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White-Collar Crime to Blame for S&L; Crisis, GAO Tells House Panel

From Associated Press

White-collar crimes, not poor economic conditions or deregulation, are the root cause of the savings and loan crisis, congressional auditors said Wednesday.

The General Accounting Office told the House Judiciary Committee’s criminal justice subcommittee that it had examined 26 insolvent thrift institutions in eight states and found evidence of fraud or abusive insider dealing in each.

While the survey was skewed to S&Ls; with the worst problems--the 26 represented 60% of total losses sustained by the government’s insurance fund from 1985 through 1987--the pattern of fraud and abuse among all failed thrifts “clearly is pervasive,” GAO officials said.

“The huge losses, which will ultimately be passed to the nation’s taxpayers,” estimated at $100 billion to $150 billion, “did not come about primarily because of economic conditions or deregulation,” Assistant GAO Comptroller General Frederick Wolf told the subcommittee.

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“The bulk of the losses are directly attributable to the failure by management of a minority of the industry to follow basic, prudent business practices, including the establishment of effective systems of internal control,” Wolf said.

Asked if that is a crime, Wolf said violation of fiduciary responsibilities to operate in a sound manner is clearly a criminal issue.

Few Convictions

The GAO said it found inadequate records and controls at all 26 of the failed thrifts it examined in detail, excessive loans to one borrower at 23, conflicts of interest among officers or directors at 20 and excessive salaries and benefits at 17.

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The subcommittee’s chairman, Rep. Charles E. Schumer (D-N.Y.), complained that of the 11,000 S&L; cases the Federal Home Loan Bank Board has referred to the Justice Department in the past two years for criminal prosecution, fewer than 200 have resulted in convictions.

“Ten billion dollars would go a long way to housing the homeless, feeding the poor, educating the public, caring for the sick,” Schumer said. “Instead, it has been wasted on lavish parties, jets, real estate, travel and meals at the expense of taxpayers.”

Atty. Gen. Dick Thornburgh last month blamed fraud and insider abuses for 25% to 30% of the S&L; failures. Industry regulators said they have found the crimes a “factor” in at least 70% of insolvent institutions.

Of the 26 failed thrifts examined by the GAO, the bank board had referred 19 and allegations against 182 people to the Justice Department for suspected violations of criminal conspiracy, theft, fraud and embezzlement statutes.

Rarely Go to Prison

As of this month, Wolf said, 23 of those people had been convicted--at least 11 after pleading guilty--and 19 more were under indictment. Two people were acquitted in trials.

Of those convicted, 15 were sentenced to prison, but the sentences “generally were suspended with probation,” Wolfe said.

The GAO did not name the 26 S&Ls; it examined, saying some are still open, or the individuals whose names had been referred to the Justice Department for criminal investigation.

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“We are prohibited by law from disclosing the names of open banks we review and, as a matter of longstanding policy, we treat thrifts in the same manner,” Wolf said.

He said the GAO also is “sensitive to the effect such disclosures could have on the government’s effort to seek recoveries in civil suits or to prosecute alleged criminal acts.”


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