Savings and Groans : THE BIG FIX Inside the S&L; Scandal<i> by James Ring Adams (John Wiley & Sons: $19.95; 308 pp.; 0-471-5135-3) </i> : INSIDE JOB<i> by Steven Pizzo, Mary Fricker and Paul Muolo (McGraw-Hill: $19.95; 443 pp.;0-07-050230-7) </i>
The savings-and-loan fiasco, which will cost American taxpayers well over $200 billion in addition to substantial contributions by surviving associations, has been described and analyzed in dozens of books and hundreds of newspaper and magazine articles. We know that for the sake of an idea--”deregulation”--the government invited gamblers to roll the dice betting hundreds of billions in government money and little, if any, of their own.
“Inside Job,” the work of three journalists, is an exhaustive portrayal of the vultures who came to the party, many of them eschewing even the appearance of making an investment; they just walked out the door with cash. The authors claim deep Mafia--and even suggest CIA--conspiracies.
That a lot of crooks smelled opportunity and grabbed it is beyond question. But those who fill the pages of “Inside Job” are Ross Macdonald schemers unimpeded by Lew Archer. Their story is a Sun Belt version of the “Gang That Couldn’t Shoot Straight.” Though they bilked the government out of unbelievable amounts and briefly rode high on the hog, most of them went broke and died or went to jail. Were there shrewd operators who walked off with and kept fortunes while evading prosecution? Perhaps so, but “Inside Job” doesn’t expose them.
The book does try to explain why all this happened. Its culprits are Donald Regan, many members of Congress and M. Danny Wall. Perhaps the most shocking episode is one currently in the news: the intervention of five U.S. senators in the regulators’ attempt to close Lincoln Savings. We now know that the delay, initiated by Wall himself when he overrode regional officials and prolonged by Sen. Alan Cranston and his colleagues, cost the taxpayers $2 billion or more.
In “The Big Fix,” Adams, another journalist, covers much the same ground as far as thrifts are concerned. He adds, however, some juicy tidbits on commercial-bank misconduct and places considerable blame for what he rightly contends is the sorry state of banking on former FDIC chairman William Isaacs. “The Big Fix” emphasizes even more than “Inside Job” the now well-known role of Rep. Jim Wright and the way Congress pressured regulators to abandon even the pretense of effective control.
Savings-and-loan deregulation was an idea bought by Congress from incredibly ill-informed, glazed-eyed intellectuals. But its most ardent proponent was the man ultimately responsible for its initiation and promulgation, the President elected in 1981. He wanted to “get government off the back of the people.”
His Secretary of the Treasury and his domestic-policy coordinator, Edwin Gray, gave White House sanction. Reagan appointed three Bank Board chairmen--Richard Pratt, Gray and Wall--to make deregulation happen and defend it from counterattack. George Bush, who as Vice President chaired a committee on deregulation, and his right hand man Richard Breedon, who designed the Bush bailout and is now SEC chairman, also have emerged largely unscathed.
Both books lionize one of the most interesting and saddest figures in the story, Ed Gray. A small-town California journalist from a poor family, Gray became a PR man for the Pacific Telephone Co., worked in Reagan’s 1966 gubernatorial campaign and became the Governor-elect’s press secretary. That led to a PR job with a San Diego savings and loan of which Gordon Luce, a member of Reagan’s kitchen cabinet, was chairman. Gray, not himself an ideologue, had come to idolize Ronald Reagan.
Gray is portrayed as discovering the threat of deregulation almost immediately after becoming Bank Board chairman, in May, 1983, and courageously fighting the White House, Congress and the industry for four years. He did ultimately get a glimpse of what was happening but not until he had concurred in one of the regulators’ worst decisions, approving the merger of two large California institutions, FCA and American, even when he knew, as did many others, that FCA was a runaway train.
In fact, the makings of a savings-and-loan disaster were evident in the Bank Boards’ own internal reports and in a document written by Gray’s predecessor. Gary lacked the curiosity or the wisdom to read them. Neither while he was Bank Board chairman, nor even after, did Gray tell the President he had known and served for 20 years what he had come to believe: that savings and loans could shatter the country’s entire financial system.
An honest and sincere man, of limited scope, Gray gave up a lucrative job to serve his idol and his country. To his credit, he did struggle to stem the deregulation tide. But lacking financial independence or the stature of a Paul Volcker, he largely failed. For his trouble, Gray was vilified and went into debt. He is one of the few people who never got any money from the debacle (Congressional inquiries forced him to repay personal expenses he charged to the government). Only in such a sordid story can the sad figure of Ed Gray take on heroic proportions.
Throughout all these years in which the thrift debacle was developing and being reported, the man most directly responsible, Richard Pratt, is barely ever mentioned. He never appears in either book. Yet, if there is one villain here it must be Pratt, who was Reagan’s first Bank Board chairman, who led the team legislating and administering deregulation, and who was quite aware of the risks it entailed. In “Agenda for Reform” published by the Bank Board in March, 1983, and supervised by Pratt, we find his own assessment:
“Although the deregulation of the past few years was a necessary response to marketplace innovations, it also substantially limited the ability of regulatory agencies to constrain the risk-taking of insured institutions. . . .
“Moreover, this has occurred at a time when there are a number of institutions that are operating with impaired capital and have strong incentives to engage in very risky investments. In the light of the competitive pressures that the industry will face in the next few years, this deregulation could result in substantial losses.”
Pratt’s answers to two questions I put to him during an interview in late 1987 tell us in a nutshell why the thrift debacle occurred. Question:
“When you took office in 1981, what priority did you give to protecting FSLIC, a deposit insurance fund you knew was broke?”
Answer: “I never thought of it.”
Question: “Now that you have the benefit of hindsight and know how much this fiasco may cost, do you regret your role in it? What public benefit could we ever have gotten for the risk you took?”
Answer: “No, it was worth it. Any cost was justified to accomplish deregulation.”
Pratt, a former finance professor from Utah and, like Wall, sponsored by Sen. Jake Garn, left the Bank Board to become a highly paid executive at Merrill Lynch. From that lofty perch he pontificates upon the thrift debacle as if he had never been a part of it, let alone its chief architect.
At the end of the Republic’s second century, nothing much seems to have changed. Perennially, government tries to achieve public ends using business as agents. Just as perennially, the enrichment of entrepreneurs, no matter how little their ventures serve the original purpose, becomes paramount.
Pratt and his governmental cohorts simply were regulating according to Coolidge’s dictum. Even when business is corrupt and contaminating, the business of America is business.
