The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry
Inside Job: The Looting of America’s Savings and Loans
Bankers, Builders, Knaves and Thieves: The $300 Million Scam at ESM
Who Robbed America? A Citizen’s Guide to the S&L Scandal
The Daisy Chain: How Borrowed Billions Sank a Texas S&L
Overdrawn: The Bailout of American Savings
The S&L Debacle: Public Policy Lessons for Bank and Thrift Reevaluation
We have here, in round figures, 2,200 pages devoted to what is unarguably the greatest financial shambles (or, as the authors of these books and articles with justice variously prefer, “robbery,” “debacle,” “looting,” “scam,” “crisis,” “scandal”) in American history, and we can be certain that at least that number of pages again is either in the bookstores or about to be. Surely the degree of coverage is justified by the scale of the calamity, for that is what it is. So far, Washington is guessing it will have to make good on roughly $150 billion, consisting of insured deposits that have gone up the chimney and of out-of-pocket costs and subsidies associated with a bailout. But that is just the beginning. The ultimate cost to the taxpayer over the thirty years it is likely to take to finance the bailout with government bonds is currently estimated at $500 billion.
To put that sum in perspective for the average reader may be useful, since most nonfinancial types have but a passing sense of the value of money over time, which is the bedrock of capitalism: Let us suppose that a new homeowner, someone about the age of those who, if the bailout financing proceeds as planned, will bear the brunt through their working lifetimes, takes out a thirty-year mortgage of $75,000 on a new house. The mortgage is at an interest rate of 10 percent per year and interest and principal are repaid in 360 equal monthly payments. According to my Thorndike Encyclopedia of Financial Tables, the monthly payments would be $658.00. These would add up to $236,944 over the term of the mortgage, or roughly three times the original principal amount of the loan. This is not only how estimated thrift losses of $150 billion triple, but it is also a fairly effective illustration of how redistribution of income, that familiar bogey of the “wealth creationists,” works in a polity that prefers to insure the wealth of its best-favored citizens but not the health of its least.
The $500 billion may be only the beginning. On page 31 I reproduce as Table 1 an estimate by The Wall Street Journal‘s San Francisco bureau chief, Christian Hill, which seems eminently reasonable in its assumptions and calculations, and which puts the ultimate cost, now projected over forty years, at $1,400 billion, or $1.4 trillion, a sum which exceeds the present national debt.1
Such is the fruit of a decade of commercial lawlessness unmatched anywhere in our history. Nothing in the Gilded Era of Gould and Fisk, or in the 1920s of Insull and Ivar Krueger, or any of the celebrated “bubbles,” comes close in scale and breadth of effect. The difference, of course, is that the defalcations of the past decade were accomplished with the full faith and complicity of government at every level, elected and appointed. It should also be recognized at the outset, and I shall return to this point, that now that the swindlers and pirates have been driven from the field, or fled to other jurisdictions with their/our treasure, and Uncle Sam is, so to speak, going it alone in putting things to rights, his performance has to date been nothing less than abysmal. To use a favorite word of Martin Mayer’s, Washington’s bailout policies have “exponentiated” the ultimate cost to taxpayers.
In a way, then, since the bailout promises to cost more than the folly that made it necessary, the books under review are being published prematurely. It is still too early to get the picture whole, in a way that will raise and broaden public awareness of very large, unpleasant, and unignorable questions about what kind of a country we have turned out to be and what we may expect, politically no less than financially, from the future.
Nevertheless, ours is a culture obsessed with topicality and with personality, and the S&L crisis is rich in both. A great many people conspired—some intentionally, a few not—over at least two decades to bring down the nation’s system of savings and loan institutions, and a number of them were amazing characters. The mosaic of disaster was complex in the extreme, mixing simple thuggery with subtle feats of financial and legal prestidigitation. This was a story in which good intentions knowingly served the cause of fraud, in which the line between the accidental and the arranged became hopelessly blurred, and it was impossible to distinguish between the good and the bad.
It is also an extremely difficult story to tell in a fashion that would provoke the kind of outrage it deserves. Very probably, it needs a novelist to get it right in its larger dimensions—The Economist headed its review of Martin Mayer’s book “Tom Wolfe, where are you?” showing a nice appreciation of the subject if a rather obvious nomination of writer. I have also been told, however, by a New York publisher that “nobody wants a novel about S&Ls.” Maybe so—but I have a friend whose family thrift is entangled in the coils of the federal bailout process, an affair of policies and regulatory practices so rapidly shifting that only their unpredictability is predictable, and his travails remind me of nothing so much as those of Miss Flite in the High Court of Chancery in Bleak House.
The problem is that the main lines of the sad story are woven from virtually innumerable threads. Both chronicler and reader risk at every turn being marooned in an acronymic quagmire: FICO (Financing Corporation), FCA (Financial Corporation of America), FDIC (Federal Deposit Insurance Corporation), FSLIC (Federal Savings and Loan Insurance Corporation), FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act), FHLBB (Federal Home Loan Bank Board, generally known as simply the “Bank Board”), FNMA (Federal National Mortgage Association, or “Fannie Mae”), FHMLC (Federal Home Loan Mortgage Corporation, or “Freddie Mac”), and GNMA (Government National Mortgage Association, or “Ginnie Mae”). This is not a challenge most readers will find inviting. Indeed, I suspect that the business of simply chopping through this nomenclatural thicket so exhausted the bureaucrats and legislators charged with dealing with the collapse that they had scant energy left with which to confront the problem itself.
Still, it is a story with which every citizen should become familiar. Together with collateral financial crises looming just over the horizon in the banking and insurance industries, not to mention the vast swamp of federal guarantees located just off the national balance sheet (as certified according to Generally Accepted Accounting Principles [GAAP], a term so central to the affair that it might as well be a character in a play), the S&L crisis promises to be the greatest event, considered collectively, in the lifetime of most Americans now living. Like World War II, it has the potential to alter the character and behavior of the nation for a decade and more, possibly for the better, possibly not. Like the Great Crash and the Depression, it at least seems likely to restore to the national memory some respect for prudence in economic affairs. But the means by which we pay the S&L and related bills or, rather, the political and social consequences of paying bills of this size may prove unlike anything in our history. Beginning—as I believe—with Reagan’s early dismissal of his “Kitchen Cabinet,” a group of older men with powerful memories of the Crash and the Depression, the past decade gleefully and actively sought to prove Santayana wrong; looking at the carnage today, I’m bound to think that his famous dictum that those who cannot remember the past are condemned to repeat it has been vindicated.
The story begins in the mid-1960s, during the first of Wall Street’s two great postwar rampages, when the nation’s thrift institutions began to feel competitive pressure from other banking institutions and a variety of investors willing and able to pay higher rates for the use of people’s free capital, or savings. Usually, such a challenge would be met by the besieged institution’s raising its own rate on deposits, and then commensurately increasing the rate it charges to others for the use of those deposits in the form of loans—including adjustments on loans already made and outstanding.
Until the 1960s, mind you, this problem had not arisen. For some twenty years, the nation’s thrift institutions had commanded a large pool of low-cost, inert money—“savings” in the ancient sense of the word—which it had employed to lend, through mortgages, to the purchasers of homes. It was an easy, hometown business, one in which, as a thrift executive observed to Martin Mayer, a fellow was not supposed to get rich. At its heart, however, lurked a fatal asymmetry now making itself felt: the thrift industry was committing its deposits at politically ordained low-interest rates for long periods of time, usually twenty to twenty-five years; but the availability of those deposits to any given institution was measured at most in months.
The politics of the thrifts’ position were as unfavorable as the arithmetic. The usual adjustments were, in the case of the thrifts, simply not possible. The right of citizens to cheap housing finance, even at rates bearing no realistic relationship to the cost to the providers of lendable capital, might as well have been a part of the Bill of Rights, so adamant was Congress on the subject, and—not for the first time—the president and his cabinet skulked in the shadow cast by Capitol Hill and said nothing. A rise in new lending rates was therefore out of the question, an adjustment in the rates on existing residential mortgages tantamount to blasphemy.
A modest, ineffectual compromise was struck: the rate thrift institutions could pay on deposits was “capped,” but at a level a few points above what commercial banks—then the thrifts’ principal competition for the nation’s idle money—were permitted to pay. During the next few years, the thrifts’ compass was somewhat enlarged: in 1967, nonfinancial companies were permitted to enter the thrift game through acquisition; in 1968, the conceptual structure of deposit rates was changed, and drastically. Heretofore, depositors in thrift institutions had, technically, purchased shares, with their promised returns taking the form of dividends, that is, payable as promised, but only if earned. (Hence the phrase “Savings and Loans” Associations.) Now thrifts could contract to pay predetermined rates regardless of profits; the supposition was that any such projected outlays would be easily covered by what the money would earn on loan—hadn’t it always?—but the commitment was now essentially legal rather than moral. Another step had been taken toward that point in American life where the writ replaced the handshake as the basis for financial understandings. Another hefty chunk had also been chiseled out of that long-weathered bulwark called “Prudence,” historically the last redoubt of sound banking.
Now ensued the gloomy 1970s, ending in the Carter “malaise,” and the thrifts were beginning to struggle. Competition for the nation’s scarce idle capital intensified; new institutions appeared, took root, and bled off deposits, most notably money-market funds organized by Wall Street, which made small-dollar investments in Treasury securities (heretofore the province of Wall Street’s big boys) available through pooling to the average saver, and offered other attractions, most particularly the right of withdrawal without penalty. The effect on the S&Ls was catastrophic. “In 1972,” according to Inside Job, “the nation’s savings and loans had a combined worth of $16.7 billion. By 1980 that figure had plummeted to a negative net worth of $175 billion.”
The table appears in "S&L Symposium," Stanford Law and Policy Review, Vol. 2, No. 1 (Spring 1990), p. 23.↩
The table appears in “S&L Symposium,” Stanford Law and Policy Review, Vol. 2, No. 1 (Spring 1990), p. 23.↩