Charles Keating
Charles Keating; drawing by David Levine

Not before in our history have so many strong influences united to produce so large a disaster as in the current case of the savings and loan scandal. Bureaucratic inadequacy and incompetence, perverse ideology, money in large amounts for the political protection of flagrant rascality, public lack of interest, and (for a long while) neglect by the press and the triumph of a hands-off administration, which relieved the presidency of any serious responsibility for ostentatious larceny—all these were present. Only now is the result in its almost unbelievable magnitude forcing itself on the public consciousness. The scandal, to repeat, will stand as one of the most appalling such events in our civil history, and undoubtedly as the most expensive.

In its shortest form, the scandal has been the extensive looting of the savings and loan associations, the looting being effectively that of government-supplied money. The total take is not yet known; it will certainly be upward of $200 billion, maybe much more, or several thousand dollars for every tax-paying American family. The golden misadventures of General and President Ulysses S. Grant and the greatly celebrated Teapot Dome peculations of Harry F. Sinclair and Albert B. Fall, duly adjusted for changing currency values, are microscopic in comparison. So, too, are the more recent and better publicized activities under the aegis of Silent Sam Pierce and the Department of Housing and Urban Development. And so also are those of the defense firms and the Pentagon’s revolving-door acrobats. In the 1970s the country was transfixed by the Watergate scandal, and Richard Nixon was thrown out for knowing too much. Ronald Reagan survived a monumental and utterly visible heist by knowing nothing at all.

Working in Reagan’s favor and against Nixon’s was the wholly comprehensible character of the Watergate felony and the simplistic characters conducting and controlling it. Most of the people involved in the S&L robbery were, in fact, no more intelligent. However, where great sums of money are involved, there is a popular presumption of personal acuity, one that is widely accepted not only by the malefactors toward themselves but also by others as well. Accordingly, both the government and the public give special deference to crime in the field of high finance. Those guilty or stupid are accorded the benefit of the doubt. Given the amount of money involved, it is assumed that they must somehow know what they are up to. In recent weeks, Mr. Charles H. Keating, Jr., of Phoenix, Arizona, and Irvine, California, whose institution honoring Abraham Lincoln failed at a public cost of well over a billion dollars, has urged that with a little time and freedom from regulation he could have got it all back, including presumably the million or so he personally assigned to politicians to exercise, as he openly asserted, government influence on his behalf. Previously he had been given quite a bit of extra time to deal with his losses, at grave public cost. But who would wish to challenge operations at the billion-dollar level, especially if it meant putting losses of this magnitude on the public budget or, by symbolic action, partially off it?

Keynes once commented that while the small borrower is at the mercy of his bank, the large one has the bank at his mercy. So it is here. The civil servant who fiddles his expense account is in serious trouble. Those at HUD who responded with millions of dollars to the phone calls of James Watt and the late John Mitchell, both men of notably adverse public reputation and one a recently released felon, have a far better chance to survive. The S&L thefts were sufficiently vast so as to win an even more extensive exemption from serious and effective legal process.

The story of this disgrace begins many years back and has British antecedents. As had earlier been the case in England and Scotland, small savers deposited money in small depositor-owned savings banks for a modest return; the savings, in turn, were used to buy modest houses at modest mortgage rates. It was a commendable exercise in self-help; through the creation of the supporting and supervisory home loan banks, it was encouraged and strengthened in the early years of the New Deal. To match similar action on behalf of the commercial banks, deposits were insured up to $2,500. This was severely limited protection for people who could not afford to lose.

Interest on deposits was also sharply regulated, and loans were effectively confined to home mortgages. Minimum standards of net worth were established, and the entire industry was kept under reasonably close supervision. It was recognized, in effect, that the government guarantee of deposits, however modest, required careful measures to insure against their dissipation. During the next forty-five years the number of savings and loan associations increased moderately as did the money on loan. Most people, depositors and borrowers apart, were but slightly aware of their existence, or not at all. Then came an appalling combination of public errors sustained and even celebrated as constructive ideological change. As ever, ideology was a major solvent of thought.


It began in a seemingly innocent way under Jimmy Carter. During his administration wage–price inflation, made worse, although only somewhat worse, by high oil prices—it was convenient to blame as much as possible on the Arabs—was attacked in accordance with the most orthodox and inapplicable of economic principles. Carter’s economists were, in their own view, far too distinguished to follow some relevant variant of the Nixon design of a decade earlier, which had been to move on the causal wage–price spiral with a wage and price freeze, an action that had helped to see Nixon through the 1972 election with the loss of only the District of Columbia and Massachusetts. Instead, in the face of what President Carter unhelpfully described as spreading economic malaise, there was action, effectively, on aggregate demand: interest rates were sharply increased; bank lending was firmly curtailed; company and consumer expenditure were thus restrained; and the malaise was made worse. Inflation was combined with general economic stagnation—stagflation. It was an appalling election-year design, which celebrated the bravery of those who were not themselves running.

After the 1980 elections, the next one being now safely distant, Ronald Reagan, or more precisely his advisers, acted directly to break union strength and to raise interest rates to yet higher levels. The consequence, as all know, was the most painful economic downturn since the Great Depression, and for the savings and loan institutions it was a disaster. Already, in 1980, unable to attract deposits at the interest rates being paid by competitors for funds, they had been allowed to raise rates. And in another seemingly innocent concession, insurance on deposits had been raised from $40,000 to $100,000. Now yet higher interest rates were being paid out on deposits, while revenues were still coming from an inventory of low-interest mortgages which, the interest rate being agreeably low, the holders were not disposed to pay off. A large number of the institutions were operating at a loss. The Reagan administration, with its commitment to government as the problem, saw deregulation as the salvation.

In a series of administrative and legislative changes, culminating in the superbly named Garn-St. Germain Depository Institutions Decontrol Act of 1982, the S&Ls were allowed to go beyond mortgages to invest up to 40 percent of their assets in almost anything that might appeal to them. The net worth they were required to maintain was set at purely nominal levels. The institutions were also allowed to accept a much greater volume of “brokered” deposits—deposits packaged in $100,000 lots that were duly insured and then shopped around the country to the associations that paid the highest interest.

Taking these government-insured deposits, an S&L could go on to real estate speculation, including loans on some of the nation’s more improbable “raw” acreage, and to commercial building, whether needed or, as in Texas, greatly in excess of need, and to junk bonds, and on to thinly disguised loans (and other endowments) to the owners of the S&L institutions and their diverse conspirators in personal enrichment. The latter, in turn, gave generous political subsidies to align legislators against any inhibiting regulation.

Also in the name of deregulation the government regulatory staff, always inadequate in numbers and ill-paid—starting salaries were around $14,000—was further curtailed in size, made subject to political restraint, and otherwise rendered less effective. And meanwhile accounting practices and malpractices allowed for a temporary disguise of losses and insolvency while releasing vast sums to participating larcenists.

This was called deregulation; it was, in fact, far from that. There remained a decisive government role in underwriting the entire operation through the deposit insurance; the deregulation was confined to a greatly decreased protection of public funds, which were now infinitely more at risk. The Garn-St. Germain bill will stand as perhaps the single most ill-conceived piece of domestic legislation in modern times. Representative Fernand J. St. Germain, then head of the House Committee on Banking, Finance and Urban Affairs and, more particularly, the Committee on Financial Institutions Supervision, Regulation and Insurance, and an admired and undiscriminating ally of the S&L industry, has been released from public office. So also former Speaker Jim Wright of Texas and Tony Coelho of California, who paid heavily for their association with this outrage and its egregious manifestation in their own states. Jake Garn of Utah remains as the ranking Republican member of the Senate Committee on Banking, Housing and Urban Affairs.

Of the three books here considered, all claiming in their titles to offer an “inside” view of what occurred, that of Paul Zane Pilzer and Roger Dietz gives the best short look at the history of the thrifts and the circumstances inviting in the thieves. As do the other two, it then goes into some of the comprehensive cases of looting. All three give attention to Texas and California, the scenes, as noted, of the most spectacular scams, although there was also widely distributed felony in the West, Midwest, and East, and notably on Long Island, where one of the more larcenous operations took place. Stephen Pizzo, Mary Fricker, and Paul Muolo are the best on the details, interconnection, and local culture of the scams. All the books deal with the protective efforts of heavily subsidized members of Congress, and with the feckless and sometimes collaborative contributions of the responsible figures in the Reagan administration. On these last and the memers of Congress a later word.


It is with the looting and the thieves that the authors deal with the greatest interest and, on occasion, the most evident pleasure. Such is James Ring Adams’s delight that he goes on from the S&Ls to the Butcher brothers’ banking operations out of Knoxville, Tennessee, and their long and skillful use of politics to disguise felony—state regulators in particular were held off by Jake Butcher’s runs, or threatened runs, for the governorship. Mr. Adams even pursued Mr. Butcher to interesting if not richly informative interviews in his present residence in an only modestly comfortable minimum-security prison.

While there are some indications of a larger criminal network—the Mafia as ever—the S&L enterprises were over-whelmingly manned by local and independent operators who, seeing the opportunity, got into the game. Here was access on easy terms to nearly unlimited sums of public money. In consequence S&L executives and their associates, often with no earlier experience in theft, now emerged with the feeling that it was their God-given right to grab.

The techniques for the grabbing were transparent and ostentatious, often to the point of stupidity. There were huge salaries and bonuses; real estate values were inflated by a series of wash sales financed by loans to shadow figures identical in interest with those authorizing them; loans were made to associated and conspiring builders for houses so bad that in a notable case in Texas they had later to be bulldozed for public safety. Much money went for entertainment and lavish personal expenditure, including obviously obscene and extravagant local celebrations, parties in Las Vegas that included the attentions of accomplished prostitutes, as well as company jets, Rolls Royce cars, and appalling personal dwellings. Even the most somnambulant regulator should have been aroused; these were “the thrifts,” after all. However, in Texas and to some extent in California and Arizona this excess was overlooked, even accepted. Personal indulgence and fiscal eccentricity, it was assumed, were part of the culture. Every person turning in his or her tax form next year and for years to come should know that part of the check is going for those parties, the women, the planes, the Rollses, and those houses.

There were some heroes. One was a surprisingly determined character of notably modest competence by the name of Edwin Gray, a longtime associate in public relations of Ronald Reagan. Gray was chairman of the Home Loan Bank Board and thus the principal regulatory officer. Early on, he recognized what was happening; he was not distinguished, however, for being able to do much about it. Restraining him were other officials in close liaison with the malefactors, and most of all, in the persuasive view of these authors, Donald Regan. Regan came to Washington from Merrill Lynch, a big operator in the assembly and distribution of brokered deposits—hand us your money, the brokers would say, and we will deposit it in insured accounts at the highest interest rate; they did not say that, very likely, such deposits had the greatest exposure to reckless use or larcenous intent.1 Regan, operating on what is loosely called principle, strongly opposed virtually all preventive or regulatory efforts, and he was the person ultimately responsible at the Treasury and subsequently at the White House. Carrying the burden of the Iran-contra affair, along with his tasteless reflections on his principals and associates in his White House years, and now with this scandal, Mr. Regan emerges as perhaps the most politically expendable public figure in modern times, a hard competition to win.

Regan is now long gone from public office; so now is one M. Danny Wall. Much of his time and effort before being released from office went into explaining his reluctance to move on the aforementioned default of Lincoln Savings and Loan. Henry B. Gonzalez, chairman of the House Banking Committee and numerous others repeatedly and, one judges, sensibly called for Mr. Wall’s resignation.

In recent weeks the man Mr. Wall protected because of presumed legal restraints and at considerable public cost, Charles H. Keating, Jr., has been cited, along with his associates, for fraud and conspiracy to divert funds from federally insured thrifts to their own use, the illegal take being, it is said, around $1.1 billion and the probable cost to the taxpayers as much as $2.5 billion. The Stealth bomber shrinks by comparison. At this writing, Mr. Keating has pleaded the Fifth Amendment as an alternative to what could have been rather intense hours or days before the House Banking Committee.

That he might be in trouble Mr. Heating was wise enough to foresee and, by heavy investment, to seek to forestall. The investment was by way of political and other contributions, and notably to Alan Cranston of California, Dennis DeConcini of Arizona, John McCain, also of Arizona, and John Glenn of Ohio, three Democrats and one Republican, as well as to Donald Riegle of Michigan, who, at an early date but perhaps not early enough, returned the cash. The senators, in turn, met with the regulators, evidently to urge tolerance and compassion. DeConcini and McCain have now also returned the money, and Senator Cranston, with possible understatement, has called some part of his own intervention stupid. All are being asked to explain their action to the Senate Ethics Committee.

The end is not yet. The bailing out and recombination of the thrifts is far from complete. There is more than a little indication that this process also provides opportunity for richly unearned reward. Nor can one be sure that all who accumulated wealth at the public’s expense will be appropriately expropriated and chastised. The ability where large money is involved both to retain and escape remains. Even the minimum-security prisons are mostly reserved for a more proletarian type of occupant.

Also still to be tackled are the problems associated with the vast assortment of properties that this episode has put into public hands. No president since Theodore Roosevelt has so enlarged the public domain as Ronald Reagan. Never was there a better example of socialism in its modern manifestation as the failed offspring of capitalism. The new Resolution Trust Corporation, which was created to receive and clean up the mess, has certainly the most diverse and unquestionably the most dubious real estate holdings of any corporate entity in the Republic. Ronald Reagan, we could be certain, accepts no responsibility for what happened. Nor, evidently, does the ranking member of his administration, George Bush. Saying recently, in a detached way, that the money so far appropriated might not be enough, he added, “It’s a whale of a mess and we’ll see where we go.”

Certainly it remains to be seen whether the lesson has been fully learned. The opportunity for highly leveraged, which is to say reckless, use of insured deposits remains. The requirements for maintaining the net worth of the S&Ls are still ridiculously small.2 There would be no difficulty in devising a way to raise the requirements and otherwise sensibly regulate the S&Ls. But for many, including prominent members of the current administration, deregulation is still an article of faith—a controlling ideology. During these last weeks in Europe we have observed and celebrated the escape from ideology, from a system that substituted economic and political formulas for thought. The lesson for us, and notably for those who celebrated their commitment to deregulation as ideology, is clear. Thinking clearly about controlling circumstances and their possible consequences is, admittedly, a painful thing. Failure so to exercise thought, it has never been more evident, can be even more painful, and not only for those mentally confined.

This Issue

January 18, 1990