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The Greatest American Shambles

The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry

by Martin Mayer
Scribner’s, 354 pp., $22.50

Inside Job: The Looting of America’s Savings and Loans

by Stephen Pizzo, by Mary Fricker, by Paul Muolo
McGraw-Hill, 443 pp., $19.95

Bankers, Builders, Knaves and Thieves: The $300 Million Scam at ESM

by Donald L. Maggin
Contemporary Books, 308 pp., $21.95

Who Robbed America? A Citizen’s Guide to the S&L Scandal

by Michael Waldman, Introduction by Ralph Nader
Random House, 250 pp., $10.95 (paper)

The Daisy Chain: How Borrowed Billions Sank a Texas S&L

by James O’Shea
Pocket Books, 328 pp., $19.95

Overdrawn: The Bailout of American Savings

by Michael A. Robinson
Dutton, 303 pp., $19.95

The S&L Debacle: Public Policy Lessons for Bank and Thrift Reevaluation

by Lawrence J. White
Oxford University Press, 224 pp., $22.95

1.

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

TABLE 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.

2.

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.”

There is an irony in the latter statistic. As has been pointed out by James Bennett in The Washington Monthly (September 1990), even as the S&Ls were bleeding, they continued to write fixedrate, low-rate mortgages to people who were busily moving their passbook savings into higher-yielding, shorter-term, money-market funds. Some feel that this “intergenerational opportunism” should be taken into account when it is reckoned who should bear what percentage of the cost of cleaning up the present fiasco.

Equally significantly, the way the nation saved had changed drastically in the course of the 1960s. People became more distant from their savings, as more and more working Americans became subject to benefit plans into which huge sums of “their” money were transferred without their ever having touched or seen it or had it recorded in a passbook. I make this point because it is my belief that financial chicanery is possible in inverse proportion to the visceral connection existing between a person and his or her savings.

Beginning in 1980, with the decision to squeeze inflation out of the economy by ratcheting the general level of interest rates to heights never before experienced by the American economy, the thrifts were put in peril of their very existence. They held vast portfolios of mortgages funded with deposits which it now took the interest-rate equivalent of an arm and a leg to keep from flowing to other money-market funds and suitors. What to do? All the commonsensical solutions—to rewrite existing mortgages, for instance, to reflect the thrifts’ drastically escalated cost of funds—were impossible because of one political pressure or another.

On the other hand, the thrifts were not about to roll over. Every congressional district was home to one or more thrift institution. The first American savings institution, after all, dated back to 1831, and the industry had grown side by side with the nation. The S&L lobby was among the most effective and influential in Washington. Repricing loans to reflect market realities was out of the question, although the industry fought with some success for an adjustable rate for new mortgages, and therefore other solutions would have to be found.

And found they were, in two pieces of legislation whose euphemism-swollen titles should forever ring in the ears of taxpayers: The Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn–St. Germain Depository Institutions Act of 1982. Both are complex pieces of legislation, but their effects can be summed up by saying that, beginning in 1980, the thrift industry was turned loose to its own devices to find its own way out of its difficulties by taking in more high-priced deposits and lending them out at better than the historically high rates then prevailing. As an article of financial wisdom, this ranks with the notion, held by some, that it is possible to borrow one’s way out of debt.

Foremost among the privileges obtained by the thrift industry in 1980 was an increase in the amount of federal, that is, taxpayer insurance backing each deposit account. The upper limit was raised from $40,000 to $100,000 plus accrued interest per account—which is not the same as “per depositor.” At the time, the average thrift passbook (or equivalent) savings account amounted to $6,000.

Garn–St. Germain, named after a senator whose mental stability was often in question and a congressman whose cupidity never was, threw open the chicken-coop doors once and for all. It was, as Martin Mayer puts it, “the financial equivalent of a nuclear attack on the deposit insurance fund.” Signing it, President Reagan averred, “I think we hit a home run.” A month later, addressing the US League, the S&L trade and lobbying organization, the President declared Garn–St.Germain to be the “Emancipation Proclamation for America’s savings institutions.” The pens he handed around as he signed Garn–St. Germain into law would, metaphorically speaking, write the largest check in history, drawn on the collective bank account of the American taxpayer.

Now men who made much of quoting Adam Smith, who even wore neckties embroidered with the profile of the immortal Scot, felt the hardly invisible hand of government smite them companionably and encouragingly on their shoulder, urging them to go for it.

And they did so. The foxes—the crooks, fools, swindlers, and charlatans—took over the chicken house. Now began the era of brokered deposits, in which the big houses like Merrill Lynch and Paine Webber, for useful commissions, electronically broke down sums placed with them into $100,000 pieces and sent each piece zapping off along the money wire searching for the best interest rate being offered.

The irony was that now an institution chartered on Thursday, having no history and only negligible capital, could bid competitively for funds on Friday against institutions many times its size, with many years of history and community standing. These no longer mattered. Thanks to federal deposit insurance, all institutions were at a stroke rendered alike; the risks were the same; a deposit with an S&L engaged in the rankest speculations ran no more risk of ultimate loss than one which made only the most prudent, well-secured loans. Much of this brokered money may have been hot. The international drug trade was by 1982 counting its profits in the tens of billions, but it passed as respectably on the streets of the global electronic village as the stodgiest Yankee hoard.

A general air of unreality about money took hold, as it does when booms are rising toward their eventual heights. Theoretically, since the ultimate guarantor of all deposits was the same, the price paid for deposits should have been more or less the same around the country. But this was not so. The important thing was to get your hands on money, whatever it cost, so as to be able to play at the grownups’ table, to be known as “a player,” the loftiest sobriquet the age could bestow. Uncle Sam had put the cream out for skimming. Consider the following passage from James O’Shea’s Daisy Chain:

If a customer wanted a loan to buy a $100,000 house, an S&L specializing in home loans typically demanded a $10,000 to $20,000 down payment before the thrift would make a mortgage loan on the remaining $80,000 to $90,000…. If a developer, by contrast, walked into Vernon seeking a loan to build a $10-million office tower, he’d usually ask for a $12-million loan…. First the developer needed $10 million to acquire the land and the sticks and bricks…[then] $1.3 million to cover a year’s worth of interest at 13 percent…. Next Vernon allowed the developer to borrow his 2.5 to 4 percent development fee…. Then add the 4.5 points, or fees, that Vernon Savings gets for making the loan….

No wonder developers hastened to form or acquire federally insured thrifts, as Garn–St. Germain now permitted them to do, since they could then lend to themselves and pocket several sets of upfront fees. As O’Shea observes:

Why borrow money from a commercial bank at 2 or 3 percent over prime, which was then 15 percent? A developer who wanted to build a twelve-story hotel in Coconut Grove could simply have [his] S&L set up a development subsidiary and use [federally] insured deposits to fund the venture.

Emboldened and empowered, mostly under new management, the thrifts plunged into every game on offer, every form of three-card monte Wall Street could devise, including Michael Milken’s junk-bond manipulations. Drexel Burnham would broker deposits into selected thrifts, all of them now under criminal investigation, which would then buy Drexel’s junk-bond offerings, often with special incentives thrown in for thrift executives.

And then there were the mortgage-backed securities gambits devised and put over by the new crop of wizards at Salomon Brothers and other firms.2 Here is Martin Mayer on that subject:

This game was played by using brokered deposits to buy marketable instruments (usually mortgage-backed securities) that could be pledged [by the S&L] against a loan to the S&L to buy more securities with the same money, thus doubling the bet. The Wall Street houses made a commission or a markup on each and every one of these transactions.

Thus it was, as Mayer goes on to relate, that one S&L ran up losses totalling $417 million despite never having held deposits exceeding $277 million!

There was, quite simply, no limit to speculative effrontery, to disregard of law and public opinion, to contempt for history and economic truth. And why should there have been, when the notion of “risk,” that vexing side of market capitalism, had been eliminated.

3.

By 1986, many thrift institutions were insolvent and the federal insurance funds bankrupt in fact if not in decree. Indeed, one of the great mysteries which none of the books under consideration satisfactorily explains is the failure to keep the insurance fund in phase with the growth of the thrifts. Both the premiums charged for federal insurance and the capital requirements for being granted that insurance were wholly inadequate relics of more financially circumspect times. As Michael Robinson points out in Overdrawn, a judicious use of “accepted” thrift accounting principles enabled a thrift to raise $1 million of capital on $25,000 of deposits, a cushion of a mere 2.5 percent. Robinson then puts the matter pithily: “In other words, for the cost of a starter home in the San Francisco Bay Area, an S&L executive could buy an entire subdivision.” The metaphor is continued nicely in Mayer’s account of the rise and collapse of American Diversified Savings Bank of Lodi, California, which was taken over in 1983 by a former Air India pilot with no banking experience, and which collapsed in 1986:

A company with $11 million in assets lost $800 million…. With perhaps $500,000 in equity, it destroyed $800 million of insured deposits, a kill ration of 1,600 to 1…. This anecdote is tantamount to a news report that a drunken motorist has wiped out the entire city of Pittsburgh.

And so the problem metastasized but no one chose to notice. Why? Well, for one thing, this was still the blazing platinum high noon of the Reagan era. Donald Trump was a national hero and incipient best-selling author, and harsh financial actuality could not be permitted to interrupt the fantasies being spun from the White House. For those charged with dealing with the industry, I suspect that the sheer size and complexity of the deals that were made, let alone the unrelenting, multifaceted lobbying pressure (Jim Wright, “the Keating Five,” Tony Coelho), made it impossible to know where to turn or where to start. There must have been times, as the Eighties wore on, that the embattled folks at the Bank Board, the Federal agency responsible for overseeing the S&Ls, envied Custer his easy lot. Not to mention that there were by now simply too few bodies left to defend the fort. It is often overlooked that the essence of Reaganite deregulation consisted not merely in the elimination of notionally burdensome regulation, but in the wholesale elimination of regulators charged with the enforcement of what codes still remained in force. By 1986, the last year in which some semblance of rationality and control might have been restored to the industry, the regulatory hiring freeze laid down by David Stockman in 1981 had done its work.

But even double or triple the number of examiners and other field personnel might not have availed. Too many well-paid mercenaries were in the field. Famous accounting firms fiddled and fudged the books; great and respected law firms devised legal strategies which mocked the spirit if not the letter of oversight; professorial propagandists mantled in the robes of the great business schools rationalized the chicanery as having contributed to the flow of investment; the press and television by and large slept—the unfolding crisis was taking place in towns and banks, many of them in sunbelt states, of too little interest to Washington or New York and it was too complicated to engage the attention, much less the passion, of the more influential newsrooms.3

All this high-paid thinking produced magical new conceptions which turned losses into profits, liabilities into assets, and created net worth out of thin air, while neglect by the press certified the moral vacuum. The size of the disaster mounted. By 1988, the crisis was so grave that insiders realized that whoever won the election would have to face the issue after inauguration and the taxpayers would inescapably suffer. Accordingly, the issue was left out of the election campaign and a bipartisan agreement was reached not to raise the matter.

Following the election, a hasty, half-hearted “bailout” scheme was hatched—to which I shall return. By then, eight years after Garn–St. Germain, most of the original predators had quit or been driven from the scarred and smoking landscape. The “rescue” of the thrifts would enrich a second generation of opportunists, well known already from other financial escapades of the Roaring Eighties, men like Ronald Perelman, Robert Bass, and former Treasury Secretary William E. Simon, in many ways the ideological godfather of the Reagan Revolution. Shepherded by the same slick lawyers, these people have struck deals with embattled federal banking authorities rendered impoverished by events and foolish and secretive by desperation and exhaustion. Thus in 1988, in what is known as the “Southwest Plan” since it concerned a group of beleaguered Texas thrifts, some of America’s richest men were “inveigled” into coming to the rescue of several troubled thrifts. Here is Mayer’s description of how it worked for Ronald Perelman, a take-over artist until recently often eulogized as America’s smartest and richest businessman:

The archetype was the purchase of a group that included what had been Vernon Savings and First Gibraltar. The buyer was Ronald Perelman, proprietor of Revlon and protégé of Michael Milken. Perelman got $12.2 billion list price in assets supported by a $5 billion FSLIC assistance package. It said in the paper that he put $315 million of his own money into the deal, but later we learned that he borrowed all but $65 million of it. In return he got tax deductions valued at $897.3 million. For calendar 1989, Perelman’s new First Gibraltar reported payments from the government of $461 million and net profits to Perelman (all tax-free) of $129 million. Wow!

Even more extraordinary in its way was the achievement of the appropriately named James M. Fail, an indicted securities swindler, who—as brilliantly and exhaustively reported by Jeffrey Gerth of The New York Times—contrived to acquire nearly $3 billion of Texas S&L assets with only $1,000 of his own money in the deal. Fail’s success was largely attributable to the intervention on his behalf by a former aide to President Bush, J. Robert Thompson. Indeed, as O’Shea is at pains to point out, the fattest pigs at the bailout trough were all members of George Bush’s “Team 100,” consisting of 249 people who had contributed a minimum of $100,000 apiece to the 1988 campaign.

Then there is the matter of the indisputable involvement of Neil Bush, the President’s son, in the Silverado insolvency and scandal, a caper reminiscent of Jay Gould’s attempt to entangle President Grant in the Gold Corner of 1869. Nor should it be overlooked, in the dust storm of distracting notoriety which the “Keating Five” affair has thrown up, that in 1985, at a crucial juncture in the invasion of the thrift industry by Charles Keating, already by then an alleged swindler who would be jailed for securities fraud, he was furnished a letter of unqualified endorsement by Alan Greenspan, a former chairman of the Council of Economic Advisers who was then a New York business consultant and is today chairman of the Federal Reserve Board. For the letter Greenspan was paid $40,000, a sum which presumably represents the amount to which thirty pieces of silver would have grown at market rates of interest over the roughly 1,950 years since they were first paid out.

Greenspan was of course not the only great New York name to put his shoulder to Keating’s wheel. In his recent testimony to the Senate Ethics Committee, Edwin J. Gray, the former head of the Bank Board, said that Arthur Liman, the lawyer for Milken and for Charles Keating, “was in and threatening to sue the Bank Board” on behalf of Keating.

4.

Which brings us to the present, and the books under consideration. It is a pity that they should all arrive more or less simultaneously. Ours is an age given to saturation reporting which tends to wear out the public’s attention and exhaust its capacity for outrage. The concerned citizen can be hammered into a state of relative apathy by a barrage of three-hundred-page books as readily as by a deluge of television interviews saying much the same thing.

Then there is the subject itself. The books and articles cited are well-written, and reflect tireless, often inspired, research and reporting. They share an admirable grasp of the subject, yet must perforce make many of the same points. There is a cast of roughly thirty principal characters, and an inventory of roughly thirty basic anecdotes or parables, which everyone writing about the S&Ls is obliged to recount: like Texas S&L swindler Don Dixon’s “gastronomique fantastique,” a no-expense-spared (to the American taxpayer, ultimately) tour of the three-star restaurants of France supervised by Philippe Junot, a hired smoothie once married to Princess Caroline of Monaco.

Which, then, to read? For the story, if grasped, is a virtual primer of what has gone wrong with America.

Recent articles by L.J. Davis, James Glassman, and, especially, Robert Sherrill’s long piece in The Nation give an excellent summary of the collapse from its origins to the present.4 It should be noted, however, that lengthy articles by Thomas Moore (US News and World Report, January 23, 1989) and Maggie Mahar (Barron’s, September 11, 1989) had also covered much of the same ground, and a year earlier. The “Citizen’s Guide” by Michael Waldman takes the tale several steps further, and has the additional advantage of dealing cogently with two of the more outrageous episodes, Keating’s involvement in Lincoln Savings and Neil Bush’s in Silverado, into separate chapters.

If one wishes to dig deeply into the matter, in a financially sophisticated and morally insightful way, if one wants to read just one book on the subject, but that book carefully, I recommend unhesitatingly that Martin Mayer’s be the one. Like the Callas–Gobbi–de Sabata recording of Tosca, this is the version to own. Mayer has been on this story a long time. He is so familiar with it, he knows what to leave out, and if the going is sometimes slow, as it must be, Mayer never founders. Moreover, he has convictions, as any book on this subject must contain, because ultimately the S&L affair is not about deposit insurance or tax policy, about mechanics and process, even about wisdom and folly, but about right and wrong. In 1982, when the Garn–St. Germain legislation was passed, Mayer wrote an op-ed piece in The New York Times (included as an appendix) which predicted exactly what would happen. His book is lively and engaging; he never draws back from “taking a view,” as the English say, whether on issues or personalities. He can be affectionately salty, as in his characterization of Richard Pratt, former head of the Bank Board:

Everybody likes Dick Pratt; and I like Dick Pratt, too. But if you had to pick one individual to blame for what happened to the S&Ls and to some hundreds of billions of dollars of taxpayer money, Dick would get the honor without even campaigning.

Pratt, one might add, made that smooth and profitable transition characteristic of the age; having planted the bomb while chief of the Bank Board, he resigned and joined Merrill Lynch to oversee the growth of its multibillion dollar deposit brokerage operations.

Mayer sees his subject whole: he has plenty to say about the failings of public agencies, which propagandists of the stripe of The Wall Street Journal‘s editorialists would have us believe are solely responsible for the calamity, but he reserves his most cutting contempt for the handsomely remunerated corruptions of the private, “market-based” economy: the venality and moral decadence of accountants, appraisers, attorneys, financiers, economists, and apologists. Only the best names need have applied. Here, late in the day, as the shadows lengthened, is how the Bankers Trust Company, which likes to style itself as about the classiest bank around, reacted to one crisis:

Now, to protect the “liquidity of the Euromarkets,” and the identity of (Colombian?) purchasers [of $350 million of Eurodollar notes sold overseas by Linfin, a Keating entity], Bankers Trust at a stroke destroyed the legal status of a $750 billion market…. With luck, no one would notice that Bankers Trust had just demolished the legal status of an investment held by pension funds, insurance companies, banks, and S&Ls all across the country. And Bankers and Merrill Lynch would get off the hook. The stink of Charlie Keating and Lincoln Savings would attach to senators and regulators but not to them. They could mingle with the crowd at the execution, excoriating the scoundrels who had wasted hundreds of billions of dollars of public money in the S&L outrage.

Mayer’s moral and intellectual disgust at this state of affairs, an anger informed by a sense of betrayal because Mayer is an avowed fan of capitalism, comes through to the reader, and gives his book a personal quality which I found attractive. The man has had his illusions badly bruised, and this gives his tale a poignancy that polemical journalism such as Michael Waldman’s Who Robbed America? (with an introduction by Ralph Nader) never quite attains.

Without specific sinners to give it life and personality, sin itself would be tiresome. For those who prefer the juicy stuff tinged with more personalized sensationalism than Mayer delivers, Inside Job will be the ticket. Where Mayer began his study with the big picture in mind, the authors of Inside Job began with a pebble of a local story, the looting of an S&L in Santa Rosa, California, and, through first-class investigative work, chased its ripples, which ultimately encompassed the entire industry.

The thesis of Inside Job is that the S&L collapse is a crime story as much as it is anything else. The degree to which the S&L crisis was precipitated by fraud and criminality remains open to debate. William Seidman, the federal official currently in charge of the crisis, has asserted that, in over 60 percent of failed thrifts seized by the government, fraud has been discovered. It may be a matter of definition; in considering the appraisals used to determine the realty values that collateralized the loans that sunk the thrifts, for example, where does one draw the line between over-optimism and outright fraud? Nevertheless, I share—Martin Mayer does not—the conviction of the authors of Inside Job that the system came to be awash with criminal money as the decade ran its course, and that many a defunct or looted institution might more aptly have been called “Wiseguy Savings and Loan.”

The mob was also using S&Ls to launder money. Thrifts’ access to brokered deposits, as well as their new ability to make direct investments in real estate projects and partnerships, made deregulated thrifts a natural vehicle for laundering large sums of money.

Indeed, as Stephen Pizzo and his fellow authors of Inside Job report in their dense and engrossing chronicle of hit-men, arms deals, casino tie-ins, and the like, they often encountered the fingerprints of the mob at the thrifts they investigated. “Did the leadership of these families have a sit-down one day and decide to loot S&Ls?” they ask. We may never know, but it is known that notorious mob money-broker Mario Renda “actually followed the progress of the [Garn–St. Germain] bill through Congress, making notes in his daily desk diary.” Other types of dark money may also have found the S&Ls useful: funds, from whatever source, routed to finance purported off-the-books CIA entanglements of the type alleged by Pete Brewton of the Houston Post and so far generally ignored by the networks and the major newspapers.5

Pizzo and his colleagues concentrate on a question that should have been vigorously addressed at the very outset, when the dimensions of the crisis were becoming clear, namely, Where did all this money come from? Had the matter been explored at the time, I believe the shape of the bailout would have been manifestly different and the ultimate costs to the taxpayer dramatically reduced. Politics is politics, however. The revelation that the taxpayer had been placed in the position of guarantor of last resort on deposits derived from drug trafficking would in the normal course of things be sufficient to bring down any government.

The books by Maggin, O’Shea, and Robinson mainly deal with specific episodes and villains. Maggin takes on the 1985 scandal which began at ESM, an obscure securities firm in Fort Lauderdale, Florida, which ultimately collapsed the Ohio and Maryland thrift systems, and resulted in the conviction of Marvin Warner, Carter’s ambassador to Switzerland. O’Shea chronicles the rise and fall of Don Dixon, of Vernon (Texas) Savings and Loan, one of the truly flamboyant characters in this dreadful saga. Dixon, who served prostitutes to clients “as if they were business cards” is a character right out of Sinclair Lewis, typical of a part of the country where swindlers read the Bible before setting out on their daily rounds. As one of Dixon’s associates put it, “Money had lost all of its meaning. It was just a way of keeping score. [Dixon] wanted to be the next Donald Trump.” O’Shea provides a lively and considered account of Don Dixon’s efforts to do so.

Charles Knapp, of Financial Corporation of America—whose collapse has cost the taxpayer approximately $2 billion—was also inspired by a model, in his case “Cash McCall,” the eponymous protagonist of a deservedly forgotten 1955 novel by Cameron Hawley. Just as Dixon exemplified Texas run amok, so Knapp personified popular perceptions of Southern California, fascinated as he was by movie stars and shiny cars. Robinson gives a marvelously fluent account of the FCA collapse, perhaps the most “complete,” the most instructive, of any of the higher visibility scandals.

Finally, I regret to say that I found Lawrence White’s book disappointing. White was an official at the Bank Board during some of its most trying times, and—according to Mayer—conducted himself as well as was possible under the circumstances. It would have been interesting had he tried to recall how and why things went the way they did. Instead, he has chosen to produce a book for the shelves of the business school library, a ponderous and somewhat awkwardly written study, which never uses three words when it can use twenty, and mainly addresses the professional. It concludes with a sixteen-point review and proposal, most of which seems an extended gloss on the obvious, to wit: “New legislation will likely be required to allocate more funds to the cleanup. Sooner is better than later…delay is costly….” and so on: value-neutral academic pap applied to a crisis whose costs are as much moral as they are financial.

So where are we now in dealing with the S&L scandal? Not very far, I regret to say, as is suggested by the diagram from Waldman’s book reproduced on the next page. On its face, it is an organization chart of the relationships among the various federal agencies handling the mess. In fact, it is a road map for disaster, completely unworkable, and a virtual atlas of the bureaucratic psyche.

A ROAD MAP FOR DISASTER

As for reforms and deeper changes in the banking system, obviously, something has to be done about deposit insurance. A lowering of limits, to around what the average saver considers his “mattress money” or nest egg, say $10,000, is surely indicated, as well as a restriction on the number of accounts insured per depositor: to one. Depository institutions should be limited in the use or investment of insured deposits. The government should never be in the business of underwriting speculation, and one would think that all those people who like to extol the virtues of free-market capitalism would insist on just exactly this.

In dealing with the collapsed S&Ls themselves, we might begin with the advice of Robert Adelizzi of Home Federal Savings of San Diego:

Regulators must proceed on the understanding that their proper objective is to remove excess capacity [to loan money], not perpetuate it…. The best way to resolve these cases, then, is to split the institutions apart and dispose of assets [loans and investments, good and bad] and liabilities [deposits] separately.

Mr. Adelizzi’s ideas make sense. I have often wondered, for example, if some of the properties now in federal hands, those deserted malls and half-finished condominiums, for example, might not be put to economical use by the government itself. Could they be made available, with grants that would amount to a fraction of what Robert Bass and Ronald Perelman and their allies have extracted, for homesteading by families anxious to flee the ghettos? Or used as additional correctional facilities? I suspect that a little imagination might go a long way.

Two policies that most assuredly must not be pursued are (a) the current practice of working through the Resolution Trust Corporation, the agency set up to rationalize or dispose of bad S&L assets and (b) a deregulation of commercial banking.

The way the bailout works is that the RTC purchases assets, many dubious, from failed thrifts; the proceeds then are used to reconstitute deposits in the thrifts. It is a silly and expensive, but thoroughly bureaucrat-satisfying, way to go about the bailout. Martin Mayer has put it succinctly:

It is probably true that everything in the RTC inventory—paper and property—is worth less today than it was six months ago. And a lot of it could have been sold six months ago…. Government agencies never feel any urge to sell. They don’t pay the cost of carrying what they haven’t sold—that is part of the interest the Treasury pays on the national debt. Congress will second-guess every sale, denouncing the agency for cheating the taxpayer if the buyer winds up making money on the deal…. And of course every time an agency actually does sell something, it loses the lovely power to award management contracts, consultant’s fees and legal business…. The assets the RTC owns can be managed, packaged and sold effectively only by people who will have their own money in the game…. Investors and speculators, not taxpayers, should bear the risks of the bailout; taxpayers have been at risk too much and too long in this business.6

Then there is the question whether we need thrifts at all. A society such as our present one requires prudently managed, flexible financial institutions that are responsive to the needs for credit that drive much of the economy, not responsive to the needs of a subgroup lobby. Whatever we choose to call them seems quite beside the point, although each format will understandably fight for its continued existence.

Questions of technique and method must, however, in the end yield pride of place to the larger issues implicit in this whole awful affair. What does it mean, after all—apart from the hundreds of billions of dollars to be expended in the “cleanup,” or are those hundreds of billions the sum total of its meaning?

The Age of Reagan (and its present dismal continuance) saw the wholesale and intentional disenfranchisement of memory as a governing principle in our institutional life. Laws of finance that had a hundred times over in history proven their inexorable ruthlessness were proclaimed to have been repealed. The New Radicalism’s propagandists, the editorial page of The Wall Street Journal being the most prominent, invited us to regard manipulation of the rankest and most obvious sort, Milken’s being the most glittering and the S&L crisis the most costly, as precious examples of the untrammeled free market’s efficiency. Efficiency indeed—but that of the skilled burglar and cutpurse.

From the inaugural, Reagan administration officials engaged in a cynical deception—the nation would do well to reread David Stockman’s disclosures—about the nation’s finances. The numbers they furnished the public and the press, the one as illiterate in matters of macrofinance as the other, were no more and no less than the projections typically used to get a swindle rolling. Intellectually, the White House supply-siders and their allies in think tanks and on Wall Street were floating a blownup version of a smalltime grift, the sort of con which Huck Finn’s Dauphin and Duke would have found congenial, although now raised to the Nth power. It would not have worked except by removing from the calculus of risk and reward the former, which is what deposit insurance and the 1981 tax bill accomplished.

When monetary risk is taken away, other types of risk also soon vanish. Ethics and morals take on a calculable cost and are thus rendered utterly relative. Some say this tendency to lawlessness is innate to the ethos of capitalism. Others blame it on lax regulation, on an absence of law. This is, paradoxically, the line taken by that arch-foe of all financial and market regulation, the editorial page of The Wall Street Journal, which now blames the crisis on the Congress, for putting too much temptation in the path of chaps who simply couldn’t help themselves.

On the basis of thirty years’ first-hand observation, I can testify that most people on Wall Street are no brighter than the average. But every now and then there comes a time when it seems that any idiot can make a million, when any deal can get done, any transaction can find financing. The Fat Years of 1982–1989 were such a time and yet they were also wholly different from prior booms in that the euphoria was this time underwritten with the hard cash of the public purse—which made the takings that much fatter and certain. Inevitably, money eventually itself lost a certain quantum of economic reality, it became symbolic of virtu instead of purchasing power.

The S&L crisis is perhaps the ultimate demonstration of the greater fool theory. An expensive demonstration, too—in that we have been taught a horribly expensive lesson with no end in sight of the tuition. But the fool always pays. In Liar’s Poker, Michael Lewis tells of being counseled that there is always a fool in the market who will be taken advantage of. When that fool is us, Reader, and we are in the market unawares, put there by the men to whom we trust our money, and our good faith, what is ultimately at risk is not mere money, but the polity itself.

The S&L crisis teaches the real cost of a politics that aggressively advocates, as Reaganism did and Bushism would like to do, that the true enemies of the people are the representatives that the people elect, in effect a dismissal of the idea of the “common weal.” Offered to replace government is the concept of an entrepreneurial, market-based individualism which will get it right, but which in fact has absolutely no interest in the functions that government performs that no private person or private group can or will.

In uncertain times, such thinking is appealing, but its underlying motives are often suspect, and usually flow from a parsimonious hatred of income taxes. Its ideology is pecuniary rather than philosophical; it therefore tends to shape public policy in the interest of personal finance, as did Thatcherism. If at the end its rhetoric is proven empty, so by then will be every repository of value, and not merely financial, to which this deadening, miserly politics of comparative advantage has managed to invade.

And, yet, we have only ourselves to blame. It is our country, our system. One would have hoped that the entire country would be riveted by the “Keating Five” proceedings on C-Span, as thirty-five years ago we were by the Army-McCarthy hearings. It does not seem to be. Some time ago, at the shank of the evening, I was flicking from channel to channel on my television set. I reached Channel 31, C-Span, and was about to move on, when my attention was caught by the intelligence and passion with which the speaker was dealing with his subject, the S&L crisis. I paused and listened. A caption identified him as Representative Olin (D-Virginia), who, along with Representative Jim Leach (RIowa), is one of the few congressmen to emerge from this scandal with honor. He spoke wisely, informedly, to the point, and with obvious emotion; I was surprised—it had been some time since I had heard such talk coming from within the Beltway.

As the congressman spoke, the camera pulled back, revealing row after row of empty desks. The great chamber was empty. No one was there to listen.

Letters

The Greatest American Shambles’: An Exchange June 13, 1991

  1. 1

    The table appears in “S&L Symposium,” Stanford Law and Policy Review, Vol. 2, No. 1 (Spring 1990), p. 23.

  2. 2

    See Michael Lewis’s enjoyable chronicle, Liar’s Poker (Norton, 1989; Penguin, 1990).

  3. 3

    See Ellen Hume, “Why the Press Blew the S&L Scandal,” The New York Times, May 14, 1990.

  4. 4

    L.J. Davis, “Chronicle of a Disaster Foretold: How Deregulation Begat the S&L Scandal,” Harper’s, (September 1990), pp. 50–66; James K. Glassman, “The Great Bank Robbery: Deconstructing the S&L Crisis,” The New Republic (October 5, 1990), pp. 16–21; Robert Sherrill, “The Looting Decade: S&Ls, Big Banks and Other Triumphs of Capitalism,” The Nation, (November 19, 1990), with an afterword by Micah L. Sifry.

  5. 5

    See Robert Sherrill’s article; also Steve Weinberg, “The Mob, the CIA and the S&L Scandal: Does Pete Brewton’s Story Check Out?” Columbia Journalism Review, November/December 1990.

  6. 6

    The Insatiable Demands of the RTC,” The Wall Street Journal, November 15, 1990.

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