Marvin L. Goldman, the soft-spoken, well-tanned and silver-haired owner of Washington's K-B Theaters chain, expected something in return when he wrote a $5,000 check to United Mine Workers President Arnold Miller in March 1977.
Goldman was in financial trouble. His theater chain -- the Washington area's largest, with 16 movie houses scattered from Bethesda to Georgetown to Baileys Crossroads -- was losing money and owed American Security Bank $850,000. In effect, the bank had told Goldman to pay up and bank elsewhere. Goldman badly needed a new banking connection in Washington, and Arnold Miller could be the key.
The United Mine Workers owned majority interest in the National Bank of Washington, third largest in the city. Goldman was confident that if his $5,000 investment could help Miller get reelected president of the union that year, Goldman would get something in return -- like a new loan or a seat on NBW's board of directors.
As it turned out, Goldman got both:
Three months after he made the $5,000 payment, Miller put him on the board. Within two months of taking his seat, Goldman received a $1.2 million loan from the same NBW bankers who a year before had flatly rejected his loan request as a bad risk.
Goldman did not consider anything wrong with his payment to Miller. His was a pragmatic view of politics, a view that accepted, for instance, the granting of prestigious overseas ambassadorial posts to the big contributors for presidential campaigns -- regardless of their diplomatic qualifications.
The story of Goldman's ascent to the board of directors of the National Bank of Washington and his financial rescue offers a glimpse of the flow of power and money in Washington. It casts light on the the usually secluded operations of Washington's oldest bank, where some officers and directors often acted more in their own interests than in the interests of their depositors, customers, stockholders and the public.
Goldman's story is taken from a five-month investigation based in part on 3,000 pages of confidential NBW executive committee records and more than 100 interviews.
Goldman has declined to comment publicly on his dealings at the bank, but his story has been reconstructed from sources intimately familiar with his activities and his motivations during the last several years.
Marvin Goldman, 58, the son of a Russian immigrant music publisher, was raised in New York City during the Great Depression. As a young man, he operated a small air-conditioning business that fell into bankruptcy. But in 1953 he bought into the theater chain cofounded three decades earlier by his father-in-law, Fred Kogod, and Max Burka -- hence the name K-B.
Goldman borrowed heavily from American Security during the 1960s and the chain of theaters flourished and expanded. But around 1975, for a variety of reasons, K-B Theatres began to lose money. By the end of 1976, Goldman was overextended.
On one $350,000 loan, he had managed to keep interest and principal payments current even though his theater chain was losing money. But, on $500,000 worth of additional debt, the theater company had stopped making principal payments as required under his loan agreement -- technically, a default.
Moreover, the agreement called for Goldman to pay off his debt once a year and then renew the loans, so they would not appear stagnant when reviewed by federal bank examiners -- a common practice in the banking industry called "cleaning up" and "rolling over" debt.
In early 1977, Goldman got the word very unceremoniously from his banker at American Security:
The $850,000 in loans would have to be paid or moved elsewhere. The bank's new chairman, Carlton Stewart, had just arrived from New York's Citibank. His stated objective was to transform the somewhat provincial image of American Security, Washington's second-largest bank, and give it the status of a large national and international institution.
That meant changing the bank's policy of bending over backward to help major local customers get through difficult financial times.
The bankers at American Security turned a deaf ear to Goldman's request for time and patience. The $850,000 loan was soon classified "substandard" by national bank examiners because Goldman had stopped making payments. This dreaded classification required the bank to set aside funds that normally would be held as profits to cover the potential loss from the Goldman loan.
The pressure was on Goldman to find a new bank.
He renewed his acquaintance with Ronald G. Nathan, a young lawyer who had practiced as an associate partner at Arnold & Porter with Goldman's eldest son, Robert. Nathan was adviser, campaign worker, legal strategist and fund-raiser for Arnold Miller and Sam Church, who, running as a team, were locked in a bitter reelection contest for control of the UMW, the nation's largest coalfield union.
Nathan, then 34, and young Goldman were frequent visitors to Marvin Goldman's colonial home set deep in the rich greenery off a quiet, tree-lined boulevard between Rock Creek Park and upper Connecticut Avenue. The friendship between the elder Goldman and Nathan developed quickly. Goldman regarded Nathan almost as a nephew, and the young lawyer proudly introduced Goldman to UMW President Miller.
At the same time, however, Goldman was canvassing other friends and advisers for banking contacts who would rescue him from his trouble at American Security.
One of his friends told him to go see Walton W. (Hank) Sanderson, the 38-year-old president of the National Bank of Washington. Sanderson was agressively trying to build up WBW's dealings with the local business establishment. It seemed like a perfect match. But throughout the early months of 1977, Goldman's negotiations with Sanderson and NBW loan officers kept arriving at the same conclusions:
There was no apparent source of repayment for the proposed loan because K-B Theatres still was losing money. The loan officers and credit analysts vigorously opposed every submission by Goldman. And, as a result, the loan was never presented for a formal vote by the bank's senior officers committee or the directors' executive committee.
It did not matter than Goldman could offer as collateral a 12-acre drive-in property in Rockville, another 58 acres in Olney and his Silver Spring Shopping Center property at Georgia Avenue and Colesville Road. To make a loan that can only be repaid by selling off the collateral is generally considered bad banking.
In frustration, Goldman went to National Savings & Trust Co. Loan officials there told Goldman that if he were willing to put up all three of his major property holdings, with a collateral value of $4 million to $5 million, the smaller bank would lend him the money to pay off American Security at an interest rate of 11 percent.
At a time when the prime rate, the interest rate charged by banks to their best corporate customers, was barely 8 percent, the 11 percent rate would mean more than $20,000 a year in additional interest payments to offset NS&T's greater risk. Goldman refused to pay that much.
In March 1977, while out of town on a business trip, Goldman received a telephone call from his youngest son, Ronald, who was managing K-B Theatres in his father's absence. Like his brother Robert, Ron Goldman had also befriended Nathan, who by March was working furiously in the final weeks of Miller's campaign to win a second five-year term as union president. Young Goldman telephoned his father to say that Nathan had asked for $5,000 to help pay the campaign's telephone bills. The potential reward for such assistance was unstated, but obvious.
Miller effectively controlled the bank because he voted the three-quarters of its stock held by the union, and after Nathan had introduced them socially, Miller had talked to Goldman about the need to have good local businessmen on NBW's 25-member board.
Goldman and his son agreed to give $5,000 to Miller's campaign.
There was not enough money in the family business, so Ron Goldman telephoned Hank Sanderson at NBW and told the bank president that he needed a $5,000 loan. Sanderson asked the purpose of the request and Goldman told him it was a political contribution for Arnold Miller. The loan was made at 8 percent interest and was unsecured. It carried, however, the guarantee of Marvin Goldman, a man whose financial statement showed a net worth of $3 million despite his troubled business.
When Marvin Goldman returned from the business trip, Nathan brought Miller to the K-B offices, where Goldman wrote out a $5,000 check on his personal account and gave it to Miller.
[Miller apparently never reported the payment as a contribution as would have been required by union by-laws. Three years later, when the payment was discovered, Miller would say through his lawyer, Harry Huge, that it was a loan; that he had signed a document that had stated so. The document, a loan note signed by Miller, was produced by Goldman showing that he had made a $5,000 loan to Miller at 6 percent interest, 2 percent less than Ron Goldman's loan from NBW. The Goldmans had never asked Miller to repay the loan, however.]
Within three months after the loan was made, Miller and Church were reelected to head the union. In June 1977, Miller asked Goldman to take a seat on the NBW board. Goldman agreed.
Goldman took his seat on the bank board the following March. More than a year had passed since American Security officials had told him to find a new home for his ailing $850,000 in loans, which still were in default.
Now, as an NBW director, Goldman renewed the request that had been effectively turned down the year before, asking for a loan of $1.2 million and offering the same collateral.
The loan officers put the best face on the loan proposal when it was presented on May 10, 1978. They told the executive committee members that the total collateral package offered by Goldman had a "conservative" value of $3.5 million, more than twice as much as the loan. But the directors were not told at the meeting that a few weeks before, a federal bank examiner had told NBW president Sanderson that if the loan were made, it would be formally criticized by the federal official.
At the executive committee meeting, there was no mention of the default at American Security, though at least two members of the committee knew that American Security officials had insisted the loan be moved elsewhere.
The bankers recognized that there was no apparent source of repayment for the loan aside from the sale of the property. Goldman had pledged that he would sell the Rockville drive-in within a year for an estimated $1.8 million, and the proceeds were to be used to pay off the loan. Consequently, the NBW loan was structured so it would become due in one year as an incentive for Goldman to sell the property or face default.
The executive committee, in voting unanimously to approve the loan on May 10, concluded: "On the basis of the strong collateral value . . . the adequacy of cash flow to service the [loan] and the prospect of reasonably imminent sale and settlements of the land, it was voted to approve the request," according to the minutes.
Not long thereafter, the City of Rockville amended its zoning classification on Goldman's drive-in property from commercial to residential use -- in one stroke reducing the value of the land by at least $500,000 and complicating its sale. Goldman sued, but was unsuccessful. More than a year past the deadline for payment, the land has not been sold.
K-B's business did turn around, however, and Goldman made every one of the $17,500 monthly interest payments.
At the same time, interest rates were climbing steadily, and Goldman's 11 percent rate was looking more and more like a favorable treatment. The law requires that a bank's insider loans to directors be made at essentially the same terms as those given to other customers.
As a result, the terms of the loan were changed, and he began to pay a "floating" interest rate -- 1 percent above NBW's prime rate in any given month. By early this year, Goldman's interest rate was up to 21 percent, making interest payments more than $21,000 a month on the balance of the loan, which was more than $1 million. But Goldman never missed a payment.
Marvin Goldman is still paying off the loan. But he got what he set out to get when he wrote the $5,000 check to Arnold Miller -- the salvation of his business.
Goldman plans to leave the board of the National Bank of Washington by the end of the year.