestown

Hill never did buy the Welcomat, thank God. He did spend millions on a 46,000-square-foot castle on a 44-acre estate in Moorestown, N.J. And now, at an age when most men are pausing to smell the roses, he's trying to replicate his Commerce Bank experience from scratch in Britain. Some of us learn and grow from experience, others cling to our visions.

Which brings me to the key question: What good is $8.5 billion if you don't know what to do with it?

The lesson of the past quarter-century, I submit, is that simple honesty and humility matters more in banking than arrogant brilliance. It's a lesson that Hill seems not to have learned, perhaps for a reason that Martin Luther pinpointed five centuries ago.

"Riches are the least worthy gifts which God can give men," Luther noted. "Therefore God gives money only to foolish people, to whom he gives little else." But then, as Hill will doubtless remind Larry Platt during their next transatlantic chat, Martin Luther just didn't get it.♦


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