To Find the S & L Billions, Check Wall Street

Les Midgeley, who produced the nightly news for CBS Television in the days of Walter Cronkite, wants to do a documentary on the mess in the savings and loan industry. The question people really want answered, he says, is “who got the money?” If $100 billion was lost, who got it?

The obvious answer is the crooks, the owners of the S&Ls; and the friends to whom they “lent” the money, who bought themselves Lear jets and beachfront mansions and Rolls-Royces, and threw those great parties with Hollywood entertainers and Dom Perignon flowing like water. But you can’t spend $100 billion on such things. A hundred million, maybe. A hundred billion, no.

What about the builders, whom a foolish government permitted to buy control of S&Ls;? Builders given access to government-insured deposits as funding for speculative projects can blow enormous amounts of money and not give it a second thought. A Texan said it was very unfair to consider these builders crooks. “If you put the fox in the henhouse and you find a lot of dead chickens,” he said, “that doesn’t mean it was a bad fox. You’d expect a fox to kill chickens.”

Still, $100 billion would make enough noisy squawking so that even the inattentive regulators of the Reagan years would notice. There has to be more.

How about the depositors themselves, who were paid interest rates well over what prudent S&Ls; could earn, at no risk to themselves, because the federal government guaranteed not only the principal on their deposits but every penny of interest offered by a bank with an FDIC or FSLIC sticker on its door. No question consumers took some of the money, but no way could they take $100 billion.

The only pockets capacious enough to hold that much money are on Wall Street. It’s the big Wall Street investment houses and brokerage firms that took the money and ran.

Jonathan Gray, the bank stock analyst for the money-management house of Sanford C. Bernstein, estimates that one-third of Wall Street’s revenues in the 1980s derived from dealings with S&Ls.;

The brokerage houses got commissions from putting their customers’ money into very high-yield deposits at savings and loans institutions. Then, knowing that the S&Ls; had money to invest, the brokerage houses sold them junk bonds and packages of “collateralized mortgage obligations.” Four years ago, I said to a man in charge of dealings with S&Ls; at one of the biggest Wall Street houses that these practices didn’t seem to be honest business. He nodded briskly. “Good,” he said. “Change the law.”

For a fee, the Wall Street houses advised the S&Ls;, who were living in a world they’d never made, about the ingenious new futures and options instruments and “stripped” bonds that they could use to hedge their “interest-rate risk” (the danger that the interest they had to pay for deposits would rise more rapidly than the interest they could earn on their mortgage loans). Then the Wall Street houses traded these brightly colored beads with the natives, on terms very profitable to themselves.

For still more fees, Wall Street advised S&Ls; on how to form holding companies and “service corporations” that could do things with depositors’ money that the savings and loan itself might not be permitted to do. Wall Street helped S&Ls; acquire other S&Ls; or sell off pieces of themselves. And when the time came, Wall Street, for more fees, advised them on how to go bust.

And the big Wall Street houses are still at it. Buried in the bill to “rescue” the S&Ls; now moving through Congress are all sorts of goodies for paper merchants. What’s not in the bill, anywhere, is the slightest thought of how the securities houses might be made to disgorge some of their profits from the disorganization of the S&Ls.;