Massive Fraud Blamed for 40% of S&L; Failures : Thrifts: Prober cites criminal activity by directors, managers. Firms swapped bad loans to stay afloat.
Massive fraud caused the failure of 40% of the 450 savings and loans seized so far by the federal government, a top government investigator said Wednesday in the first specific estimate of the role that criminal activity has played in the scandal.
“It is fair to say 40% of the failures were caused by fraud and abuse by insiders . . . by criminal action by the owners, directors and managers,” said James R. Dudine, assistant director for investigations at the Resolution Trust Corp., the agency in charge of operating insolvent thrifts.
Government agents have discovered also that the same persons tend to turn up repeatedly as borrowers at failed institutions and that many S&Ls; engaged in swapping and selling bad loans among themselves, Dudine said.
As many as 15% of the failed S&Ls; hid their insolvencies for years, committing fraud by exchanging worthless loans with one another in an effort to hide the truth from government financial examiners, he said.
Although government officials and legislators long have known that fraud was a problem at many S&Ls;, Dudine said that government experts have discovered far more worthless loans, false appraisals, kickbacks and direct fraud than they previously had suspected.
Conventional wisdom has held that declining energy prices and weakening real estate markets caused hundreds of S&Ls; to collapse. However, Dudine’s report makes it clear that criminal activity was the primary cause in the collapse of two of every five S&Ls; that failed.
Dudine, whose agency has 200 investigators and plans to hire 100 more, delivered his surprising report during a meeting of the Oversight Board, which sets Resolution Trust Corp. policy.
The General Accounting Office said in 1989 that fraud had been discovered at 60% of the S&Ls; it had checked in a preliminary inquiry. However, the GAO report was based on a sample of only 26 institutions seized from 1985 through 1987.
Dudine’s report, in contrast, is based on a detailed, intensive inquiry by investigators of more than 400 of the 450 institutions seized by the federal government.
“The most common experience is that an insider at the S&L; is responsible for (arranging) bad loans,” Dudine said in an interview after the Oversight Board meeting. The loans eventually become uncollectible, he said.
The investigators were surprised by the frequent exchanges of bad loans among S&Ls;, Dudine noted. “They were really insolvent for a couple of years,” so “they look(ed) for ways to exchange assets,” he said.
An S&L;, for example, might take a bad $10-million loan, on which no payments are being made, and exchange it for a worthless loan of the same amount from another institution. Each S&L; then can tell government examiners that the loan it just obtained is a sound investment.
Because it will be some time before the loan’s non-paying status becomes obvious, the institution can camouflage its financial problems and put off government regulators.
Such swaps were found in about 15% of the S&Ls; seized so far by the government, according to Dudine.
Meanwhile, responding to growing taxpayer anger over the thrift scandal, House Democratic leaders on Wednesday announced broad proposals to stiffen criminal penalties for S&L; fraud and to prevent wrongdoers from keeping their profits. The proposed legislation would also supply more federal agents for the crackdown.
Besides handing prosecutors new tools, the legislation clearly is aimed at giving Democrats a new weapon in their election-year fight with Republicans and the Bush Administration over blame for the crisis and credit for the cleanup.
At a news conference, House Speaker Thomas S. Foley (D-Wash.) and other leaders asserted that the proposals go substantially beyond Administration requests.
“We want to encourage the Bush Administration to fully prosecute all cases of S&L; fraud,” Foley said at a news conference, “and we want to ensure that all possible funds are recovered wherever there is criminal conduct, so that the cost to the taxpayers can be as low as possible.”
Foley said that the S&L; package will be wrapped into an omnibus anti-crime measure scheduled for floor action next week. The provisions are similar to those approved by the Senate last week as part of its own crime bill.
Timothy Ryan, director of the Office of Thrift Supervision and a key coordinator of the multiagency task force combating S&L; fraud, said that the final legislative package by Congress should grant strong powers to the government to freeze assets of those being prosecuted.
“It is very, very important for us to . . . obtain a freeze on assets,” Ryan told the Oversight Board. The ability to freeze assets is necessary, he said, so “there will be something there to recover in the end.”
The Democratic proposals would extend the potent Racketeer Influenced and Corrupt Organizations Act to cover eight banking crimes, increase criminal penalties for fraud and bar from the banking business anyone convicted of a major bank offense. It would also create new offenses for concealing assets and obstructing audits.
In addition, the package would seek to prevent the use of “golden parachute” severance agreements, bankruptcy laws and other means to protect illegal gains from being seized in restitution orders.
“We provide tools that law enforcement officials need to pierce the veil of financial protection that too many fraudulent operators have,” said Rep. Charles E. Schumer (D-N.Y.), the bill’s prime sponsor.
Schumer said that the legislation would provide retroactive power to go after the assets of such S&L; figures as developer Bill L. Walters, who is living in a $2-million home in Newport Beach, Calif., after defaulting on nearly $100 million in loans obtained from a Denver thrift of which a business associate, Neil Bush, the President’s son, was a director.
The legislation would also set up a bipartisan commission to study the causes of the S&L; crisis and to offer ideas for preventing another such scandal. That proposal is aimed at reducing the finger-pointing that has infected congressional debate on the debacle.
The bill would authorize $459 million over three years for more prosecutors and investigators.
