Butcher Brothers

In 1976, Jacob F. “Jake” Butcher and his younger brother Cecil Hilque “C. H. Jr.” Butcher, Jr., created Tennessee and Kentucky banking operations worth almost $1 billion. Nine years later these high-living bankers were incarcerated following federal convictions related to various fraudulent practices in their banking empire.

With the exception of one credit life company, the brothers' holdings were held separately. They did fund their purchases similarly: When they could, the Butcher brothers financed their bank acquisitions by getting the seller to finance the purchase. When that was not possible, they borrowed the money from a larger bank. At their peak, the two brothers owned or controlled almost 40 banks with approximately $3 billion in assets.

The Butchers' banking empire began to crumble January 19, 1983 with a cease-and-desist order from the Federal Deposit Insurance Corporation (FDIC) against Jake's United American Bank (UAB) of Knoxville, Tennessee. That order and another the following month accused the bank of issuing false and misleading information regarding the bank's condition, and directed it to correct its 1982 financial statements and the information the bank provided.

The bank was declared to be insolvent on February 14, sold to the state's largest bank holding company, and reopened the following day as First Tennessee Bank of Knoxville. The failure of UAB Knoxville was the nation's third-largest.

Several of C. H. Jr.'s banks faced runs by depositors after the February close and sale of UAB, and his finance company, Southern Industrial Banking Corporation, filed for bankruptcy in March. Following regulatory pressure to support his banks, April 1983 brought the sale of most of C. H. Jr.'s banking interests. In May, the FDIC arranged for the sale of five more of the Butcher Tennessee banks, creating the single biggest day of bank closings since the Depression. Between February 14 and August 26, 1983, nine banks owned by the Butcher family failed and 11 others in which they had interest or association were sold or merged.

Banks owned or controlled by the Butchers, or their friends, made loans to individuals and other banks which exceeded the amounts allowed by law, as well as by good business standards. In some cases, collateral offered was over-stated in value, in once case by 100 times the purchase price of the collateral. The Butchers and their associates also set up companies under different names, and took out loans from Tennessee and Kentucky banks without telling the bank officers that the same people were affiliated with these companies and would be getting the proceeds from more than one loan.

Butcher-owned or -managed banks were found to be making loans without adequate documentation, collateral, or consideration of the credit-worthiness of the borrower. Excessive loans were also made to the Butchers, bank directors, and their associates and friends. The banks then traded the loans back and forth among other banks controlled by Jake and C. H. Jr. to make it harder for bank examiners to discover the hidden accounting problems.

Along with the fact that loans were shuffled from one bank to another, state regulators had difficulty discovering irregularities and fraud for other reasons: The geographic area covered by these banks was included in two FDIC regions and three Federal Reserve Districts. Short staffing was another problem; in 1983 Kentucky only had 33 examiners responsible for 263 state-chartered banks, and Tennessee had 38 examiners for 281 state-chartered banks.

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