COLUMN ONE : Totting Up Blame for S&L; Crisis : The $500-billion tab will cost the average American family $20 a month for 30 years. Here’s a primer on how we got into this mess.

The $500 billion has vanished down a hole in the front yard, gone under the fine, green lawn that is bordered by a white picket fence, lost into that benign part of the American dream known as owning a home of your own.

That was what savings and loan companies were for, to help the home buyer fulfill the dream. For years, they did. Then the S&Ls; began to “crater,” to use a favorite industry term. Good money chased bad down the maw.

In the midst of it, the Pinocchios and Magoos of the U.S. government were there watching. They turned their backs on the hole or misjudged its size. Remarkably, appallingly, disastrously, they then enlisted help from the kind of real estate slickers who keep their code of ethics in a pocket calculator.

Now the price has risen to an estimated $200 billion in principal and $300 billion more in long-term interest. The S&L; calamity will cost the average American family more than $20 a month for the next 30 years.

What a god-awful waste. At current outlays, this sum could have financed the space program for 46 years or federal school lunches for 172 years or the Drug Enforcement Administration for 810 years. It could have bought 12,148 Trident missiles or built 46,296 miles of interstate highway.

Instead it has paid for false prosperity in the 1980s and will now become a leech on the back of generations to come. It is the largest financial disaster in half a century, and the recounting of it is a prolonged slapstick sequence of high spending and low morals, inept lawmaking and outright recklessness.

There are several places to lay the blame, though, admittedly, the scandal does not have the sharp focus of a third-rate burglary or an arms-for-hostages trade. Culpability spreads out like sand across a dune to include 60-year-old errors, bureaucratic sleepwalking and the riptides of inflation.

Historic forces caught America back on its heels. When the nation needed more supervision in the banking industry, it instead volunteered itself for an experiment in less. When the people most needed their public officials, the politicians most needed tit-for-tat friendships from campaign contributors.

There are some notable faces to identify. The hole opened during the Jimmy Carter years and then widened toward enormity under the distanced eye of Ronald Reagan. Vice President George Bush headed a task force on “regulation of financial services” that could have plugged the hole as early as 1983.

Donald T. Regan, first as Treasury secretary and then as White House chief of staff, flicked aside every warning like lint off his suit. A trio of top federal regulators--the rugged Richard T. Pratt, the amiable Edwin J. Gray and the prickly M. Danny Wall--to one degree or another oversaw every pratfall.

Sen. Jake Garn of Utah and former Rep. Fernand St Germain of Rhode Island were chairmen of the congressional banking committees. In 1982, they sponsored legislation that rebuilt the structure of S&Ls; into a flimsy trellis sure to collapse.

Often-tyrannical Jim Wright of Texas, then Speaker of the House, and deft deal-maker Tony Coelho of California, then majority whip, acted questionably after sniffing the expensive cologne of S&L; political contributors.

Add to them a fivesome of senators who interceded on behalf of a spendthrift named Charles H. Keating Jr., owner of the now-insolvent, $2.5-billion loser Lincoln Savings & Loan of Irvine.

Keating was one of the notorious high-fliers who did loop-the-loops with federally insured money. Their engines died amid unpredictable economic weathers. Then they crash-landed inside the white picket fence.

CHAPTER TWO

THE MONEY-BACK GUARANTEE

It is a notion inspiring such comfort: Savings deposits are backed by the full faith and credit of the U.S. government. Over the years the idea has been taken for granted as if it were an article in the Constitution.

Actually, federally insured deposits are an inherently perilous scheme. They allow savers to transfer their risk to the general public. The depositors are the insured. The taxpayers are the insurers.

Most other industrialized nations guarantee only part of an account--and then spread the risk with private insurers. The American government has taken on no such partners.

Instead it supplies its own complete safety net, one fashioned 60 years ago after the cliff dive that was the Great Depression. Many banks and S&Ls; went bust then; people lined up anxiously at the chained doors.

On March 6, 1933, President Franklin D. Roosevelt temporarily closed even the still-functioning banks, better to sort out the financial shambles.

Imagine it, all the banks shut: My God, how much money do we have in the house? Ten dollars? Twenty? Department store clerks went days without a customer while grocers faced the hungry and the pleading.

At such a time, deposit insurance seemed a wonderfully sensible idea. Congress, in fact, already had the legislation in the hopper.

“You’ll have to have it, cap’n,” Vice President John Nance Garner advised Roosevelt, arguing that this was the only way to coax savings out from under people’s mattresses and back into the reopened banks.

But the President was opposed. Various states had tried deposit guarantees dating back to New York in 1829. Some programs had worked for years, though every one eventually failed after hard times caused a spate of closings.

Besides, there were inborn limits to all the proposals. They were not really “insurance” plans as the term was generally used by insurance companies.

Each bank was to make modest contributions into a federal fund, but these premiums would not be assessed according to risk. Heedful lenders would be equally responsible with incompetent or careless ones.

What’s more, this limited insurance pool would never be enough to cover the losses of a massive run. No, if that ever happened, it would be the taxpayers versus the depositors--one or the other on the hook.

Despite these objections, a Depression-weary Congress passed an insurance provision for banks in mid-1933. A year later, it happily extended the guarantees to savings associations.

The twin aims of S&Ls; were a nest egg for the common man and home loans for families. The companies came to be nicknamed “thrifts” for these very virtues. And lawmakers were eager to support them.

In 1966, Congress went so far as to mandate what was already true in practice, that S&Ls; could pay more in interest than banks, assuring them an ongoing flow of deposits.

The thrifts were thought of as the commendable Boy Scouts of finance, a presumption that ironically overlooked a fundamental flaw. By their very nature, S&Ls; were endangered. Think of it:

Both banks and thrifts in effect “borrowed” money from depositors, but only the S&Ls; were confined to relatively long-term home loans. Banks could spread their money elsewhere, to businesses and consumers, for instance. Their notes varied in maturity. Banks had flexibility.

Thrifts, on the other hand, were entirely dependent on stable interest. If rates were ever forced sky high, S&Ls; would end up paying a lot more to their customers on the short-term than they were taking in from dead-weight, 30-year fixed loans on the long; they’d hemorrhage.

But no matter. Such a frightful scenario was 45 years in arriving. In the meantime, everything appeared as bright as the shiny new toasters that went with opening a savings account.

S&L; officers were pillars of the community. The fellows in Congress and the statehouses could count on them at election time--and the officers, in turn, could count on the legislators to be attentive to their concerns.

It was a fine, steady world. Cynics liked to say the S&Ls; ran by the 3-6-3 rule: give 3% on deposits, take 6% on loans, play golf by 3 p.m.

CHAPTER THREE

A LONG, HORRID TUMBLE

This is what happened. Near the end of the Carter Administration, interest rates blew toward 20%! The tempest of inflation twisted the economy off its hinges, and the S&Ls; began to look like aging duffers who had teed up against the wind.

Savers had better choices in these gusts. Brokerage houses now offered money-market funds paying double and triple the S&Ls;’ interest. Why would anyone sit tight at a piddling 5 1/2%?

Don Crocker, the man who eventually sold Lincoln Savings to Keating, recalls each day punching in for the numbers on his computer screen.

“The money was gushing away from every one of our branches,” he says.

From a high point in 1978, when the thrifts were amassing record profits, they then took a long, horrid tumble. Depositors were pulling their money out. Save us! the thrifts demanded of Congress. But how?

Congress’ first attempt at deregulation was in 1980. It freed the S&Ls; to phase in higher interest rates on savings, but still left them largely restricted to the business of home mortgages. This only made them lose money faster.

In yet another myopic move, Congress in 1980 upped the deposit insurance limit from $40,000 to $100,000, actually a change long favored by industry lobbyists and one that in only a few years would prove to be ruinous.

The lower limit may have been a protection for Mom and Pop, but the higher one was meant to entice big parcels of money from people of wealth and huge institutional investors, such as pension funds.

There were no interest restrictions on these bundles of $100,000 and above. The cash was commonly known as “brokered money.” Each morning, brokers scoured the markets looking for the best rates for “jumbo CDs.”

Thrifts wanted in on the game, risky though it could be. While the deposits gave an S&L; an energizing boost, its supply was undependable. In a single computer blip the money chased higher interest rates from place to place.

In any case, the thrifts were impeded from taking full and immediate use of the change. A hindrance or two remained in federal regulations. S&Ls; had to go on relying on the same small savers who no longer needed them.

The “silent run” continued, withdrawals exceeding deposits by $32 billion in 1981 and 1982. Six out of seven thrifts were operating in the red.

“Back then, they rated S&Ls; on how long we had to live,” Crocker says.

A few California thrift executives were friends of President Reagan. They hoped he would cooperate with some sort of federal bailout. But Reagan left complicated financial matters to his Treasury secretary, Don Regan.

The former chief of Merrill Lynch did not have much patience for the S&Ls.; “Well, the thrifts are losing money, so what?” he told reporters in 1981; to him, a bailout would be nothing but a “massive raid on the Treasury.”

The prevailing ethic was for industries to sink or swim on their own. After all, this was the Reagan era of deregulation, and the business of government was to mind its own business.

Along these lines, Congress passed the Garn-St Germain Act in 1982. This new law amounted to a personality transplant. It attempted to preserve the S&Ls; by transforming them into entities much like banks.

Thrifts would no longer have to devote themselves to the financing of homes. They could “grow out of their troubles,” making loans in most any way they wished--shopping centers, office buildings, mushroom farms, name it.

Some of these investments required complex land appraisals and difficult evaluations about future occupancy. Greenhorn S&Ls; were venturing onto bumpy terrain that experienced banks had often chosen to avoid. Nevertheless, they were told to go to it.

Pratt was then the presidentially appointed chairman of the Federal Home Loan Bank Board, which regulated the thrifts. A Reagan zealot, the former finance professor enjoyed the beatific visions of free-market fever. By his lead, S&Ls; were allowed to shed even more constraints:

They could keep less money in reserve to cushion against bad times. They could choose an accounting formula that propped up their net worth, something like a thumb on the scale to balance the books. They could be owned by a single dominant person rather than a minimum of 400 stockholders--with no single one holding more than 25%.

It was anything goes. And most everything went. The fact that there were state-chartered S&Ls; as well as federally chartered ones (though all were federally insured) only made things more unrestrained.

If the Feds were going to free up the rules, state bank commissions would go them one or two better. California and Texas were the most free-wheeling of all, fixing in place the scandal’s two biggest sinkholes.

All talk was pep talk. S&Ls; were now to be brash and energetic, rebuilding themselves atop the decay, writing so many sweet, new loans that they would eventually deodorize all the low-paying stinkers.

This precarious transformation involved the potential loss of $1 trillion in federally insured deposits. Where were the lookouts? They were so gung-ho they were blinded. Only now there is reflection.

Pratt recently admitted with rue: “When the government tries to guarantee the affairs of private business, it is almost certain to be subject to abuse and become almost uncontrollable.”

The deregulators had deregulated everything but the deposit insurance. If the whole thing went up in smoke, the fire alarm would ring in each American home for years to come, every April the 15th.

CHAPTER FOUR

BRASH NEW PLAYERS

The new rules seemed to need new players, faster ones, larger ones, S&Ls; not afraid to bet big money on which of the moving shells held the pea.

Of course, not every conservative thrift operator suddenly changed into a high-stakes speculator. Most stuck to the old ways as much as they could--or hired senior loan officers who knew their way around commercial real estate.

These were chaotic times. The economy was recovering, but inflation had seemed to inflict mortal wounds on the S&Ls.; Risky propositions promising speedy profits were hard to resist.

“You can’t imagine what it’s like being called stupid for not buying high-interest junk bonds,” recalls Anthony Frank, back then the chairman of First Nationwide Financial Corp. of San Francisco.

Many S&L; veterans simply got out. Don Crocker’s family had been involved with Lincoln Savings since his father had paid a pittance for a chunk of shares during the Great Depression.

Lincoln’s directors were not necessarily eager to sell, but then along came Charlie Keating with $51 million and they lurched for the dotted line. Anyway, Keating seemed the kind of entrepreneur the regulators were looking for. Maybe adventurous real estate men would accomplish what timid bankers could not.

The Phoenix developer had good reasons to want to play in the new game. In effect, revised laws allowed him to loan himself funds for his own mammoth deals. A dollar borrowed is a dollar earned.

Let’s see. There would be Estrella, the 50,000 homes he wanted to put southwest of Phoenix--and then the $300-million Phoenician, a luxury hotel at the foot of Camelback Mountain that would make the Ritz look like a Day’s Inn.

Dozens of money men around the nation were likewise smitten. Running an S&L; was like minting your own money. Thomas Gaubert, a Dallas home builder, paid a modest $2 million for a controlling share of a thrift in Grand Prairie, Tex. He’d never again have to finesse his way around tightwad lenders.

“You go years with too much money, then not enough, too much, not enough again--having your own bank is the way to even all that out,” he explains.

Why not buy a thrift? If the price was $3 million, a new owner could recoup his investment by loaning out $100 million and charging 3% in “points.”

After that, if loans went into default, there was the reality softener of the money on deposit being federally insured. It was heads we win, tails you lose; the profits were private, the losses public.

Deposits were not that hard to attract--not if the thrift had confident managers willing to pay a top interest rate. In March, 1982, the Bank Board had removed the final restrictions on accepting that fickle, brokered money now insured up to $100,000.

Thrifts were free to go all out. On a computer screen a broker would see that Vernon Savings & Loan in Vernon, Tex., was paying an enticing 12%.

“I never heard of Vernon,” a client might say.

“What do you care?” was the answer. “It’s federally insured.”

Actually, country-bumpkin Vernon made use of brokered deposits--colloquially known as “hot money”--to grow from reported assets of $82.6 million in 1982 to $1.3 billion in 1986.

The thrift was owned by one of the most daredevil of the high-fliers, the now-indicted Don Ray Dixon, known best for his $2.6-million yacht, his fleet of planes and his company-paid tour of the best restaurants in Europe.

Somehow, the sages of American government had failed to realize how hot money would be handled in such hot little hands. Leading names in finance, among them Don Regan and Paul A. Volcker, the chairman of the Federal Reserve Board, were on a council that opened the flow of brokered deposits into the S&Ls.;

Similarly, from late 1982 to 1984, a task force of top thinkers reviewed the entire federal system for regulating financial institutions. It was headed by George Bush and included Regan and Budget Director David A. Stockman.

Some of the task force’s suggestions might have proved helpful, but it never engineered them into law. Nor did it divine the disaster in the making. Indeed, one of its main conclusions was this: Regulatory interference with the free market must be kept at a minimum.

In 1983, Pratt had been replaced as chairman of the Bank Board by Edwin Gray, the preference of industry chieftains at the U.S. League of Savings Institutions.

Press secretary to Ronald Reagan when he was governor of California, Gray had once done public relations work for a thrift in San Diego. “The League wanted a patsy, and I was their man,” he says candidly.

An irrepressible glad-hander, Gray, then 47, was also something of a foul-up. On the campaign trail, he was known for leaving his briefcase on airport Tarmacs and falling asleep in the middle of conversations.

He was the nice guy who always made people snicker and sigh, the genial bumbler they liked to call Mr. Ed.

And there he was, in charge of the S&Ls.;

CHAPTER FIVE

THE RICH AND THE SHAMELESS

Ed Gray’s domain was all at once pitiful and grand. From 1980 to 1982, the industry had lost almost 90% of its net worth, and many enfeebled S&Ls; merited some sort of regulatory euthanasia.

The Bank Board pulled the plug on many of them, but others stayed open as if they were zombies, resurrected from a burial beneath the bottom line with the elixirs of accounting gimmicks.

More of the terminal should have been shut, but that would have cost a few billion dollars, depleted the Federal Savings and Loan Insurance Corp. (FSLIC) and alarmed who knows who among the voting public.

The watchword was “forbearance.” Thrifts begged for time to rally back to health in the improving economy--and they got it from a Bank Board that lacked the manpower, willpower and especially the money to take them over.

Anyway, forbearance seemed to be working here and there. Some S&Ls; appeared a picture of robustness, gulping the potions of the Garn-St Germain legislation and metabolizing into behemoths. They were the subjects of fawning profiles in the financial press.

Until his fall, Charles Knapp was one of those darlings. His Financial Corporation of America (FCA) took distressed American Savings & Loan in Stockton and inflated it into the nation’s largest thrift.

Much of the puffing was supplied by platoons of salesmen who tempted strangers with the very highest in interest rates. “Dialing for dollars” this was called.

“Any schlep could pick up the phone and start brokering CDs,” says Al Parisi, who made a good living at it for an FCA affiliate.

Unorthodox banking methods, even brassy ones, replaced the cherished canons of the thrift industry. The underhanded, even the illegal, occasionally became the stuff of everyday business.

Just before audit time, some S&Ls; temporarily shuffled their red-ink investments to cooperating thrifts, camouflaging their own sagging finances and chuckling at the insider bromide that “a rolling loan gathers no loss.”

Appraisers and accountants were willing accomplices. It seemed such an easy game. This was the roaring ‘80s, and it was as hard for many people to be scrupulous as it was for them to be altruistic.

Money liked to show itself off. Wonder boy developer David Butler used Bell Savings in San Mateo as his personal piggy bank, flew about in a $2-million airplane and sat regally astride a $4,500 red leather toilet.

Thomas Spiegel of Columbia Savings in Beverly Hills was obsessed with security. Headquarters were equipped with bomb shelters and an arsenal of assault weapons and Uzi submachine guns. An electronic map showing worldwide terrorist activity was placed in a $9-million hangar at Van Nuys Airport.

Edwin McBirney III, chairman of Sunbelt Savings, held lavish theme parties in his Dallas home. One Halloween, he dressed up as a king and served his guests a feast of pheasant and antelope. At Christmastime, the decor was a Russian winter with the waiters dressed up as peasants.

In Miami, David Paul made sure the dining room at CenTrust projected the appropriate image of an elite S&L.; The crystal was Baccarat, the china Limoges, the ashtrays Tiffany, the gold-plated flatware Callegaro.

Though this finery was genuine, Paul himself was partly fiction. He bought his way into society, donating the thrift’s money to the right charities. Few seemed to mind that he lied about having a Ph.D. from Harvard and a master’s degree in business from Columbia.

Powerful people drank Dom Perignon at Paul’s island estate. The neighbors had complained about the bulky $7-million, 95-foot yacht that was moored in the bay behind the property, but Paul had since bought all of them out with loans from his S&L;, bulldozed their homes and installed extra dockage.

CHAPTER SIX

THE EDUCATION OF MR. ED

Ed Gray got his first real chance to soar with the high-fliers in June, 1983. He was squired about Dallas in a blue Rolls Royce by an S&L; owner named Spencer Blain Jr. An apostle of brokered deposits, Blain was transforming Empire Savings from a half-pint suburban thrift into a $330-million scrapper.

Whiskey poured freely in Blain’s penthouse. There was a lot of hooting and knee-slapping, and Gray enjoyed how these rich Texans could be so showy and yet down to earth. Linton Bowman, the state S&L; commissioner, pulled out a guitar and joined an industry lobbyist in playing some country standards.

Oddly enough, Bowman later surprised Gray by confiding in private that their host’s S&L; was growing far too fast. Empire and other thrifts were doing “land flips,” where property was traded back and forth, multiplying in price each time, with the S&Ls; cutting themselves in for a big fee.

Bowman also said Empire was building shoddy condominium projects east of the city. Something was haywire. He thought cars were being hauled in from a junkyard and parked out front to make the buildings look occupied.

Ed Gray, new to the job, was not in a mood to hear about troubling scams. The Bank Board’s purpose was not just to regulate the S&L; industry, but to promote it. And promotion was why Gray had come to Dallas.

Still, that day was the start of a long education. The Bank Board’s chief was not the complete toady most presumed. He may not have been a whiz with the numbers, but he did believe in public service, especially with the revered Ronald Reagan at the lead, getting government off the backs of the people.

Gray’s staff soon began to awaken him with cold water. Slowly--many say far too slowly--the sleep rinsed from his eyes. This was hard on him. More and more, he realized that sometimes less government can become bad government.

In early 1984, the usually upbeat chairman turned ashen watching a video about Empire’s construction binge. Building upon building lay vacant, windows broken, doors warped, no condo sales going on. All the same, laborers were rushing to throw up more of these ghost towns on land nearby.

In short order, the Bank Board declared Empire insolvent, and the insurance fund ponied up $279 million to pay off depositors. At the time, this was the costliest S&L; closing in history--and one of the first openly attributed to fraud.

It made Ed Gray wonder. How many similar orgies of deal-making were going on? He shuddered at the possibilities. Something had to be done, and the first step seemed to him obvious: stop that geyser of cash, the brokered deposits.

The Bank Board did so, but it was not a change that would stick. The courts overruled it. Worse yet, the secretary of the Treasury branded it heresy.

Don Regan had become a believer in money brokering at Merrill Lynch. He felt it increased the efficiency of capital markets--money finding its own place in the sunshine of higher interest rates. Anyone who could not see the beauty of that was probably some kind of turn-back-the-clock re-regulator.

Gray must go, Regan concluded. The dunderhead of a PR man was making hysterical speeches about the FSLIC running out of money. If the Bank Board closed down all the insolvent thrifts it should, Gray explained, the fund would plunge deep into the red. He wanted Congress to come to the rescue.

Friends cautioned the chairman about panicky talk. No one wanted to listen to a Chicken Little while the economy was purring along. Besides, only a scattering of academics, bureaucrats and congressmen agreed with him.

“Maybe a man of more stature could have gotten through,” Gray says now. “But the industry would never tolerate a man of stature. It wanted a good ol’ boy, and if they hadn’t gotten me, they’d have gotten someone worse.”

In truth, Mr. Ed was an easy man to vilify. Like some of his predecessors, he took freebies from the U.S. League and lived a bit too well off his expense account. Newspaper stories about indiscretions hurt him at critical times.

He was embattled. If only he could speak to the President, he told himself. In just an hour, he could make Reagan understand. But insiders advised him this was impossible now that Regan had become White House chief of staff.

Even if such a meeting took place, Regan would be there to bad-mouth him before, disagree with him during and bad-mouth him again after.

Then, one day, Gray heard about a secret post office box used for sending letters to the President without Don Regan knowing. He asked an old friend from California about it, Edwin Meese III, the attorney general.

Sorry, Gray says Meese told him: “The post box is still there, but Don Regan, these days he sees everything.”

CHAPTER SEVEN

A PUNY, RAGTAG BAND

Fraud leaves little enough in the way of fingerprints, and the regulators on guard against it were neither the keenest nor most experienced of sleuths.

Ed Gray whined about it all the time: “Can you imagine a $1-trillion industry backed by the credit of the U.S. government and all there was to protect it was a puny, ragtag band of examiners?”

Deregulation not only meant fewer regulations but fewer regulators as well. From 1980 to 1984, with hundreds of S&Ls; metastasizing into insolvency, the Bank Board’s staff of field examiners atrophied from 638 to 596. Gray did not get reinforcements until 1985 when he figured a way around the budget cutters.

Federal thrift examiners were paid less than dogcatchers. Starting salary was $14,000, and annual turnover was 25%. Once gaining proficiency, many left for the thrifts themselves. Top college grads never even considered the work. State S&L; boards were similarly undermanned.

In California, more than half of the 160-person staff had been axed, largely in cutbacks by Gov. Edmund G. Brown Jr. In Texas, there were only 14 field auditors for 250 state-chartered thrifts.

Arthur Leiser was Texas’ chief examiner during most of the 1980s. His staff was on the road constantly, traveling across vast territories, sleeping in fleabags and trying to get by on a $40 per diem. “You’d come home for the weekend and then it would be back out the door again,” he says.

The pace had always been frenzied, but at least in the old days the tasks were routine. One home loan looked much like another, the appraisals in the loan applications usually matching up with the sale price on the deeds.

But after deregulation an examiner was faced with confounding loans that seemed as intricate as a chalkboard full of algorithms. Most S&Ls; still were honest; but now they were involved in mammoth real estate projects.

Worse for auditors were corrupt thrifts. They had accountants and lawyers who could make 2 plus 2 add up to 22. Loans in default were slyly swapped with other thrifts, “a dead horse for a dead cow,” then refinanced to new borrowers.

“I can’t imagine Christ coming off the cross having the wisdom and intelligence to sort it all out,” says Bowman, the former Texas state commissioner.

By some estimates, Texas will be responsible for nearly two-thirds of the S&L; calamity’s full cost. Oil prices plunged the state into its own private depression just as buildings were sprouting like wildflowers.

Texas was also a swindler’s paradise. Linton Bowman apologizes for some of it. He partied with people he was supposed to regulate. His handpicked deputy quit to work at Vernon Savings--and then was convicted of S&L; fraud.

“It was easy to get suckered in . . . “ he says. “We were up against the smartest, and all I had was one lawyer till I got it up to two.”

The Feds were in no better shape in Texas. Back in September of 1983, the office of the 9th District--also covering Arkansas, Mississippi, Louisiana and New Mexico--was relocated from Little Rock to Dallas. Thirty-seven of the office’s 48 employees quit rather than make the move. Chaos prevailed.

By 1986, a wised-up Ed Gray finally got around to focusing on the Lone Star mess. To clean it up, he sent in H. Joe Selby, a career regulator who had been known for his toughness at the comptroller of the currency’s office.

Selby expected the worst, but his imagination had been unable to conjure up what he found. There were thrifts that had not been examined in three years. Some were looted so badly it took more than a month to write up the referrals for criminal prosecutions.

“Examiners didn’t know about the concept of safety and soundness,” Selby says. “If there was no exact regulation against it, they’d let you do what you want--buy five carpeted airplanes, a hunting lodge, $5 million in art.”

The Texas crackdown made enemies. One regulator found a listening device in his phone. Rumors began circulating about Selby. Enemies said he was a vengeful homosexual who had hired a ring of gay lawyers to hound the S&L; honchos.

The tough regulator installed an alarm at his house. One day, he felt so fearful he imagined a high-powered rifle pointing at him as he stood in his kitchen. He scooted from room to room, closing all the plantation shutters.

But this was not the low point. That probably came in February of 1987 when Selby and five others were summoned to the ornate office of the Speaker of the House and chewed out by an angry Jim Wright.

“He was a scary fellow, that Wright; I’d never seen raw power like that,” Selby says. The Speaker wanted to know why regulators were making life miserable for an upstanding Texan like Don Dixon of Vernon Savings.

Six weeks later, Vernon was closed at a cost to the insurance fund of $1.3 billion. More than 95% of its loans were in default.

CHAPTER EIGHT

THE POWER OF MONEY

Money talks, people listen. And few listen better than lawmakers when they want the spigot turned on at reelection time.

The thrift industry contributed $11.6 million to congressional campaigns in the 1980s. Even more was coaxed from friends at $1,000-a-plate dinners. Favors were common. Don Dixon let Tony Coelho use his yacht for fund-raisers, and Tom Spiegel cut the majority whip in on a sweet-sounding junk bond deal.

Charlie Keating and his associates dispensed $1.4 million to political groups controlled by five grateful senators: Alan Cranston (D-Calif.), Dennis DeConcini (D-Ariz.), John Glenn (D-Ohio), John McCain (R-Ariz.) and Donald W. Riegle Jr. (D-Mich.).

These are busy men, but they made time to rally to the particular concerns of such an endearing “constituent.” When the Bank Board waded knee-deep into the red ink of Lincoln Savings, the senators personally questioned regulators about why Charlie was being browbeaten. “Forbearance” was urged.

Keating had expected no less. He would later be unperturbed at suggestions that his money was meant to buy influence: “I want to say in the most forceful way I can: I certainly hope so.”

Tom Gaubert in Dallas was one of the Democratic Party’s biggest national fund-raisers. He and Jim Wright and Coelho were buddies. Gaubert considered himself their tutor about the ins and outs of S&L; problems.

The way Gaubert saw things, overzealous regulators were closing down thrifts before they had a fair chance to straighten themselves out.

This was a familiar lament from afflicted S&Ls.; Their owners complained about the Gestapo tactics of Bank Board hit squads--and begged for time.

Ed Gray, to the contrary, thought too many expensive months had already slid past. Delays allowed gasping thrifts to sell off their remaining sound assets, gamble again with the money and roll up more losses.

The meter was running at an estimated $30 million a day. Gray wanted to bury every zombie he could, but the insurance fund was down to a paltry $2.5 billion. It needed another $15 billion--and probably even more than that.

In 1986, the Bank Board decided to raise the money through bond sales. This was a final chance to forestall--or at least to minimize--an eventual taxpayer bailout. S&Ls; were then only a big problem, not yet a historic one.

There was a hitch, however. The bonds needed the approval of Congress. And for that, Ed Gray needed the cooperation of Jim Wright.

The powerful Democrat already had the chairman in his cross-hairs. Friends all over Texas moaned about the simpleton rough rider at the Bank Board.

Wright phoned Gray repeatedly, checking into the problems of Dixon, Gaubert and others. He wanted the Bank Board to show more flexibility and understanding.

The two men parried week after week. Sometimes Gray did just as Wright told him--and sometimes not. And sometimes the Speaker allowed the bonds to move toward a vote--and sometimes the proposal was stymied.

The S&L; industry itself opposed the $15 billion, displaying a survival instinct for the particular instead of the general. The less money in the insurance reserve, the fewer thrifts that could be closed down.

In the end, the fund was not replenished for more than a year. The sum was $10.8 billion, not $15 billion, and it came with strings. There were limits on annual spending, a way to restrain the regulators from too many takeovers.

Congress had not conferred much respect on Ed Gray; nor had he been capable of commanding it. His term expired in June of 1987, and he left office reviled as a crybaby.

There were some satisfactions. Gray had outlasted Don Regan, who took a wrong turn into Iran-Contra and never found his way back.

But for the most part he was only exhausted and disillusioned. He had finally concluded that the S&L; crisis was a political one first and a financial one only second. Washington did not work the way he had thought.

Says Gray: “People just don’t understand the power of money.”

CHAPTER NINE

SUCH A SHOCK

By 1988, anyone paying attention could see it. There was a colossal hole in the lawn inside the white picket fence. But how deep did it go?

The new chairman was M. Danny Wall, a longtime Republican staffer on the Senate Banking Committee. He had the look of a scholar with a trim beard and glasses. A Capitol Hill insider, he had campaigned for the job.

Wall offered what Gray could not, a man who understood Congress. He was certainly no one to make hasty remarks about a taxpayer bailout. Yes, he admitted, there were difficulties. But a crisis? No, not at all.

The General Accounting Office, on the other hand, began siding with outside experts. There were far more S&L; fatalities than thought. The costs would be monstrous. Series after series appeared in newspapers saying much the same.

All the while, Wall remained optimistic. His figures about losses were usually half those of anyone else’s. He smiled even as he backpedaled.

In February, he guessed $15 billion would set things right. In April, $23 billion. In June, $31 billion. In July, $42 billion. In October, $50 billion.

Many in Washington suggest that this good soldier wanted to keep a lid on things until after the presidential election. No doubt, George Bush preferred to say “no new taxes” without having to add an S&L; footnote.

Wall denies any such masquerade. He says field reports were incomplete. The Bank Board lacked a system for appraising real estate. It was too hard to tag the S&L; corpses. Analysts may as well have been counting beans in a jar.

“In hindsight, we should have been worst-casing it,” he says. “We just didn’t have the capacity to assemble the data. It all came as such a shock.”

Toward year-end, Wall was preoccupied with trying to sell off 200 deathly sick S&Ls; that he did know of--his only option with no money to close them.

But who would take these losers off the Bank Board’s hands? To interest buyers, Wall had to promise a guarantee of profits and point the way toward lucrative tax write-offs.

This awakened a market. Canny tycoons did the complicated arithmetic, men such as Ronald O. Perelman and William E. Simon and Robert M. Bass. Then they outfoxed the government at every turn.

Perelman reportedly earned 250% income in just one year on First Gibraltar Bank in Houston. Savings on taxes alone exceeded his investment of $160 million.

These windfalls came to smart people honestly; but they also came at the expense of the taxpayer, adding at least $39 billion to the S&L; tab.

Damage was always outracing repairs. In the meantime, the financial disaster largely evaded public indignation. It lacked clarity and pizazz and, most of all, simple villains.

Democratic presidential candidate Michael S. Dukakis’ staff members were among the few who did their S&L; homework. They laid it out for him in a three-ring binder, but Dukakis only mentioned the thrifts once or twice in the campaign.

The issue seemed so complex. TV was not intrigued. The networks never picked up on his brief statements, and Dukakis quickly gave it up. “The problem was there was no visual,” he says.

Besides, the facts were simply too incredible to spring on the uninformed. With barely a ripple, the United States had stumbled into an expense that was more than triple the cost of the entire Vietnam War.

Who would believe it?

CHAPTER TEN

WHERE DID IT GO?

On the back of the currency it says, “In God We Trust.” But for the protection of their money, Americans rely on elected officials.

It is a blind faith really, nothing but complaisance and wishfulness. It assumes government officials can be counted on to watch out for the taxpayer.

That was not so during the S&L; crisis. Expediency won out over statesmanship every time. Now there is $500 billion in hell to pay.

Ronald Reagan, if aware of the crisis, never mentioned it in public. George Bush, an economics major from Yale, grasped it late and then kept it to himself. Silent so long, he offered a bailout plan as soon as he took office.

The Bank Board has now become a relic, its responsibilities spread to new creations, the Office of Thrift Supervision and an administrative leviathan called the Resolution Trust Corp. Revised S&L; rules have returned many of the constraints flung to the winds by Garn-St Germain.

In the last year, the OTS has taken over 486 thrifts. Of 2,442 survivors, about half are crippled or badly reeling. Even healthy ones are given an uncertain prognosis. S&Ls; may need to be absorbed into the banks.

By Jan. 1, the RTC hopes to dispose of $50 billion in assets seized from failed thrifts--the largest close-out sale ever. The merchandise includes thousands of homes, hotels, office buildings and shopping malls.

It is property too expensive for the government to maintain. Uncle Sam is over a barrel. Tycoons will again walk off with bargains.

Eventually, most of the bailout will be paid for with long-term U.S. bonds. America has decided to borrow its way out of the S&L; blunder.

That is why the price is put at $500 billion, not $200 billion. The nation will share the cost with the future--with its children and its grandchildren.

At last there is some outrage about it. Predictably, it comes with discovery of a celebrity villain, a rich man’s son with carfare to Easy Street.

Neil Bush served on the board of Silverado, a Denver thrift since gone bust at a loss to the fund of $1 billion. Among indiscretions, he voted to give $106 million in loans to a business partner. Regulators say it was a conflict of interest.

Young Bush, 35, faces administrative, not criminal, charges. On a roster of S&L; evildoers, he would rate very far down a very long list. But he is the President’s son and too good a catch to let go.

Congress has taken the public’s temperature. There is bloodlust for scalps now, and politicians prefer to hunt down S&L; rogues than look in the mirror. It is better that heads get lopped off in jury rooms than in voting booths.

Prosecuting fraud has been hard. The paper trails zigzag, then vanish. Last year, the government needed a moving van to carry documents to the trial of Spencer Blain in Texas. The seven-month proceeding ended in a hung jury.

More than 200 S&L; officials have been convicted, but they are mostly the small fry. Their sentences are often shorter than those of small-time drug dealers. Little money has been recovered--and little will be.

Where did it go? Where does that terrible hole lead? If the taxpayers are out $200 billion in principal, in whose pockets has it ended up?

Some of it was certainly squandered on the extravagances of a few, on gluttony and vulgarity and pretension. A portion may well be wearing clever disguises in the snug hideouts of foreign banks.

But ill-gotten fortunes add up to only a small share of the immense total. The place where most of the money ended up is much less sensational. The bulk of it simply dispersed into the economy--gone for salaries and profits that were acquired during a spending binge placed on the taxpayers’ credit card.

It went to developers and engineers and masons--to anyone who benefited off a building boom driven by loose capital instead of need. It made its way into factories and hotels and stores. It fed chauffeurs and the chauffeured.

Evidence of the spree can be found in peculiar monuments to incaution--in high-rise buildings hollow of occupants and in shopping centers put up at catty-corners, one rendering the other unnecessary.

The money, at the same time, made historic shifts.

Parts of America did better than others. As usual, the rich outgained the poor. Savers earned an estimated $14 billion extra in artificially high interest rates. The more they had, the more they gained.

There was a geographic passage as well, the money hastening to those states with the most irresponsible thrifts, fleeing the cold of the Northeast and Midwest for the fever of the Sun Belt.

More than anything, the wealth made a regrettable move from the nation’s future into its past, a needy tomorrow bled by a neglectful yesterday.

It will not be there to compete in the fluid reshaping of the world.

Or to heal and to feed and to shelter.

Or to clean the air and the earth.

Or to buy a home of your own.

Times staff researchers Nina Green and Anna M. Virtue contributed to the reporting of this story.

MAPPING THE DAMAGE:

From Jan. 1, 1980 to Sept. 10, 1990, 985 S&Ls; have been closed or sold by the U.S. government--or continue to operate under federal control. Here is a state-by-state breakdown. (Thrifts vary in size. California’s total includes some of the nation’s largest troubled institutions.)

Alabama-8

Alaska-5

Arizona-8

Arkansas-20

California-78

Colorado-24

Connecticut-4

Delaware-0

D.C.-2

Florida-42

Georgia-14

Hawaii-2

Idaho-3

Illinois-83

Indiana-16

Iowa-22

Kansas-24

Kentucky-9

Louisiana-73

Maine-1

Maryland-11

Massachusetts-4

Michigan-10

Minnesota-11

Mississippi-21

Missouri-22

Montana-3

Nebraska-9

Nevada-1

New Hampshire-0

New Jersey-24

New Mexico-15

New York-21

N. Carolina-8

N. Dakota-5

Ohio-29

Oklahoma-24

Oregon-11

Pennsylvania-13

Rhode Island-2

S. Carolina-3

S. Dakota-4

Tennessee-19

Texas-217

Utah-8

Vermont-0

Virginia-19

Washington-12

W. Virginia-8

Wisconsin-3

Wyoming-6

Guam-0

Puerto Rico-4

Virgin Islands-0

*Compiled by the Los Angeles Times with information from the Office of Thrift Supervision and the Resolution Trust Corporation.

BIGGEST S&L; FAILURES Largest thrifts closed or sold by the U.S. government since 1980, ranked by their size in assets. Assets are stated in millions.

ASSETS NAME STATE DATE $30,142 American S&LA; California 12/88 6,891 Gibraltar Savings California 6/90 6,700 CenTrust Savings Florida 6/90 6,430 Gibraltar Savings Texas 12/88 4,600 Western Savings Arizona 5/90 4,413 United SA of Texas Texas 12/88 4,215 First Fin S&LA-Downers; Grove Illinois 4/82 3,762 University FSA Texas 10/89 3,133 Columbia FSLA Colorado 12/88 3,110 First Texas SA Texas 12/88

Source: Office of Thrift Resolution and Resolution Trust Corp.

SAVINGS AND LOAN SCORECARD

Here is a recent tally on the savings and loan situation. Information was supplied by the Justice Department, Resolution Trust Corp. and various sources.

COST: $500 billion or more over 30 years

CHARGED: 328 defendants indicted

CONVICTED: 231 defendants, 5 others aquitted

FINES IMPOSED: $1 million

PENALTIES: $56.6 million ordered in restitution, including $25 million in civil settlements.

SCOPE: 985 S & Ls have been closed or sold by the U.S. government since Jan. 1, 1980, or continue to operate under federal control

JAIL TERMS: 1.9 terms on average. The average term for a bank robber is 9.4 years

ACTUALLY PAID: Of the $2.5 million ordered in restitution to be paid this year in cases prosecuted by the Dallas Bank Fraud Task Force, $50 has been paid. In the previous two years, $23,700 of the $8.9 million ordered in restitution has been paid

PENDING: Eighty-four civil lawsuits against 48 thrifts in an attempt to recover lost money. About 40,000 lawsuits in an attempt to recover money from thrift officers.