A Wonderful Life : S & L HELL: The People and the Politics Behind the $1 Trillion Savings and Loan Scandal, <i> By Kathleen Day (W.W. Norton: $24.95; 384 pp.)</i>
Much has been written about the savings-and-loan crooks and their expensive habits. “S&L; Hell” is about the aiders and the abettors. The finger points in familiar directions--Congress and the Keating Five, etc.--but also in a few surprising ones. Did you know that Federal Reserve chairman Alan Greenspan was once a paid shill for Charles Keating?
Kathleen Day, formerly a reporter for this newspaper and for the Washington Post, has produced a detailed and galling analysis of how government, in concert with private enterprise, created the greatest plundering opportunity in the history of peacetime America. If you’re still wondering how all this could have happened, here’s the short answer:
Stage One, early 1980s: High interest rates are ruining the S&L; business. The S&L; lobby, a.k.a. the League, turns to Washington for help. President Carter, the original dupe in the story, responds with the first of several deregulation bills. This allows the struggling S&Ls; to improve their fortunes by investing in other things besides the boring residential mortgages with which they’ve been stuck to date. Racetracks, industrial parks, brothels in Nevada--none of these are off-limits.
Along with deregulation, Congress then raises the federal deposit insurance to $100,000 for every CD and every individual savings account. The $100,000 figure is never debated openly on the floor of the Senate or the House. It magically appears in the final compromise version of a banking bill--put there, Day contends, by Sens. Alan Cranston and Jake Garn, plus Rep. Fernan St. Germaine, at the behest of the League.
This increase in federal protection results in billions in new deposits flowing into hundreds of S&Ls; from coast to coast. These enormous sums can then easily be squandered on the aforementioned deregulated investments. Individuals who might have considered robbing a bank the old-fashioned way now opt for buying an S&L; and doling out the proceeds to themselves and their friends.
Ronald Reagan is known as the deregulation President, but apparently we can’t blame him for the S&L; mess. According to Day, when the Reagan people first took office, they regarded the thrift industry as overprotected, oversubsidized and poorly run, which is why the lobbyists had to work around the White House and wheedle concessions out of Congress, with its Democratic majority.
The Democrats tended to think of the S&L; lobby as representing the Little Guy, and of the owners of S&Ls; as loyal, upstanding Americans, because they remembered how Jimmy Stewart came back to save the local S&L; in “It’s a Wonderful Life.”
Perhaps if Frank Capra, a famous Democratic filmmaker, had never produced “It’s a Wonderful Life,” then this latest generation of lawmakers wouldn’t have gotten the mistaken impression that they were still dealing with Jimmy Stewart-type owners of S&Ls;, when in fact many of the Jimmy Stewarts were bought out by an enthusiastic group of Nathan Detroits and Harry the Horses, who for the first time were attracted to the S&L; business, thanks to the changes in the rules.
Stage Two, mid-1980s: Interest rates have fallen, which in normal circumstances would have caused the S&L; industry to return to profitability. Instead, a scary percentage of these institutions is getting sicker. Ed Gray arrives on the scene. He’s the hero of the story, but not without warts. He gets a job in government as Reagan’s thrift regulator and heads out on the S&L; banquet circuit, expecting to sit back and enjoy eight years’ worth of shrimp cocktails. Soon, he begins to smell a lot of rats.
An S&L; owner driving a Mercedes he can understand, but not the Rolls Royces he sees in Texas, which Gray takes as evidence that something is amiss. He figures out what’s happening, and then starts screaming “Stop thief,” but nobody in Washington wants to listen, because “Stop thief” sounds like excessive government regulation. In fact, the government is cutting back on S&L; regulators, who make an average of $14,000 a year, in an effort to reduce the budget deficit, which is a lamebrained strategy when you figure that an S&L; left to its own Harry the Horse management can run up a $1-to-$3-billion tab in no time.
At this point, the Washington solution to the S&L; problem is to change the accounting rules so that the growing number of insolvent institutions looks solvent on paper. There are so many revisions to the Regulatory Accounting Practices (RAP) that wags in back offices refer to them as CRAP. The idea of closing the bankrupt institutions, or taking actions to stem the losses, is unthinkable in Washington, and vehemently opposed by the S&L; League, which worries about the industry getting an undeserved bad reputation.
Meanwhile, millions of S&L; dollars are contributed to the campaigns of key senators and representatives, in particular those on the banking committees. Don Dixon, the owner of the Vernon S&L; in Texas, has purchased the sister ship of the presidential yacht Sequoia, which is parked in the Potomac and used to entertain important elected officials. Day suggests that one of the principal motivations for elected officials to keep crooked S&Ls; alive is that every time one is closed, a valuable source of campaign revenues is lost.
It is during this stretch in the mid-1980s that Alan Greenspan, then a private economist, takes up the cause of 17 thrifts, including Charles Keating’s Lincoln Savings and Loan, arguing that the new restrictions on S&L; behavior suggested by Ed Gray are too harsh and not in keeping with “free market principles.” Greenspan tells government regulators that Keating is “seasoned and expert,” and describes Lincoln as a “strong institution that poses no foreseeable risk to the FSLIC.”
Stage Three, 1988-1990. Democratic challenger Michael Dukakis mentions the S&L; problem only once during his campaign against George Bush, and Bush likewise ignores the subject until after he’s elected, when he informs the nation of this multibillion-dollar boo-boo in a press conference. The S&L; lobby is about to launch a vigorous campaign to make us taxpayers pick up the tab, which starts at $40 billion and quickly grows to $200 billion, $400 billion, and beyond.
If the government had taken action to foil the thieves in an earlier stage, the bailout would have been much cheaper, and the S&L; industry might have been required to pay for it. Day suggests this is the reason the industry continued to oppose any government meddling until the losses reached 12 digits. Nobody could expect the S&Ls; themselves to come up with this kind of money, which meant the bill would have to be sent to you and me. This suits the industry just fine.
In any event, a lot of insolvent S&Ls; are finally sold or closed, and the government vows it will go after the bad guys who walked away with the proceeds. But prosecutions are hampered by the government’s reluctance to spend money for more prosecutors and thereby add to the budget deficit, which has grown a great deal because of the cost of the S&L; bailout.
In the thousands of S&L; fraud cases, only a small percentage of defendants has actually seen a jail cell, and where fines are levied, the money is often uncollected. Meanwhile, the sale of S&L; assets attracts a new crowd of connivers, who through their political connections are rewarded with a succession of amazing deals.
One example is an Arizonan named Fail, who, in spite of having been indicted for securities fraud in an earlier case, is allowed to buy 15 insolvent Texas thrifts with only $1,000 out of pocket, plus $70 million in borrowed funds, and $1.82 billion in federal subsidies. In hindsight, regulators agree this transaction is a mistake.
In order not to make such mistakes, the government is using advisers such as Salomon Brothers, whose expertise got several S&Ls; into trouble in the first place. In a newspaper advertisement, Salomon brags about have been hired by the Resolution Trust to come to the rescue, the text appearing under a big picture of a happy Uncle Sam.
By the end of this book, the U.S. League of Savings Assns. that lobbied so strenuously for deregulation, the $100,000 guarantee, and for its right to loot without interference from Washington has changed its name to the Savings and Community Bankers of America, to distance itself from a bad experience and get on with its business. The organization that gave the League everything it wanted is still called the U.S. government. Maybe it should change its name as well.
