How Taxpayers Contributed to S&L; Crisis

Fraud, fraud, fraud.

When it comes to the savings and loan crisis, that’s practically all you hear about. Fraud implies broken laws, of which there were plenty. But often the biggest losses in this $600-billion fiasco (paid out over 30 or 40 years) arose from actions that were entirely, tragically legal.

There’s no better example than the collapse of Far West Savings, a big Newport Beach thrift controlled by those storied greenmailers, the Belzberg brothers.

Nobody at Far West appears to have broken any laws. But now you and I own its huge portfolio of bad loans and junk bonds, which we came to possess when the federal government recently seized Far West as insolvent. Miami thrift analyst Kenneth H. Thomas says it may cost us $500 million to clean up the mess.

The Belzbergs lost less--a lot less. They began acquiring Far West shares in the early 1970s, so it’s hard to sort out how much they invested, but even at its peak, their stake probably never topped $100 million. They paid much less for it and got some back in dividends and salaries.

What they really got, though, was a license to print money. Assets of Far West--whose board included Monty Hall, former host of “Let’s Make a Deal”--swelled from $908 million in 1980 to $4.76 billion in 1988, and it was by no means atypical.

How did these thrifts do it? By transferring most of the risk to the American people. Federal deposit insurance of up to $100,000 per account meant thrift owners could offer high rates to harvest cash from all over the country. Depositors couldn’t lose, and neither could thrift owners, beyond their relatively small investment. Managers continued to collect nice salaries as well.

All they had to do was invest the dough at higher rates, at which point enter Michael Milken, the junk bond maven. In a very real sense, the Belzbergs’ thrift charter gave Milken and his firm, Drexel Burnham Lambert, a blank check drawn on the U.S. Treasury.

Far West used taxpayer-guaranteed deposits to buy $670 million worth of high-yield junk, a good chunk of it from Drexel. The Belzbergs didn’t have to look Drexel up in the phone book; a lawsuit by disgruntled Far West shareholders claims that Drexel was providing financing for lucrative Belzberg raiding. A Drexel spokesman also says Drexel did financing for the Belzbergs and Far West, but not for takeovers. The Belzbergs even invested in Reliance Capital, a partnership in which Milken also invested. Former Far West Chairman William Belzberg could not be reached.

Using thrifts this way made perfect sense, to those who controlled them. Such big California thrifts as Columbia Savings, Lincoln Savings and Imperial Savings, as well as Miami’s Centrust, all loaded up on junk bonds, with similar results.

The roots of the problem go deep. Ohio State University thrift expert Edward J. Kane says the industry had been in crisis since 1971. Stuck with fixed-rate mortgage portfolios and a rising cost of funds--money market accounts and soaring interest rates were slow death--it got itself deregulated. Then it exploited slack accounting rules, compliant auditors and lawyers and a regulatory structure that was beholden to the regulated.

With their net worth largely evanescent, thrifts that invested in junk bonds and made loans to brothels behaved rationally. They had little to lose and everything to gain. Says Thomas: “Heads they win, tails we lose.”

Unlimited access to federally insured deposits--in other words, to our collective pocketbook--helped mightily. One former Far West official says the government, as the system’s insurer, just didn’t rate the risks right. “It was an underwriting failure,” he says, in a comment so appalling he won’t be quoted by name.

Federal and state governments--including California’s--made things worse. Donation-hungry politicians helped zombie thrifts continue accumulating losses. New laws curtailed silly tax breaks that had made commercial real estate so desirable, helping torpedo thrift portfolios.

And don’t forget Drexel. It dominated the junk bond market. When Drexel succumbed to prosecution and bankruptcy, the value of junk plummeted, further undermining thrift holdings. (To be fair, a federal requirement that thrifts unload junk bonds by July, 1994, meant more junk on the market when there were fewer buyers.)

This might be OK if the Belzbergs and their ilk weren’t playing with our money. Lord knows they didn’t need our help; the Belzbergs are said to be worth perhaps $400 million, although recent setbacks may have slashed that.

Given their wealth, the Belzbergs’ role raises a big question: Why should you and I be on the hook for $500 million when they got away so much easier?

I hate to say it, but it’s kind of our fault. The S&L; crisis represents a gross failure of our political leadership, and we elected those leaders. Resolving the mess will lower our standard of living by siphoning resources from needed government programs, productive private investment and pleasurable consumer spending. It is undoubtedly the worst financial debacle in history.

The Far West case shows one more thing: America is still the land of opportunity. The Belzbergs, after all, are Canadian, yet we threw our Treasury open to them. Is this a great country or what?