When David L. Butler's real estate development company faced collapse in 1982, he found a novel and lucrative way out: He swapped it for control of a Northern California savings and loan.
The 29-year-old developer then turned Bell Savings & Loan into a personal piggy bank, paying himself millions of dollars and bankrolling questionable projects of friends and associates, according to court records.
Along the way came perks, courtesy of the San Mateo thrift, such as a $50,000 Jaguar and a $2-million airplane with a $4,700 video center and a $4,500 toilet upholstered in red leather. There was also a small fleet of Mercedes-Benzes for his fellow officials and a Ferrari for a thrift employee identified in court records as Butler's girlfriend.
Ultimately, it was Bell S&L; that collapsed. Since federal regulators took control of the institution in mid-1985, Bell has lost more than $495 million, including $17 million on Butler's original development company.
The greed and high living of dozens of savings and loan owners with the instincts of gamblers have turned an industry created to finance the American dream of home ownership into a nightmare. The abuses have hobbled the industry, which just last week reported losses totaling $3.8 billion for the first quarter of 1988, and bankrupted the agency that insures its deposits.
To survive the enormous costs of the failed and failing thrifts, the Federal Savings and Loan Insurance Corp. may well need a federal bailout.
If that happens, the nation's taxpayers will find themselves paying for such extravagances as Butler's Jaguar, Erwin Hansen's $900,000 penthouse condominium at the foot of Telegraph Hill in San Francisco and Don Dixon's $2-million Del Mar beach house.
Drawn from court records, here are three of the cases that best symbolize the thrift industry's woes:
The Texas High-Roller
The biggest high-roller of them all may turn out to be Don Ray Dixon, a Dallas real estate developer who transformed a sleepy thrift in Vernon, Tex., into one of the nation's fastest growing savings and loans and his ticket to the good life on the sunny coast of Southern California. By the time he was stopped by regulators in March of 1987, Vernon Savings & Loan's assets had exploded to $1.4 billion from $82 million--and 96% of its loans were in default.
The collapse of Vernon is the subject of a federal criminal investigation and a $540-million civil lawsuit by FSLIC--the agency's largest ever--that chronicles spending by Dixon lavish enough to make a potentate blush.
In October of 1983, Dixon and his wife, Dana, took another couple on a whirlwind 10-day tour of Europe aboard chartered aircraft. Dana Dixon called the trip "a flying house party" and a "gastronomique fantastique" in a 17-page diary that is part of the court record.
In elaborate detail, she described eating at seven three-star restaurants in France, highlighted by a lunch with truffle soup and Champagne in Lyons after which famed chef Paul Bocuse lined up 12 of his cooks for an inspection.
Vernon S&L; paid for the entire trip, which Dixon claimed was a market study for his plan to open a fancy restaurant in Dallas. It was one of four European junkets by Dixon that cost Vernon a total of $68,000.
Another trip occurred in the spring of 1985, when the couple flew to Europe aboard a company-owned Falcon 50, a top-of-the-line corporate jet. Their guests were Roman Catholic Bishop Leo T. Maher of San Diego and his assistant, Monsignor I. B. Eagen.
The group stayed at the Grosvenor House hotel in London, the Bristol in Paris and the Ritz in Madrid. The high point this time was an audience with Pope John Paul II, arranged by Maher. Dixon presented the pontiff with a $40,000 painting, "Night Sentry" by Olaf Wieghorst of El Cajon, courtesy of Vernon's extensive collection of Western art.
Not counting the painting or the cost of operating the jet, the trip cost the savings and loan firm $17,319.
Dan E. Pitre, a spokesman for Maher, said the bishop was not aware that Vernon had paid for the trip or the painting. He said Maher and Eagen were going to Europe on church business anyway and merely accepted the invitation from the Dixons.
Vernon's money helped pave Dixon's way into San Diego society and to get him appointed in 1984 to the board of trustees of the University of San Diego, a Roman Catholic school. He later gave the university $3 million worth of stock in Vernon's parent company. The stock is essentially worthless now and Dixon's term on the board expired last year.
Court records show that the thrift's money was used to buy a $2.6-million yacht named High Spirits, a sister ship to the one-time presidential yacht Sequoia; a Rolls-Royce and Ferrari dealership in La Jolla; a $1-million home in Solano Beach near San Diego, and the $2-million beach house on the Pacific in Del Mar, north of San Diego, where Dixon lived rent free.
Vernon also paid $561,874 for Dixon's personal expenses at the Del Mar house, including groceries, liquor, stereos, televisions, mobile telephones and maid service. The home's furnishings were bought by Vernon from Dondi Designs, an interior-decorating shop run by Dixon's wife in Rancho Santa Fe, a pricey residential community near San Diego.
Rancho Santa Fe also was the site of a $7-million hillside estate that Dixon was building with his own money, complete with a man-made waterfall, two-story stable and eight garages. Construction was abandoned after Dixon declared bankruptcy in 1987 just before the regulators closed Vernon.
Dixon hosted lavish parties at Del Mar, such as a 1986 Christmas fund-raiser for Rep. Bill Lowery (R-San Diego) during which tiny Christmas trees floated in the swimming pool.
An aide said Lowery was introduced to Dixon by an official of the Roman Catholic Diocese of San Diego. Lowery rented High Spirits for two parties, including a reception for Washington political reporters on the Potomac River. His campaign reimbursed Dixon for the cost of the yacht as well as for two trips he took aboard a Vernon corporate jet.
The aide said Lowery believed that the jet, the yacht and the house all belonged to Dixon and that the reimbursement checks were made out to Dixon.
Flight logs that are part of the court record in Dixon's bankruptcy case show that former President Gerald R. Ford, a neighbor of Dixon's at another Vernon-owned home in Colorado, rode in a Vernon jet three times long after he left office. Sen. Pete Wilson (R-Calif.) took a Vernon jet once and, like Lowery, paid for the trip immediately. The check from Wilson's campaign committee was made out to Vernon and mailed to Dixon's address in Del Mar.
Another California politician was not so diligent in observing campaign laws.
Rep. Tony Coelho (D-Merced), the House majority whip, rode on a Vernon plane and used High Spirits seven times in 1985-86 for fund-raising parties. Coelho's campaign committee paid $25,168 to the thrift for the use of the plane and yacht only after reports about his relationship with Dixon emerged in the press after Vernon's collapse in 1987.
Unreimbursed use of the yacht and plane appeared to violate federal campaign laws. However, Coelho's committee called the failure to pay for them in a timely fashion an oversight, and he has not been charged with any wrongdoing.
House Speaker Jim Wright (D-Tex.) also rode Vernon planes, but an aide said the arrangements were made by others and that Wright did not know that Vernon owned the aircraft.
Later, Wright was highly critical of the way federal regulators were treating thrifts in Texas in 1987, particularly Vernon. His activities in helping Texas thrifts are part of the current House Ethics Committee investigation of Wright.
The beneficiaries of Dixon's largess were not always politicians or prelates.
In the summer of 1985, the thrift's board and senior executives met for three days at the Solano Beach house. Court records show that John V. Hill, Vernon's executive vice president, arranged for two Dallas women to attend the first and third nights of the meeting at company expense, along with six to 10 women hired from San Diego-area escort services.
"It was Hill's intent, and that of others, that sexual favors would be available to Vernon's officers and directors in connection with their service to Vernon and to Vernon's owner, Don R. Dixon," according to federal charges against Hill, who is cooperating in the investigation of Vernon.
In a rare interview on Friday, Dixon complained bitterly about the actions of the regulators in closing Vernon and defended his spending habits, while declining to comment on specific incidents.
"If we were spending a little extra here and there on perks for customers and top executives, it was getting us good business," he said. "We were at almost double our capital requirement and we were benefiting the shareholders. Whose money was it but the shareholders'? And they were getting the benefits.
"Quite honestly, some of those free-spending habits had to do with Vernon going from a small town backwater institution to a significant player in a national market. You don't get access to Florida development loans or California construction loans by taking a Greyhound bus out of Vernon, Tex. I was a successful developer and I was entertained at hunting lodges. I did not invent the idea of perks to attract business."
Dixon said that, under his direction, Vernon became one of the most profitable thrifts in the nation. He said that the federal regulators "came in to destroy Vernon" and ignored the solid business that he had built.
He is fighting the FSLIC lawsuit with a battery of high-priced attorneys, including R. Stan Mortenson, a Washington lawyer who represented President Richard M. Nixon during Watergate.
For their part, the regulators contend in the lawsuit that Vernon's profits were an illusion and they paint a portrait of Vernon as a thrift that went far beyond the new rules of the game that came with deregulation of the industry in 1982 by the federal government.
Several states, most notably Texas and California, approved broader measures that basically removed the barriers to any type of lending by thrifts. Combined with the federal deregulation, many thrifts grew dramatically by attracting deposits with sky-high interest rates and loaning out the money on increasingly risky real estate projects. Thrifts became particularly attractive to real estate developers, such as Dixon or Siddharth Shah.
Pony-Skin Stools in Northern California
Shah was a Northern California developer who teamed up with the president of Centennial Savings & Loan in Santa Rosa to move the institution into risky ventures and provide themselves generous benefits before the bubble burst.
Assets rose to $392 million from $82 million in less than three years at Centennial before it was taken over by the regulators in August, 1985, after being declared insolvent as a result of bad loans and insider abuses, according to a pending lawsuit filed by FSLIC against its former officers, including Shah and its late president, Erwin Hansen.
After gaining control of Centennial in 1982, Hansen and Shah spent what the lawsuit claims were exorbitant amounts of the thrift's money "for personal pleasure and enjoyment." Shah's attorney says the expenses by his client were legitimate.
The two men traveled to Europe and East Asia, where they bought expensive suits, cars and other items. A single trip at the thrift's expense by Hansen and his wife to Asia in April of 1985 cost $43,400 at a time when the thrift was losing money monthly.
In September, 1983, Centennial paid $773,487 for the penthouse condominium at 101 Lombard in San Francisco used by Shah and Hansen. Another $140,802 was spent on furnishings and decorating. When later sold by the regulators, it brought $655,000.
In November, 1983, Shah, Hansen and a third Centennial shareholder, a Dutch businessman named Niek Sandmann, sold the savings and loan a rundown landmark building in Santa Rosa, called the Stonehouse, for more than $1 million, far more than they had paid for the building a short time before.
Centennial spent nearly $1 million more on decorations and renovations at the Stonehouse, including a private bar with pony-skin-covered stools, a rock fireplace with a carved mantel from Europe, a $30,000 chess set and antique furniture.
Hansen and Shah also paid themselves handsomely. In 1984, Hansen received a bonus of $818,924 on top of his $100,000 salary. Shah got the same size bonus in addition to his salary of $120,000.
And Centennial's executives threw their share of parties, including a 1983 Christmas celebration that cost $132,000 and featured jugglers, violinists and a forest of live evergreens, carpeted in Persian rugs.
"I'd been to parties at the White House, embassies and places like that," Rep. Douglas H. Bosco (D-Occidental) told the San Francisco Chronicle. "But this was by far the most opulent. The effect was very magical. It showed a lot of taste and a lot of class."
Peter Robinson, a former federal prosecutor who headed a criminal investigation into Centennial, had another view. "Centennial was the bordello of the banking industry," said Robinson, now a private attorney who rents an office in the Stonehouse from its new owners. "Anything you wanted you could get."
The party ended in 1985 when the regulators took over the insolvent institution and called in the FBI to begin a wide-ranging criminal investigation that led to 16 guilty pleas and one conviction.
Hansen died of a brain hemorrhage in the summer of 1987; Shah has not been accused of criminal wrongdoing in the Centennial collapse.
Shah has pleaded innocent and is awaiting trial in an unrelated case in which he is accused of participating in a drug-trafficking operation that laundered money through his real estate projects, including several joint ventures with Centennial.
Shah's attorney, Marcus S. Topel, said the civil lawsuit against his client is a "fantasy wish list" in which the FSLIC labeled as fraud disputes over business judgments. He said FSLIC has tried to cover up problems created by deregulation and bad regulatory supervision by wrongfully accusing his client of misdeeds.
"What will be shown is merely business judgment disputes as opposed to any actual embezzlement of funds or fraud," said Topel, who said Shah will fight the civil lawsuit after his trial on the drug-related charges.
A Horse With a Great Deal of Spirit
Hitching a real estate developer to a savings and loan also led to the downfall of San Mateo's Bell Savings & Loan, California's 11th-largest thrift when it was taken over by regulators in 1985.
Early in 1982, Sacramento developer David Butler and a partner, James L. Grauer, began acquiring stock in Bell. At the time, their development business was in trouble; their loans on two construction projects were delinquent and two others were coming due. So they sold the company to Bell for enough stock to obtain control of the saving and loan.
The regulators later charged that the price of the company was grossly inflated and pointed out that Bell lost $17 million on the company's projects.
Butler's lawyer, William M. Goodman, said it was a risky but fair transaction that went on the rocks because of changes in the business climate. He said Butler would have "looked like a genius" if the deals he put together at Bell had been successful.
When he first got involved at Bell, its directors felt Butler might bring growth and profit to the moribund institution. Despite his lack of experience in the industry, they said, he had big ideas.
"We sometimes used the concept of breaking a horse without breaking his spirit," Bryant Brooks, a director, testified in one court case in describing the board's early view of Butler.
Instead, Butler broke Bell and awaits sentencing after pleading guilty to two criminal charges in connection with loan frauds at the savings and loan that were part of a string of questionable transactions.
Butler has settled the FSLIC lawsuit, but Grauer is contesting the suit and has denied its allegations. He has also pleaded innocent to a federal criminal charge related to a loan transaction at Bell and is scheduled for trial in September.
Grauer's attorney, Barry D. Hovis, said: "Bell Savings engaged in these transactions with the full knowledge of the regulators. Now the regulators think that because the venture did not succeed it is a sound basis for suing people who followed a prudent and approved policy at the time."
In one disputed deal, court records show, Bell paid $8.3 million for a building in which Butler and Grauer held a substantial hidden interest. Butler also arranged a $3-million unsecured loan to a developer for one project, and the money was actually used on a building owned by Butler and Grauer, records show.
In another instance, Butler arranged a $160,000 loan to an associate, ostensibly for a remodeling project. Instead, the money was used to buy an airplane for Butler.
Another form of abuse was called "dirt for stock" scams in the lawsuit. They involved arranging loans in exchange for the borrower's secret promise to use part of the money to buy stock in Bell and grant the stock's voting rights to Butler and Grauer.
The arrangement allowed the two men to increase control of Bell at the same time the thrift was able to loan more money to their friends and associates because it had more capital as a result of the stock purchases.
In one "dirt for stock" deal described in court papers, Bell loaned $19 million to a developer who was supposed to put up land worth the same amount as his part of a joint venture. The developer did not buy the land until a week later and paid only $10.8 million. He used the rest of the $19 million to buy stock in Bell. The developer then gave the proxy for the stock to Butler and Grauer.
In 1983, his first full year as president of Bell's holding company, Butler was paid $668,800. The next year, he got a bonus of $629,434 on top of his salary, according to a lawsuit in which Bell shareholders were awarded $22 million in damages.
Susan Illston, one of the attorneys who sued Bell's former officers on behalf of shareholders, described Butler's attitude toward the savings and loan: "To him, it was truly a toy."
The nation's taxpayers are likely to wind up paying for the toys of David Butler and dozens of others who turned the savings and loan industry into their playground.