INSIDE JOB
The Looting of Americans
Savings and Loans
By Stephen Pizzo,
Mary Fricker
and Paul Muolo
The Looting of Americans
Savings and Loans
By Stephen Pizzo,
Mary Fricker
and Paul Muolo
CHAPTER FOURTEEN
Casino Federal
In the movie Quest for Fire a band of Stone Age men, consumed with the need
to acquire a cinder from which they could kindle their fires and reap the huge
benefits fire could bring, scoured the countryside. To get a cinder they would
steal and even kill. The quest became an obsession. When we investigated a
close relationship that we discovered between savings and loans and gambling
casinos, we learned that certain segments of the business community pursued
casino ownership with the same passion that cave men searched for fire. They
flocked to areas where it was rumored the public was about to approve gambling.
They used every tool at their disposal, primarily political and financial, to ingratiate
themselves with the local power brokers.
Because of the skimming and money-laundering opportunities inherent in
a business that dealt in such a high volume of cash, no one was more dogged
than the underworld in the pursuit of casinos. Owning a casino was a wise guy's
most cherished dream. The propensity of organized crime to circle the casino flame had a dual result: Rumors of mob affiliation followed virtually everyone who applied for a casino license, and the gaming control boards that granted casino licenses developed a tough licensing procedure designed to weed out
crooks. Nevada and New Jersey licensed casinos as a means of raising revenue and as a way of controlling casino ownership. Applicants underwent a rigorous
investigation and interrogation during which Gaming Control Board investigators looked for any possible connection between the applicant and organized crime.
If even a casual relationship could be established, the license was generally
denied, hi perhaps the ultimate irony, after thrift deregulation it was much easier
to own a thrift than it was to own a casino.
To circumvent the licensing obstacle, men with organized crime connections
often used "beards, " individuals with clean records who could hold the casino
license for them. In return a beard was generally rewarded with a piece of the action either at the casino or in some other business enterprise. The gaming
control boards routinely uncovered beards and denied them licenses or, if they
had already slipped by, threw them out. But other beards would replace them
in short order, all part of the continuing quest for fire. Sitting on a gaming
control board was like being a pest-control expert, some said. They sprayed
regularly but the roaches always returned.
Conservative financial institutions shied away from making loans on an
enterprise with such a colorful history. For this reason casinos were often financed
by pension funds' or other large pools of money- that did not have to operate
under the strict standards that regulators demanded of thrifts and banks. But
then came the deregulation of the thrift industry and, with it. new owners and
managers who were only too happy to make loans on casinos. The timing of
thrift deregulation was serendipitous for those who aspired to own a casino because it came just as financing by the pension funds was being closed to them
by fierce government anti-racketeering prosecutions and seizures. Those who
pursued casino ownership with a lifetime passion promptly saw the opportunities inherent in thrift deregulation. Time and time again, as we researched this book, we ran into the casino connection—thrift executives loaning on and investing
in casinos.
We first encountered the casino connection when we met Norman B. Jensen
at Centennial Savings. Jenson was a Las Vegas attorney with a 20-year history
in Las Vegas gaming, including, at various times, connections with the Crystal
Bay Club Cal-Neva in North Lake Tahoe and the Thunderbird Hotel, the
International Hotel (now the Las Vegas Hilton), and the Royal Inn Hotel, all
in Las Vegas. His "claim to fame," he told us, was the Las Vegas Holiday
Casino, which he and partners developed, promoted, and operated. He and an
associate held a $1.7 million mortgage on the Shenandoah Casino in Las Vegas,3 and in the early 1980's Jenson was also trying to get control of two casinos in Nevada, the DeVille and the Crystal Palace.4 We learned of Jenson's casino involvement when coauthor Steve Pizzo spotted Jenson's name in a National
Thrift News article about a Seattle trial of executives of three thrifts that were
located in Louisiana, Texas, and Washington. Jenson, the story said, was involved in a complex $4 million casino-financing agreement with the thrifts. We
wondered how Jenson got involved with three such widely separated institutions,
and he told us that a loan broker named John Lapaglia, whom he had known
for 15 years, had made the introductions.
When we researched Lapaglia we found that he was a former Texas vice cop who had gone into the real estate business and at one time had maintained
an office in Las Vegas, which was where Jenson had met him. In the mid-1970's
Lapaglia owned East Texas State Bank in Beaumont, Texas, for a little over a year. In 1984 Lapaglia would apply to own his own savings and loan, Uvalde
Savings Association, but federal regulators denied the application.
In the 1980's Lapaglia was the owner of Falcon Financial Corporation, a mortgage brokerage firm in San Antonio.5 A smooth operator, he reminded
people of an Arabian merchant. He traveled in a leased corporate plane, accompanied by his man Friday who doubled as a secretary. He said he did so because traveling with a woman secretary could raise questions. He was rumored
to be a womanizer, ordering $100 bouquets for pretty receptionists he'd just met,
but he told us the rumors weren't true. The brokerage business had been good
to him—he claimed to have brokered $2 billion in loans, on which he earned
his company hefty commissions of between $20 and $60 million over 20 years.6 Perhaps that was why his wife had a dollar sign painted on the bottom of their swimming pool at his home outside San Antonio. Associates said he was a high
flier, living the good life.
Through his trade as loan broker, Lapaglia had become well acquainted
with the nation's savings and loans. He was a strong supporter of deregulation —as were most loan brokers, because it increased their income potential
dramatically—and he had developed his stable of favorite institutions. He knew
which thrift executives wanted to participate in the speculative opportunities (and
risks) made possible by deregulation. In late 1983 Lapaglia 7 had sponsored a seminar in Acapulco, Mexico. About 25 thrifts, those on Lapaglia's most favored
list, attended. The topic of the seminar was wheeling and dealing in a deregulated
environment and those attending were the lenders of choice for Lapaglia's borrowers.
When Norm Jenson approached Lapaglia for help in getting loans for the
Crystal Palace and DeVille casinos, Lapaglia knew just who to talk to —Guy
Olano, chairman of Alliance Federal Savings and Loan in Louisiana.8 Lapaglia
had a close working relationship with Olano. Employees at Alliance said he
often visited Olano in New Orleans, and one of Lapaglia's former employees
worked for Olano. (Federal authorities told us Lapaglia brokered $40 million worth of loans to Alliance, including loans to himself, his family and his own
projects, and the thrift lost several million dollars on the loans. Lapaglia denied
the charge.) Alliance Federal was in Kenner, Louisiana, 40 miles up the Mississippi
River from New Orleans in the bayou country of southern Louisiana. Guy Olano, a New Orleans attorney, was a founder of Alliance Federal and
later became chairman. He was an arrogant young man in his early thirties,
Italian, handsome, and stocky.
"He produced a physical revulsion in me," a fellow attorney told us. "He
looked like a fat Moamar Gadhafi [sic], curly black hair, dark glasses, wafer thin
gold watch, Italian suits. He had a psycho-look in his eyes. He looked
gangsteresque."
Once Olano got control of Alliance, it didn't take him long to get in trouble. By August 1982, long before Lapaglia went to Olano on behalf of Norm Jenson,
Olano had already earned his first cease-and-desist order from the Federal Home
Loan Bank Board. Regulators' documents showed that Alliance Federal ignored
the order for two years, and finally, on June 11, 1984, the F.H.L.B.B demanded
(and got) court enforcement of the order—the first time in history that the F.H.L.B.B had resorted to court enforcement of one of its cease-and-desist orders. The Bank Board said it did not like Alliance's loose loan underwriting practices
or the compensation Olano and some of his fellow directors and officers were
paying themselves.
But Alliance Savings officers probably knew that short-handed regulators were paper tigers, and Olano went right on ignoring government saber rattling.
In 1984 he tried to buy a Miami bank, and he was represented at that time by
Miami attorney Jose Louis Castro. A New Orleans attorney described Castro as
a "great dresser" who was "breathtakingly handsome. " Castro was frequently in and out of Olano's office in New Orleans, an FSLIC attorney told us, and Olano
visited him regularly in Miami. In addition. Alliance made several loans to
Castro. Later, FBI agents testified in court that Castro had close ties with the Colombian Duque and Aroseo organized crime families, which had been connected
to money-laundering schemes at American financial institutions. They
said Olano may have tried to set up bank accounts in the Netherlands West
Antilles so he could use the account as a depository for money in the event he
needed to flee the country. (Castro was later sentenced to ten years in prison for bank fraud in a case unrelated to Alliance.
)
John Lapaglia told us that when he went to Alliance Federal to get a loan
for Norm Jenson, he was only looking for interim financing (Home Savings in
Seattle had agreed to assume the loan after one year), and Olano said he would
be happy to arrange a one-year, $4 million loan.9 The agreement was finalized during a meeting June 15, 1984, in a private suite at the Sands Hotel in Las
Vegas. Among those at the meeting were John Lapaglia, Norm Jenson, and
Guy Olano.
"We went up to Lapaglia's suite at the Sands, " Jenson said. "We sat down
and at the time they had loan forms with them, and I think somebody either had a secretary with them or someone from the hotel —I can't remember—but
they had a typewriter they had gotten, and they actually executed final loan documents. . . ."10
The meeting at the Sands Hotel appeared to be a lucrative one for everyone
involved. Initially Jenson received $500,000 as the first installment of the $4
million from Alliance. He promptly sent $50,000 to Olano for "legal fees." Regulators later called the $50,000 a kickback. (It was not illegal at that time
for Jenson to pay a kickback, but it was illegal for Olano, an official of a federally insured thrift, to receive one. It later became illegal to receive or pay a bribe to
a thrift or bank official.)
Within six months of the meeting at the Sands, Alliance Federal had released
to Jensen $3.2 million of the promised $4 million for the DeVille Casino. The
last installment the thrift paid, just before Alliance was seized by federal regulators,
gave us a rare glimpse into just how loan money was often divided up
among the players. Jenson signed for a $900,000 installment but claimed he saw only $22,000 of it. Apparently it was payday on this deal and others were
in line ahead of Jenson. Jenson later testified that Lapaglia received $250,000
as his fee for referring Jenson to Alliance and took another $142,000 to pay off
a loan he had at Alliance. In Jenson's words, the $142,000 was "scraped off the deal" by Lapaglia. Lapaglia told us the $250,000 and the $142,000 were his commissions for the DeVille and Crystal Palace deals. He said Olano took the $142,000 for Alliance out of Jenson's loan without Lapaglia's knowledge.
Asked by FSLIC attorneys why he would sign for $900,000 while getting
only $22,000, Jenson responded, in essence, that you had to be there.
"You know, it's hard to put yourself in somebody's spot at the time," Jenson
responded, "it's almost incomprehensible if you weren't there."
What did he think happened to the rest of the money?
"They just divvied up the fees and just cut it up. That's what they did.'
Jenson was referring to the principal players in the deal: the chairmen of the two lending institutions (Raymond Gray at Home Savings, Seattle, and Guy
Olano at Alliance Federal, New Orleans) and the man who arranged the loan, loan broker John Lapaglia.
Alliance Federal didn't cough up the final $800,000 installment on the $4
million loan to Jenson because federal regulators stopped the deal. As soon as he saw he wasn't going to get the rest of the loan money, Jenson threw the DeVille project into bankruptcy. He never told how much of the $3.2 million
that he did get was "divvied up " in his name. Alliance Federal Savings collapsed
in 1985 with a negative net worth of over $150 million. Norm Jenson and
Lapaglia testified against Olano in a bank fraud trial in Seattle in 1987 and
eventually Olano got 15-year and 8-year sentences in federal prison, two of the few tough sentences we were to see during our investigation.11 In June 1989 a
federal judge awarded the F.H.L.B.B an $86 million judgment against Olano and
four other associates of the thrift.
An attorney for one of the defendants in the Seattle trial described Lapaglia
as "an unctuous witness who professed to be a born-again Christian." During
his testimony Lapaglia lectured the jury on his deep personal code of ethics, but
jurors weren't impressed. "The jurors didn't like him," one defense attorney
recalled, adding that even the U.S. attorney who had called Lapaglia as a witness
felt compelled to tell the jury they did not have to believe anything Lapaglia
said unless it was corroborated by other testimony. In the Seattle trial five
executives of Home Savings near Seattle, Irving Savings near Dallas, and Alliance Savings near New Orleans were convicted of bank fraud for creating a complex daisy chain in which officials of the three thrifts made illegal loans to each other. Loan brokers had made all the introductions. All three thrifts had, at one point
or another, been involved with Norm Jenson's DeVille Casino loan.
One day in the fall of 1985 a mortgage trader walked into the New York
office of the National Thrift News and told coauthor Paul Muolo that millions
of dollars had disappeared from a company he worked for. That tip led us to
investigate Philip Schwab, who owned Cuyahoga Wrecking Company, based
in Great Neck, Long Island. In 1986 Cuyahoga was the largest demolition firm
in the United States, with offices in 18 cities from Florida to New York to Michigan. Schwab also had a stake in about 40 other development, wrecking,
and demolition companies and had business connections in every major city in the Midwest and on the East Coast. He and his wife, Mary, divided their time
between a waterfront Mediterranean-style villa near West Palm Beach, Florida, and a sprawling home in posh Pelham, New York.
Schwab had been in trouble with authorities for years. In 1963 a Buffalo,
New York, grand jury had indicted Schwab on three counts of perjury and two
counts of grand larceny. Two of the trials ended in hung juries, and most of
the charges were eventually dropped. (Schwab was acquitted ten years later of
the remaining perjury charge when the witness could not testify—he was
dead—and the key piece of evidence, a check, purportedly disappeared from
the district attorney's files on the day of the trial.)
In 1965 the IRS filed tax liens totaling $128,000 against Schwab's company
for failure to pay payroll taxes and seized the company's equipment and records. A few months later Schwab filed for bankruptcy. When his company didn't
fulfill its contracts, the insurance company that had bonded Schwab took him
to court. In court the insurance company demanded to see company records. Schwab refused to produce them. The judge cited Schwab for civil contempt
and ordered him to spend 30 days in the Erie County Jail.
In 1966 Schwab's mother, who was home recovering from dental surgery, was tied up and gagged by a man dressed like a priest while thugs ransacked her modest Buffalo, New York, home. No money was taken, and police later speculated
that the intruders were mob wise guys searching for files on Schwab's
business.
Schwab's style was to keep his mouth shut when things began to go wrong.
He consistently refused to talk to reporters and often refused to talk to authorities
too. He was a tough, self-made man who had made his fortune armed with
only a high school diploma. He looked like a cross between actors Gene Hackman
and Ed Asner. A Catholic, he and his wife, Mary, were married in 1949 when
she was 18 and had raised 14 children together.
Mary was his partner in all his businesses, and she filed for bankruptcy in 1969 when one of their businesses defaulted on $25 million in contracts after
it was seized by the IRS. In her bankruptcy filing she listed assets of $3,500 and
debts of $8.2 million. Although documents showed she was Philip's partner in the company, she claimed to know nothing about it. In court she testified that when she asked Philip for details about the family's business finances, "He sang
to me a medley of songs."
"What did he sing?" U.S. Attorney Kenneth Schroeder, Jr., asked. " 'Impossible
Dream'?"
"No," she replied. "He sang 'Raindrops Keep Falling on My Head,' 'I Can't
Give You Anything but Love,' and "You're My Everything,' and he told me to mind my own business." She added, "I don't know anything about any records.
I only know that I sign papers.
" Schwab took the stand and confirmed he had
sung to his wife but he declined to answer other questions. Consistent in his determination to keep his affairs private, he reportedly took the fifth amendment
156 times.
Despite his past financial (and legal) troubles, by the early 1980's Schwab
had rebuilt his empire, and thrift and bank officials were falling all over themselves
to make loans to him. Cuyahoga was by then touting a net worth of about
$70 to $80 million. How could a banker say no?'12 Schwab's companies demanded
such a healthy cash flow that he incessantly scoured financial institutions for
cash, and finally he decided it would be useful to own a casino, the ultimate cash-flow machine. In 1984 he acquired the Mapes Money Tree in Reno for about $6.75 million. He renamed the casino Players Casino, and then he showed
up at Eureka Federal Savings, near San Francisco, seeking financing to renovate
his new gaming house.
How, we wondered, had a New Yorker made connections with a savings
and loan near San Francisco? An attorney for Eureka Federal gave us the
surprising answer—loan broker John Lapaglia, again. Schwab had hired Lapaglia
to shop for a loan for him, and Lapaglia took him to Kenneth Kidwell, who
was president of Eureka Federal Savings.13 Kidwell was the son of Eureka Federal
Savings' founder, and he had succeeded to power at the thrift just as deregulation
changed all the rules that his dad had depended upon to build Eureka Federal Savings into a respected San Francisco Bay Area institution. Associates said Kidwell was cut from a very different cloth than his father. He was flamboyant
and reckless, and he reveled in the Nevada casino scene. During the time Kidwell was head of Eureka Savings he was involved in a number of bizarre events that were widely publicized in California. One night police stopped his car after it was spotted weaving down the road. Officers suspected that Kidwell was drunk. When they searched him they found he was carrying two loaded pistols, a . 38-
caliber strapped to his leg and a .357 magnum. The guns were loaded with
illegal, armor-piercing, Teflon-coated bullets. (The bullets had recently been
outlawed because they could penetrate bulletproof vests worn by police.)
Kidwell lined up on the side of law and order when he provided the services
of Eureka Federal to the FBI on at least two occasions. In 1981 he let the FBI
and the DEA use Eureka Federal as a cover for a drug sting operation. He
"hired" the agents and even let them rent a company car, a Mercedes 600. The
FBI brought more than $3 million in cash into Eureka's vault as part of the
sting, which did net a drug kingpin, Kidwell later told us. On another occasion,
in 1982, Kidwell provided agents with covers as part of their sting operation to
trap car manufacturer John DeLorean, whom they believed was dealing drugs
(he was later tried and found not guilty). Kidwell let the feds wire and put video
equipment in his 1,200-square-foot office, which adjoined a 3,000-square-foot
suite in Eureka Federal Savings' main office building. The suite had a living room with two fireplaces, a bedroom with a huge round bed, a bar, and a wine
cellar.
Kidwell got close to another FBI informant, Teamster union boss Jackie
Presser, when Kidwell was contacted by a union official who said maybe "some
lending activity" could take place through Teamster pension funds. Kidwell
wrote to his lawyers in 1984 recalling the moment:
"I have been trying to do business with the Teamster pension fund for a lot
of years. If I could obtain them as a client, surely every pension fund in the U.S. would want to do business with me." (One Teamster deal with Eureka
Federal Savings, Kidwell said in his letter, would be brokered by Abe "the
Trigger" Chapman, who has been widely alleged to be a former member of the infamous Chicago Murder Inc. gang.) When news accounts referred to Chapman's
alleged mob connections, Kidwell dropped the deal. Eureka Federal employees
told us Kidwell developed a social relationship with Presser.
Casino loans became a Kidwell specialty. Most lenders wouldn't go near them, but Eureka Federal made at least four major casino loans. 14 Regulators
said Schwab received a $7.5 million loan from Eureka Federal and paid John
Lapaglia a $30,000 finder's fee. Schwab also paid Lapaglia $630,000, which
Schwab claimed was a commission for another loan but which looked to gaming
board officials like part of the casino loan. If almost 10 percent of the Eureka
Federal Savings loan ($660,000 out of a $7. 5 million loan) went to Lapaglia for
a finder's fee, gaming board officials later complained, it was an "inordinate amount."
But a little matter still needed to be cleared up before Schwab could
pluck fruit from his new money tree—he was not yet licensed to operate a casino in Nevada. Schwab promptly filed an application with the Nevada
Gaming Control Board. But if he thought that obtaining a casino license would be as easy as getting a loan out of Ken Kidwell, he was in for a rude
surprise.15
While Schwab was awaiting word on his casino application, he took stock
of thrift deregulation and decided he could also benefit by owning some savings and loans.16 He had been a customer at Freedom Savings of Tampa since 1984 (Cuyahoga had offices in Tampa), and in December 1985 a Freedom
Savings officer asked him to invest in Freedom stock. Freedom Savings, a $1.5
billion thrift that was well known among regulators for its use of high-cost brokered deposits to fund risky real estate development projects, was desperate
for capital to meet a new regulation that increased the size of the reserves an S&L had to maintain, hi January 1985, F.H.L.B.B Chairman Ed Gray had toughened
the reserve requirements in an attempt to stop the fast growth and risky
lending that he saw in progress all over the country.17 The new regulation
caught a lot of high-flying thrifts like Freedom Savings with their reserves down,
and Freedom officers were looking for investors willing to pay cash into their
reserves in exchange for stock.
When the Freedom Savings officer invited him to buy stock in the thrift, Schwab bluntly laid his cards on the table. "I informed him I would but that
I am a businessman and if I were to invest in a losing bank to help it during
a difficult time, I would expect a reasonable treatment when I applied for new
loans. ... It was agreed that I would pick up any shortfall that the other
investors did not produce. In return I was able to borrow $?.2 million—without
paying points—for each million worth of stock I purchased. . . ."'18 In other
words, Schwab demanded the right to borrow from Freedom Savings three
times the amount of his investment. It was strictly illegal for an S&'L to make
such a quid pro quo arrangement, but Freedom Savings agreed because it needed Schwab's investment.
Schwab paid about $7 million for a 5.9 percent stake in Freedom Savings,
which promised him up to $24 million in loans, in disregard of regulations
that forbade an S&'L to make loans equaling more than 10 percent of its assets
to any one borrower. Court records showed that, as it turned out. Freedom
Savings actually loaned him $4. 5 million on projects in Arizona and $7 million on a project in Philadelphia.19 (All the loans eventually went into default. Freedom Savings failed in July 1987.)
When we checked further into Freedom Savings, we found our old familiar
friend Charles Bazarian. Charlie was getting to be like a touchstone to our investigation —kind of a litmus test to see if a thrift was of the accommodating
persuasion. Fuzzy had taken a shine to Freedom Savings, too, and
he bought a 9.9 percent stake in the thrift. Sig Kohnen, a longtime friend
of Bazarian who helped him start CB Financial in 1983,20 told the Tulsa
Tribune Bazarian bought stock in savings and loans as a way to meet lenders.21 As co-shareholders in Freedom Savings, Bazarian and Schwab soon struck up
a relationship, Bazarian told us, and before long CB Financial began arranging
loans to Schwab ventures. (Those loans would later go into default, Bazarian
said.)
At the same time that Schwab was buying into Freedom Savings in Tampa,he was taking control of Southern Floridabanc Savings Association in Boca
Raton, Florida, by buying $3 million in preferred stock with a loan from First Federated Savings of West Palm Beach. Schwab was on a roll.
But if things were going well in Florida for Schwab, they were going poorly
in Nevada. He had hired a consulting firm (that specialized in helping
people get gaming licenses) to help him navigate the Nevada Gaming Control
Board investigation. But after listening to Gaming Control Board concerns,
the consultants handed Schwab a thick report so damning it became obvious
that he would never pass muster. Schwab's gaming consultants reminded him,
for example, that the main purpose for allowing casinos in the state was to
generate tax revenues for Nevada, and the Gaming Control Board was not
likely to look with favor on someone who had been successfully avoiding taxes
for 20 years. '22 Schwab's consultants also zeroed in on his maze of companies
and nonexistent records. In a written report they said Schwab admitted that he used money from his companies interchangeably, or funneled money from one through another, for whatever purpose he pleased. When asked why his companies didn't keep minutes of board meetings, he replied that he and his
wife had a board of directors meeting every time they sat down together.
The consultants noted in their report that the Gaming Control Board might
not be impressed when they learned that Schwab had been called to testify
before the grand jury investigating the Abscam sting'' and Morris Shenker
(whom the consultants included on their "persons believed to be unsuitable by law-enforcement authorities" list). They were referring to an occasion
when undercover FBI agents posing as Arabs met Schwab on a boat at Del
Ray Beach, Florida, and asked him if he could guarantee them a gaming
license in New Jersey. Their question was prompted, Schwab told the gaming
consultants, by his association with Morris Shenker and the Dunes Hotel and Casino project in Atlantic City. Schwab said his answer to the "Arabs" was no.
Schwab's loan from Eureka Federal Savings, ostensibly to renovate the
Players Casino, was also under scrutiny by the gaming board. He had put up
property that had cost him only $1.4 million as security for the $7.5 million
loan from Eureka Federal Savings. Schwab contended that, no matter what
the property cost him, it was worth $16 million to $25 million, based on what
it would be worth as a "going concern" someday. A bank appraisal obtained
later said the property was worth $267,000, the gaming consultants noted in
their report.
When the Gaming Control Board investigators interviewed Schwab, they
asked him about "meetings at night with potential undesirables" and ten men
with Italian surnames, prompting Schwab's gaming consultants to comment in
their report to Schwab, "We have no specific records available to us regarding
the backgrounds of these individuals. We can only presume at this point that the Gaming Control Board has information from law enforcement authorities
associating these individuals with organized crime activities in the United States." Several of the men were connected to Schwab businesses. Schwab admitted
knowing one of the men was a loan shark but he denied knowing the man was
also a heroin dealer.
To top it all off, Schwab's own consultants said he failed to tell the truth, the whole truth, and nothing but the truth on his gaming licensing application:
He told about the old perjury indictments but didn't mention the larceny charges
because, he said, he thought they were the same thing. He also contended there were years when he was not employed. Schwab's consultants went on to say that he hadn't told about his gambling debts. Further, he hadn't told about all of
his companies because, he said, "They never did anything" or were "owned by
other members of the family."
It was hard, gaming board investigators concluded, to "get a handle on you
[Schwab]." Schwab must have seen the handwriting on the wall. He dropped
his application for a casino license, defaulted on the $7. 5 million loan from
Eureka Savings, and beat it back to the East Coast. (Regulators said Schwab
used part of the Eureka Federal Savings loan for a project he had going in Philadelphia. Eureka Federal lost between $5 million and $7 million on the Schwab loan.)
What most intrigued us about the Schwab story was the ease with which he
was able to become a major stockholder in two federally insured savings and
loans (Freedom Federal Savings and Southern Floridabanc) at the very time that
a Nevada gaming board was finding reasons to deny him a license to run a small gambling house.
After Schwab gave up on the Players Casino project, he overextended himself
in real estate developments on Hilton Head Island off the coast of South
Carolina. Within a year he claimed to be broke. In November 1986 Schwab
and Mary filed personal bankruptcy in New York (chapter 7—liquidation).
Soon Cuyahoga Wrecking filed chapter 11 (reorganization). The St. Petersburg
Times reported that a bankruptcy command post was set up in a large room
at the Columbia, South Carolina, courthouse right next to a similar one for the only other case that size, the bankruptcy of Jim and Tammy Bakker's P.T.L
Club.
Schwab had been a very private man. Only in bankruptcy did the scope
of his empire become public. Ultimately there would be 15 Schwab-related
bankruptcies in New York, mostly the Cuyahoga companies, and eight in South Carolina. Investigators admitted Schwab's business affairs were so complex and as before, many important records had disappeared, according
to Schwab's bankers—that they couldn't even tell how many companies
Schwab owned. At first creditors filed claims totaling $135 million, but
hundreds of millions were later added. Bankruptcy court records showed that as of July 1988 there were 103 creditors, including Bazarian's company, CB
Financial. The overall debts of Pliilip Schwab, Cuyahoga Wrecking, and related
companies were pushing the half-billion-dollar mark and growing.
Schwab owed $200 million of that amount to thrifts and banks from Israel
to California.
"This bankruptcy has already generated enough paperwork to kill half the
national forests," said one attorney.
Representatives of several financial institutions got together to try to figure
out how to best collect the money Schwab owed them, "it was like an Alcoholics
Anonymous meeting, with all of the bankers standing up and confessing
their involvement with Cuyahoga and Schwab," a Chicago lawyer
present at one meeting told a reporter. Ultimately the bankers decided there was no hope. As they would later testify in court, they believed Schwab had
bamboozled them, sometimes using the same collateral —by moving it secretly
in the dead of night—to secure several loans at one time. He had operated
a shell game, they said, that was nothing more than a fancy pyramid scheme,
using oft-pledged assets (such as steel from demolition jobs) to get new loans
that he used to pay off old ones. Thrifts banging on Schwab's door included: Cross lands Savings in New York, First American Bank and Trust in Lake
Worth, Florida,24 Freedom Savings of Orlando, South Chicago Savings in Chicago, American Pioneer Savings in Stuart, Florida, Harris Trust and Savings
in Chicago, Community Savings in North Palm Beach, Eureka Federal
Savings in San Carlos, California, Southern Floridabanc Savings in Boca Raton,
Florida, First Federated Savings in West Palm Beach, and Concordia
Federal Savings of Philadelphia.
In October 1988 Schwab was convicted of paying an Environmental Protection
Agency inspector $25,000 in bribes between 1983 and 1987 to overlook
violations Cuyahoga Wrecking Company committed while removing asbestos from building and construction sites. (Schwab had removed the asbestos from
Carnegie Hall "so Frank Sinatra wouldn't get asbestos in his lungs" when he
sang there, an employee said.) Schwab was sentenced to 42 months in prison.
The national media reported that Schwab was also under investigation for violations
regarding illegal handling of toxic wastes in Maryland and Delaware,
for other environmental violations in Chicago, and for bank fraud in South
Carolina. And in New York the U.S. attorney's office, headed at that time
by headline-making Rudolph Giuliani, was digging into Schwab's deals with
New York thrifts and banks.
Another one of Kenneth Kidwell's casino loans went to John B. Anderson.
Anderson was a giant of a man, six feet three inches tall and barrel-chested, a farm boy, mostly a tomato grower, who had grown up in the agricultural communities near Yuba City, California. He put himself through the branch of the University of California in his hometown of Davis in the 1960's, majored in
agriculture, and began work as a humble sharecropper. The fundamental values of hard work and living close to the land stayed with him while he became a millionaire many times over. An admirer told us that even after he made his fortune Anderson expected his children—to whom he was a good father, his neighbors said —to work for minimum wage.
But to the farmer's solid values Anderson added burning ambition. He told
his hometown friends that his dream was to be the nation's single largest agricultural land owner. He knew he would have to accomplish that feat with
borrowed money, of course, and borrow he did. Along the way he acquired vast holdings in Nevada, California, Arizona, and Louisiana. On paper Anderson
was worth millions, but he was deeply in debt. When the agricultural recession
hit in the early 1980's, his loans went sour. So, too, did his financial obligations elsewhere. By early 1985 newspapers would report that Anderson was being sued
for $56 million by a host of creditors.
None of this misfortune dampened Ken Kidwell's willingness to extend Anderson credit. In 1984 Kidwell convinced Anderson to buy a controlling
interest in the Dunes Hotel and Casino in Las Vegas.
When Kidwell first heard that the Dunes could be bought from reputed mob
associate Morris Shenker, who had filed for bankruptcy in January 1984 (Shenker was neck-deep in trouble over about $197 million in debts, including loans from
various union pension funds, banks and thrifts, and unpaid taxes of about $66
million), Kidwell first thought of his friend Wayne Newton as a potential buyer,
he later told his Nevada attorney. But to his dismay he discovered that San
Francisco loan broker J. William Oldenburg—whom Kidwell had introduced
to Newton had already convinced Newton to let Oldenburg broker the Dunes
deal for him. Furious, Kidwell said he called Anderson, to whom Eureka Federal had already made several agricultural loans, and suggested that Anderson buy
the Dunes. Anderson had first entered the gambling world with his 1981 purchase
of the Maxim Hotel and Casino in Las Vegas and his 1982 purchase of the Station House hotel-casino in Tonopah, Nevada.
Anderson agreed. Eureka Federal was willing to put up the $25 million
letter of credit (a guarantee to loan on demand) that would be required to swing
the deal. In the meantime an option had to be acquired to ace out Oldenburg
and Newton. Kidwell called San Antonio loan broker John Lapaglia for help
with that end of the deal.
In the end the Kidwell/Anderson team beat out the Oldenburg/Newton team
when those negotiating the Dunes sale said they preferred a letter of credit from
a federally insured institution (Eureka Federal) to Oldenburg's financing package,
which an associate said was mostly personal notes and guarantees. When Anderson
applied for the Dunes gaming license, he sailed through the rigorous Nevada State Gaming Control Board investigation. He assumed control of the Dunes from Shenker in 1984 but retained Shenker's son as a vice president and
said Shenker himself would remain a board member.25
Some in Nevada's gaming industry wondered out loud if Anderson was "a
beard" (fronting) for Shenker or for other interests that could not pass a Gaming
Control Board muster. Such rumors had first surfaced a few months after Anderson
had gotten control of the Maxim Hotel and Casino. The St. Louis PostDispatch
broke a story that claimed organized crime figures from St. Louis,
Kansas City, Chicago, and Denver had tried unsuccessfully to purchase the Maxim in 1982. The story said that sources in Las Vegas and Denver had told them, following that failure, that they had "put together another attempt to
penetrate legal gambling in Nevada." The story identified the mobsters involved
in the alleged plot as being Tony Giordano[T.R.] of St. Louis, Eugene Smaldone[B.L.] of Denver, Joe "Joey Doves" Aiuppa[T.L.] of Chicago, and Nick Civella[B.R.] of Kansas City.
State Gaming Control Board member Dale Askew characterized the story as
"street talk" and said that the related rumors that John Anderson was acting as
a front for organized crime were "thoroughly checked out and discounted at the time Mr. Anderson was licensed. We did not find a thing."
Later the Las Vegas media reported that the Gaming Control Board was checking into Anderson's relationship with Eureka Federal Savings and Loan and Kenneth Kidwell. Following the Dunes deal, the Gaming Control Commission declared Eureka Federal an unacceptable source of funds for future casino acquisition. They gave no explanations for their action, but Kidwell complained in a letter to his attorney that the Dunes deal had caused him to become "trapped in Shenker's shadow."
Kidwell wrote that it had surprised him to read in the newspapers that he had ties to Morris Shenker and various mobsters. He complained that even some of his Eureka Federal customers thought he was working with the mob. He said that John Anderson called him one day and asked if it were true that he (Kidwell) was "washing money for one of the families."
Whatever problems there may have been at Eureka Federal Savings may never be known. Although the Nevada Gaming Control Commission was clearly concerned, the F.H.L.B.B was not. Even though some of the most prominent thrift looters we investigated were borrowers at Eureka Federal, even though one employee received phone threats just before she was to be deposed, even though a director told us he had been threatened by an officer, even though 170 loans were in default at Eureka Federal, regulators told us they had investigated Eureka Federal and found no evidence of fraud there. Mitchell Brown, a ubiquitous borrower who had also been co-owner of First National Bank of Marin in San Rafael, California, until he was forced out by regulators, felt differently.26 Just before Brown was indicted for bank fraud in Oregon, according to investigators, he asked the U.S. attorney if he could cut a deal. He wanted blanket immunity he said, for what he had done at Eureka Federal, but he would not tell regulators what he had done there (and they did not cut him a deal). His trial was pending as of this writing.
Six months after John Anderson's successful purchase of the Dunes, in May 1984, he submitted an application to the Gaming Control Board to purchase
the Las Vegas Sundance Hotel, owned by M.B. "Moe" Dalitz, Mike Rapp's
old Las Vegas buddy. The Gaming Gontrol Board announced they were going
to conduct another thorough review of Anderson's finances, including his association with persons doing business with San Marino Savings and Loan in Southern California. According to published reports, Anderson suddenly withdrew his licensing application without explanation, (in referring to San Marino
officials may have had Jack Bona in mind. See next casino story.)
Like many other ambitious Anderson ventures, the Dunes turned out to be a giant money loser. Anderson put the Dunes into bankruptcy in September 1985 for protection from creditors, who were owed $117 million. Anderson would eventually leave Eureka Federal Savings stuck with nearly S?2 million in his delinquent loans. A source close to the Eureka Federal Savings case said in late 1988 that Anderson was attempting to bring the loans current by making monthly payments of $500,000.
According to media accounts, Anderson also defaulted on $22 million in loans from Crocker Bank and $2. 1 million borrowed from Aetna Life Insurance Company. He had $43 million in debts on his various real estate holdings and owed $68.6 million to Valley Bank of Nevada. After tapping out these sources Anderson headed north to Oregon, where authorities said loan broker Al Yarbrow helped him get $25 million in loans out of State Savings of Corvallis. Yarbrow also introduced Anderson to Charles Bazarian and Anderson later borrowed money through Bazarian's CB Financial. We would find Anderson's footprints at Vernon Savings in Dallas as well. (See Texas chapters.)
Jack Bona and his partner, Frank J. Domingues, got $200 million in loans from San Marino Savings and Loan in San Marino, California,27 in ten months, even though tax records showed that three years earlier they had reported combined incomes of less than $30,000.28 (Remember that the next time a banker tells you you don't earn enough to qualify for a $9,000 car loan.) The plan they submitted to San Marino was to convert apartment units to condos and sell them as tax-shelter rentals to investors in high income-tax brackets. When San Marino failed in December 1984 29 regulators charged that the properties on which San Marino lent Bona and Domingues $200 million were worth only about $100 million. Most of the loans were in deep default, and the properties turned out to be in such bad neighborhoods in Dallas and Los Angeles that even an internal memorandum at San Marino showed that the thrift's staff referred to them as "the Zulu projects." A California thrift director who went to Texas to look at the condos for himself sent back a memo with this discouraging word: "They are NOT convertible [into condos) except to a BLIND investor." Regulators claimed Bona and Domingues pocketed up to $50 million for themselves on these projects. Domingues told reporters that they made only about $10 million.
Remarkably, even as regulators were wringing their hands over what Bona and Domingues had done to San Marino Savings, the two new millionaires were buying their own savings and loan nearby. South Bay Savings. "Apparently the left hand didn't know what the right hand was doing," deputy California Savings and Loan Commissioner William Davis said later (he became deputy commissioner after the South Bay affair). The San Diego Union reported that Domingues said he would never allow his thrift, South Bay, to make the kinds of loans that San Marino had made to him and Bona. Be that as it may regulators later revealed that the day the two men bought South Bay, they had the thrift loan them $6 million.30
Shortly after opening South Bay, Jack Bona 31 split with Domingues. He sold out his share in South Bay to Domingues 32 and in 1983 purchased another kind of financial institution, Morris Shenker's troubled 664-room Atlantic City Dunes Hotel and Casino project. Shenker had begun the project just before defaulting on millions in loans from union pension funds. Now it was little more than a rusting abstract sculpture of I-beams in the middle of town. Shenker sold the project to Bona shortly before John B. Anderson bought Shenker out at the Las Vegas Dunes. Bona kept the Atlantic City Dunes for a couple of years, during which time he added a few more millions in loans to the project's crushing debt,33 and then he defaulted and filed for bankruptcy in 1985.
The Dunes was put up for sale by the bankruptcy trustee and sold in 1988 to Royale Group Ltd., run since 1981 by Leonard Pelullo. We remembered Pelullo because his name had shown up without explanation in documents regulators had seized from Consolidated Savings. The handsome, swarthy Pelullo, who was 37 in 1988, worked out of an office in the Carlyle Hotel in Miami Beach's Art Deco district. Business Week reported that he described himself as a "workout" specialist, a consultant who helped companies drowning in debt. The still not built Atlantic City Dunes project certainly qualified.
But Pelullo may have had a darker side. Business Week also reported that he had recently worked under the alias Bob Paris because, Pelullo reportedly said, he wanted to avoid drawing attention to a New Jersey State Commission of Investigation report on boxing that described him as "a key organized crime associate from Philadelphia." Pelullo denied any ties to the mob.
In June 1989 a Cincinnati grand jury handed down an indictment against Pelullo and David A. Friedmann, a Houston businessman who from 1983 to 1985 was owner and CEO of Savings One, a thrift in Gahanna, Ohio (Mario Renda and Martin Schwimmer attempted to purchase Savings One in 1983). The indictment charged the two men with conspiring to obtain loans from the thrift that were used for purposes other than stated on the loan application. The indictment also charged that Pelullo paid Friedmann $145,000 in kickbacks for arranging the loans. Pelullo said the money was pre-paid interest on a loan extension he expected to receive. The case was pending at this writing.
We had run into the casino connection at Consolidated as well. One of Consolidated Saving's problem loans, regulators claimed, was a $614,311 loan to Robert Shearer and Llewellyn Mowery for refurbishing the Treasury Hotel and Casino in Las Vegas. Shearer and Mowery refused to repay the loan, according to regulators, unless Consolidated loaned them $3 million more.
Consolidated Saving's owner, Robert Ferrante, got into the casino act personally, court records showed, when he and Mario Renda teamed up for a casino project in Puerto Rico that they called the Palace Hotel and Casino.34 After Consolidated failed and Renda found himself enmeshed in all manner of criminal and civil difficulty, the Palace Casino was allowed to go into bankruptcy and Las Vegas newspapers reported that the project was purchased out of bankruptcy by the Pratt Hotel chain, a division of Southmark, Inc.. a Dallas-based conglomerate that also owned San Jacinto Savings and Loan in Houston (see Chapter 21).
By far the most frequent casino connection we ran into at failed thrifts around the country was the Las Vegas-based Dunes Hotels and Casinos company and its chairman, Morris Shenker. Shenker, born in Russia in 1907, had been an attorney in St. Louis since 1932. He first came to national attention in the early 1950's during the congressional hearings of the Kefauver committee, which investigated the influence of organized crime in interstate commerce. Twenty years later Life magazine detailed his alleged mob ties in an expose of a former St. Louis mayor (by then, ironically, Shenker had been appointed chairman of the St. Louis Commission on Crime and Law Enforcement, a position he held from 1969 to 1972). In 1975 Penthouse magazine said Shenker was under investigation by a federal strike force and grand jury in St. Louis and added, "His Byzantine financial maneuvering astounds investigators in and out of government."
The source of Shenker's power appeared to be his lengthy and well-publicized relationship as chief attorney and confidant of Teamster union president Jimmy Hoffa. Hoffa was Teamster boss from 1957 until he went to prison in 1967, and he continued to run the union from prison for several years. (He was released from prison in 1971 and disappeared in 1975 as he was attempting to regain control of the Teamsters. Authorities believe he was murdered.) The President's 1986 Commission on Organized Crime reported that the Teamsters, the nation's largest union, had been 'firmly under the influence of organized crime since the 1950's." In 1989 the FBI released material collected for the FBI by Teamster president Jackie Presser during the nine years he was an FBI informant, until he died in 1988 of brain cancer. The documents showed a union dominated by organized crime and corruption.
As Teamster leader, Hoffa controlled the massive ($400 million in 1967, $1.6 billion in 1977) Teamsters' Central States Pension Fund. He directed that millions of the fund's dollars be loaned to associates and mobsters, and over the years the fund became, as author Steven Brill wrote in The Teamsters, "a special bank where loans depended almost always on the right kickbacks or the right organized crime connections." By 1974 Shenker had more than $100 million in loans from the fund, for the Las Vegas Dunes and other properties, according to Brill. The President's 1986 Commission on Organized Crime said that Shenker received the largest single loan ever made by the fund, a portion of which had never been repaid. With that access to millions came, apparently, tremendous power.
Hoffa pioneered the use of Teamster pension funds to finance casinos in 1960. The Penthouse piece said Michael Rapp's buddy Moe Dalitz helped persuade Hoffa to finance Nevada hotels and casinos.35 In Las Vegas the Teamsters at one time backed Dalitz's Desert Inn, Circus Circus, the Fremont, the Lodestar, the Plaza Towers, the Stardust, the Landmark Hotel, the Four Queens, the Aladdin, and Caesar's Palace; in Lake Tahoe, the King's Castle, the Lake Tahoe, and the Sierra Tahoe; in Riverside, the Riverside; and in Overton, the Echo Bay, according to investigative reporters Jonathan Kwitny and Steven Brill. Presser told the FBI that profits from Las Vegas casinos were illegally skimmed and mob couriers took the cash away in suitcases.
Shenker got control of the Las Vegas Dunes with the promise of a $40 million advance from the Teamsters' Fund, and we came across him or the Dunes numerous times in our investigation. Erv Hansen at Centennial gambled at the Dunes regularly, reportedly sometimes dropping $10,000 at the roulette table in a single night. Norman B. Jenson had been a Shenker business associate. Shenker made the Dunes a hospitable place for thrift officials and even occasionally provided suites where deals could be cut, as when Winkler, Daily, and Russo met there to formalize their Indian Springs State Bank project. The Dunes Hotel and Casino and several of Shenker's associates received loans from Indian Springs State Bank. Jack Bona bought the Atlantic City Dunes from Shenker and John Anderson bought the Las Vegas Dunes, both using S&L credit, when Shenker was in deep financial trouble. Shenker was mentioned in Renda's 1981 desk diary. Nevada gaming documents revealed Philip Schwab was a Shenker associate, as was Eureka Federal Savings President Kenneth Kidwell, who also knew Jackie Presser well.
When Sun Savings in San Diego failed in July 1986, court documents showed that the president, Daniel W. Dierdorff, had loaned Shenker almost $2 million, which he never repaid. Shenker often entertained Dierdorff at the Dunes, regulators said, and Dierdorff used Shenker's jet for gambling trips to the Dunes and other personal trips. Shenker maintained a $25,000 line of credit in Dierdorffs name at the Dunes. Also around that time Dierdorff opened an account at another savings and loan under an assumed name and deposited more than $200,000 to that account in 1983. Dierdorff later pleaded guilty to two felony bank fraud charges, but the source of the money remained a mystery. He was sentenced to eight years in prison in 1989.
Why would Shenker, who appeared to have a direct pipeline to limitless Teamster pension-fund money, be so solicitous of his connections within the S&L industry? Because in 1983 the Labor Department finally wrestled control of the Teamster Central States Pension Fund away from the mob. With its immense appetite for money, Shenker's empire was in crisis. How serendipitous for Shenker, then, that at that very moment Congress was obligingly deregulating savings and loans. Without missing a beat Shenker swung into his savings and loan mode, and when he had to sell the Dunes in 1984 (a massive court judgment against him, on behalf of a pension fund he owed millions, forced him into bankruptcy), his hunt for fresh money intensified. Legitimate bankers wouldn't loan to him, so he needed insiders like Dierdorff, over whom he had some control. Better yet, suppose he could use a beard to front for him and take control of a thrift? That's apparently when he thought of Charles Bazarian, a heavy gambler at the Dunes (his 1987 bankruptcy filing revealed he owed the Dunes $174,000).
In early 1985 Bazarian was buying stock in savings and loans as a way to meet lenders. (Not until his indictment in September 1986 at Florida Center Bank with Rapp and Renda did his wheeling and dealing begin to catch up with him. ) He bought 9.9 percent of Freedom Savings in Tampa (the maximum that could be acquired without regulatory approval), where he met Philip Schwab. A month later he bought 9.9 percent of Bloomfield Savings and Loan (for a reported $731,000) in a ritzy suburb of Detroit, and two weeks later, in early April 1985, he showed up there with his hand out for a loan. He didn't come alone, however. With him were Shenker and loan broker Al Yarbrow. Bazarian later said in court depositions and in conversations with acquaintances that the Bloomfield connection was Shenker's idea. He said Shenker had a friend with connections to the chairman of Bloomfield, and Shenker wanted Bazarian to get control of the thrift, make Shenker's friend chief execuhve officer, and approve loans to Shenker.
A former Bloomfield official told Detroit Free Press reporter Bernie Shelkim, who dug up much of the Bloomfield story, that Bazarian's approach at the meeting was that he was a partner in the thrift, he wanted to help it make money, and one important step it should take was to loan to his company in Oklahoma City. The former thrift official said Bazarian was "loud and aggressive—a pound-the-table type guy" whose message was, "Here's what you should do, you dummies." The thrift's chairman evidently agreed, saying in a memo to thrift directors that Bazarian would bring "the huge loan demand and deep pocket which we have been trying to find."
Bank records show that on April 22 the thrift approved a $15 million loan for Bazarian (the loans-to-one-borrower limit at Bloomfield at that time was $3.5 million) backed primarily by real estate that regulators later said turned out to be over appraised or already pledged as collateral for another loan someplace else. Court records showed Shenker was to share in a finder's fee for taking Bazarian to Bloomfield.
The new president at Bloomfield (promoted to the position in February), unfortunately for Shenker, was a career banker who vehemently opposed the Bazarian loan, and within two weeks the thrift was trying, without success, to get its money back.36 By late 1988 Bloomfield was hopelessly insolvent and regulators seized control.
Shenker's assault on the thrift industry was massive. No one will ever know its true extent. As this book was going to press, we learned that Shenker had tried to borrow from Freedom Savings in Tampa, and a highly placed law- enforcement official told us he had just discovered that Shenker had borrowed from Liberty Federal Savings in Leesburg, Louisiana (Liberty later collapsed), a thrift with connections to an incestuous Texas banking network we discuss later in this book.
In 1988 Shenker, 82, suffered two heart attacks, and when we tried to contact him at his St. Louis office, a spokeswoman told us he was in poor health in a St. Louis hospital. In February 1989 he was indicted in Nevada on two counts: conspiracy to commit bankruptcy fraud (by concealing money from creditors) and conspiracy to defraud the IRS. A Nevada Gaming Control Board investigator told us that when he had investigated Shenker years ago he found him to be "a financial Svengali with over 105 corporations between which he was shuttling money."
In 1982 Congress passed the Carn-St Germain Act, which allowed thrifts to begin to invest in areas other than home mortgages so they could diversify their portfolios of investments and protect themselves against swings in interest rates and other market fluctuations. No one suggested that casinos were a great hedge against inflation, deflation, or stagnation, but within months after thrifts were deregulated, millions of dollars in loans were flowing into casino operations. Casinos also used junk bonds, many arranged through Drexel Burnham Lambert, to finance their acquisitions and expansion, and some of those junk bonds, we discovered, ended up in the portfolios of troubled thrifts who bought them hoping that their potentially high returns would pull their thrifts out of trouble.37 [Pervert Steve Wynn's 'Mirage' and Empire started on those JUNK bonds,karma...DC]
"These guys are going to have a rude awakening when the day comes that junk bonds live up to their name," one thrift analyst told us.[Indeed quite the reckoning it was...DC]
Of all the thrift/casino deals we discovered, not a single one resulted in anything but substantial losses for the thrifts. Like the union pension funds that came before them, thrifts were always the losers in the casino game, while the high rollers—some with long-standing mob ties—emerged unscathed. The casino connection was a financial black hole that sucked millions in insured deposits off to who knows where.
In April the industry got unwanted publicity when the San Francisco Examiner reported on what it said was a land flip orchestrated by San Francisco loan broker J. William Oldenburg at State Savings of Salt Lake City. Reportedly Oldenburg bought 363 acres of land in Richmond, California, in 1977 for $874,000 (he actually paid only $80,000 in down payment, the paper reported). In 1979 he hired an appraiser who appraised the land at $32.5 million. Just a little over two years later, in 1982, the same appraiser decided the land was worth $83. 5 million. In 1983 Oldenburg bought State Savings for $10.5 million. In 1984 he sold the Richmond property to State Savings for $55 million, the Examiner reported.2 Oldenburg resigned as chairman of State soon after a searing article appeared in The Wall Street Journal in June 1984.3
On July 31 a congressional committee released a report that made public for the first time the causes for the collapse in March of Empire Savings near Dallas. Pressure on Gray to do something about the emerging problem was building. But do what? The growing number of insolvencies presented Gray with a heads-I-win, tails-you-lose dilemma. If he ordered all the insolvent institutions closed, as the law required, the FSLIC would be liable for billions of dollars in losses. If the dying thrifts were allowed to continue operating, they would only sink deeper into the red. Gray began to gear up for an extended battle to get the thrift industry back under control and to try to develop a plan for responding to the emerging crisis.
The last thing he needed then was a run-in with Charlie Knapp. Knapp was dashingly handsome, a young, self-styled financial visionary whose gold-plated faucets, in the lavatory of his company's $14 million Lear jet, have become part of the lore of those go-go S&L years. He ran Financial Corporation of America (F.C.A) in Irvine, California, south of Los Angeles. F.C.A in turn owned American Savings and Loan of Stockton, California, which was at the time the largest thrift association in the country. F.C.A was one of Gray's rapidly emerging headaches. The company was on a growth curve that pointed straight up. in just one year, 1983 to 1984, F.C.A had grown from an already staggering $22 billion in assets to an unbelievable $32 billion. Regulators said Knapp used brokered deposits and jumbo CD's sold through his own money desk" 4 to invest in fixed rate mortgages and sophisticated hedging instruments that regulators and the Securities and Exchange Commission had a very difficult time understanding or evaluating. They couldn't see how F.C.A was coming up with the profits it was reporting while at the same time it was drowning in repossessed real estate.
F.C.A had invested billions in old, fixed-rate loans at the very time the rest of the industry was rushing to safe adjustable-rate loans. And court documents later revealed that F.C.A had its share of risky commercial development projects in California and Texas as well. Delinquencies piled up and regulators said F.C.A was making outrageous deals in order to sell the properties it had already had to repossess. At one time, Knapp told us, he had 300 people working in F.C.A's repossessed properties department. 5
Among Knapp's borrowers was the ubiquitous Morris Shenker. F.C.A had loaned millions to the Las Vegas-based Dunes Hotels and Casinos when Shenker was chairman. (When Shenker ran into financial woes. F.C.A was partly bailed out by Jack Bona, who purchased the Atlantic City Dunes project in 1983.6 However, as of October 1985 F.C.A was reportedly the Dunes' largest creditor with a $51 million mortgage on the Las Vegas Dunes' building.)
Another borrower was Leonard Pelullo. Pelullo and American Savings and Loan eventually became entangled in litigation over a $13 million mortgage. (The Atlantic City Press reported that circumstances surrounding Pelullo's business relationship with American prompted a grand jury investigation in 1986 but no indictments resulted." In 1988 Pelullo's Royale Group Ltd. bought the Atlantic City Dunes.)
Gray didn't like Charlie Knapp's way of doing business and wanted him out of the thrift industry. If F.C.A failed, the weight of its $32 billion portfolio would pull the FSLIC fund down in one swoop.
From Washington, Gray called Knapp at his offices in Irvine, California, and said he wanted to see him in Washington as soon as possible. Knapp flew straight to Washington to confront the chairman on his own ground.
"Mr. Gray will see you now," the receptionist told Knapp, a dapper dresser nicknamed "the Red Baron" by his friends because he flew a vintage P-38 World War II fighter. But this was one dogfight Knapp wasn't going to win. The meeting between Gray and Knapp began at 2:15 p.m. and Gray had another meeting scheduled for 2:30 that he could not miss. Gray told us he read Knapp the riot act, quoting chapter and verse on everything he disliked about F.C.A's operations. He accused Knapp of running F.C.A in an "unsafe and unsound manner." The phrase was a provocative one and Knapp could not miss its significance—it was the very phrase the F.S.L.I.C used when it closed thrifts and sued former owners for the losses.
"Because of your irresponsible actions," Gray said he continued, "you've placed in jeopardy the entire savings and loan industry, Mr. Knapp, and I'll do everything in my power to make sure you are removed from this industry. I'm putting you on notice." Gray looked down at his watch. It was 2:30, and he was a busy man.
Knapp remembered the meeting a little differently. He told us Gray greeted him with, "I understand that your loan portfolio is not sound."
Knapp said he asked Gray, "What do you base that on?"
Gray pulled out of his shirt pocket an article from the business section of The New York Times and started reading. As Knapp later recalled it to us, "I just threw up my hands and said, 'The hell with this, I've gotta get out of here.' I couldn't get out of there fast enough."
Regardless of the version you believe, it was clear that the normally flamboyant, self-assured Knapp was caught by surprise by the vigor of Gray's attack. This was not the dopey "Mr. Ed" his friends in the industry had told him to expect. The Red Baron had been shot down in flames.
"I fly all the way from California and the guy gives me 15 minutes and shows me the goddamn door," Knapp told us later.
Shocked, Knapp returned to California, formulated a plan, and called Gray to make a proposal. This time Gray had to listen because F.C.A was too big to shut down, no matter how rotten it may have been. Somehow Gray had to keep the company going, like a ward of the F.H.L.B.B, until its problem assets could be disposed of in an orderly manner over a long period of time. Knapp knew the bind that Gray was in and offered him a deal. Knapp agreed to leave voluntarily on two conditions: first, that he be allowed to select his successor, pending Bank Board approval, and, second, that Gray agree to a $2 million golden parachute for Knapp. Gray agreed.
Knapp hung up the phone and called Washington again. This time he phoned the Office of Management and Budget.
"David Stockman, please. Tell him Charlie Knapp's on the line."
Knapp told us he called Stockman 8 and said that Gray had forced him out of F.C.A. Knapp asked Stockman if he would be interested in the job. Stockman had been President Ronald Reagan's spokesman on budget matters since Reagan took office in 1981, and he had made it known he was getting tired of taking the heat—outspoken and opinionated, he had attracted a lot of press coverage. He also may have been getting tired of taking trips to the Oval Office woodshed whenever he "misspoke." The prospect of running a $32 billion company must have seemed an easy matter after what he'd been through. He agreed to Knapp's proposal. Knapp told Stockman to get Ed Gray's approval. Stockman called Gray.
"Come on over, David," Gray said.
Within 30 minutes Stockman had arrived at Gray's office. Gray told us Stockman said he had talked to Knapp about the F.C.A job and was interested. He said he was tired of Washington and wanted to return to the private sector, and the F.C.A job was an attractive challenge. Gray listened patiently, thinking to himself that Knapp must have offered Stockman a lot of money to take the job and to act as Knapp's mouthpiece. But Gray let Stockman present his case. Gray's friend and the F.H.L.B.B's general counsel. Norm Raiden, sat quietly in a corner chair. Finally Gray spoke up. Out of curiosity he asked, "How soon could you leave your job at OMB, David?"
"Five days," Stockman shot back. But Gray had already made up his mind.
"I understand you're a nice man and a quick study, David, but you've never operated a thrift before. I'm sorry, but I've already lined up Bill Popejoy for the job.'" 9 A half hour after Stockman left Gray's office, James Baker, the president's chief of staff, phoned and Gray told us he asked angrily:
"Why are you trying to hire Stockman away from us? There's an election coming up. We need him." "I didn't," Gray answered. "He wanted the job and I suggested he forget all about it." Baker hung up the phone. Later that day Stockman called Gray and said he didn't want the job anyway. He was going to stay at OMB. (As of early 1989 Knapp had not been charged criminally or civilly in connection with F.C.A's huge insolvency. However, F.C.A's troubles cost the FSLIC over $2 billion and spawned nearly 1,200 separate lawsuits, many naming Knapp, and he had sued F.C.A. By press time about half the suits had been settled, ruled on, or dismissed.)
As Gray mapped his strategy for stopping the abuses at thrifts and dealing with the damage already done, he realized he could not do the job with regulations alone. He would need help from Congress. He knew he was pushing a stick into a beehive, but he felt the situation was deteriorating so fast that he had little choice. To get Congress to act he would have to have public support. so he took his battle pubic. In speech after speech Cray attacked some of the elements he identified as being at the root of the industry's problems. Among them were: brokered deposits, risky lending, direct investments,10 and inaccurate appraisals. He proposed restrictions, and he even introduced the idea of a risk based premium program that would require individual thrifts to pay special assessments to the FSLIC if they engaged in risky behavior.
His candor produced a vigorous counterattack in Washington. Gray claimed Don Regan had the Treasury Department 11 back a bill in Congress that would actually further deregulate the thrift industry. Gray was appalled and vigorously opposed the bill, it was defeated. Score one for Gray.
A short time later. Gray believes, Don Regan exacted his revenge. On
September 13, 1984, Regan spoke on the state of the economy to a convention
of mortgage executives in Washington. At the news conference that followed, Stan Strachan, editor of the National Thrift News, asked Regan if the Treasury
would guarantee losses at F.C.A in the event of a run on the company by depositors.
After all, Strachan reminded Regan, Treasury had done just that a few
years earlier during a run on Continental Illinois bank in Chicago.
"No," Regan shot back. Pressed by Strachan, Regan categorically ruled out any kind of Treasury backing for F.C.A. That public statement created exactly the kind of turmoil Gray had been trying to avoid by moving slowly on the FCA matter. He had eased Knapp out and Popejoy in with as little fanfare as possible. So far his strategy had worked—until Don Regan's remarks. The next day there was a run on F.C.A and $400 million in deposits walked (or ran) out the door as customers and deposit brokers rushed to remove their money. It was the largest one-day run in thrift history, and Ed Gray was furious at Regan. Regan's careless remarks had been devastating to Gray's F.C.A rehabilitation program. Gray shot off an angry letter to Regan, asking him to check with the F.H.L.B.B the next time he planned to speak out like that.
Regan replied with an angry letter of his own in which he said, "I was surprised and frankly displeased by your letter. . . . Candidly, I do not have to be reminded of my responsibilities in areas of concern to you or, for that matter, any of the other areas of government in which economics and finance play a role."
Soon Regan had another opportunity to throw stumbling blocks in Ed Gray's path. To repair the damage done at F.C.A by the massive outflow of deposits in the wake of Regan's remarks. Gray turned to brokered deposits as a quick fix. Ironically, Gray, the very man who was death on brokered deposits, was now turning to them to buy time. For help he approached his predecessor at the Bank Board, Richard Pratt, now an executive with Merrill Lynch, and Pratt agreed to have Merrill Lynch place $1 billion in deposits with F.C.A within days. But he soon called Gray back with the news that he'd been overruled by his superiors at Merrill Lynch and the deal was off. Gray was forced to raise the money from other brokerage houses. Later Pratt told Gray privately that Don Regan had personally intervened at Merrill Lynch to kill the deal. It was almost as if Regan were taunting Gray for his opposition to brokered deposits. Gray thought Regan was trying to get back at him for Gray's suggestion that Regan check with him before commenting public about S&L matters.12 Regan, who had promised he would not involve himself with matters relating to his former employer Merrill Lynch after he joined the Reagan cabinet, denied intervening with Merrill Lynch about the $1 billion in brokered deposits for F.C.A. Pratt declined to comment.
After Gray's brokered-deposit regulation was rejected by a federal court, which ruled that only Congress could make such a prohibition. Gray decided that if he couldn't limit brokered deposits, he'd better limit what thrifts did with those federally insured deposits. At every insolvent S&L, Gray found both excessive brokered deposits and risky direct investments. In Gray's view thrifts chartered in states with liberal thrift regulations were using federally insured deposits to take far too many risks.13 The thrift industry was turning into a crap shoot, with the bets insured by the FSLIC. Gray thought that was wrong, and he made it known that his next move would be to draft new regulations that would curb direct investments by FSLIC-insured state thrifts 14 and limit thrifts' growth.15
"It had to stop," he was telling everyone who would listen. S&Ls were padding their financial statements with too many direct investments that seemed on the books to be worth millions but whose quality couldn't really be determined until the project was completed. If the project was a ripoff, no one would know until it was too late.
Gray had first proposed a new direct investment regulation in May 1984. In early December 1984, shortly before he actually issued the new regulation. Gray said Bill O'Connell of the U.S. League of Savings Institutions phoned and pleaded with him not to go through with it.
"If he had been at Gray's office, you can guarantee that O'Connell would've been down on his hands and knees," an aide said later.
O'Connell denies he asked Gray to kill the whole regulation, but only to modify it. Whatever the case. Gray was unmoved.
In January the regulation was finally enacted, to go into effect in March. In general it would limit direct investments to just 10 percent of a thrift's total assets,16 and it would also limit a thrift's rate of growth to 25 percent a year.17 Some thrifts had been growing at rates of 100 to 500 percent a year.18
Gray says that the U.S. League again tried to kill the regulation. O'Connell remembers events differently, repeating that, rather than wanting to kill Gray's growth restrictions, the League had simply wanted them modified and calling Gray's version "overkill." Gray says "nonsense." He believes O'Connell is trying to rewrite history.
"During the late afternoon of the day before both of these reg's [the growth regulation and the direct investment regulation] were proposed in open hearing of the Bank Board, Mr. O'Connell called me," Gray recalled. "My recollection is that the calls came in at around 5 to 6 p.m. Mr. O'Connell begged me to not go through with the growth regulation, not to propose it the next day, and he said if I did so my career would be ruined if I ever decided to go back to the thrift industry. The call was a long one, as I recall, probably 30 to 40 minutes. I told him that if I had to be the son-of-a-bitch to do it so be it. It would be done."
Regarding the direct investment regulation. Gray said it was only after the regulation was adopted by the Board that the U.S. League "grudgingly" supported it.
As 1985 dawned it was beginning to appear to Ed Gray in Washington that Texas was especially out of control. Gray's shorthanded and underpaid examiners were coming in from the field with stories about Texas thrift owners and managers that made J. R. Ewing look like a minister. They told Gray about thrift board meetings attended by hookers whose services were paid for by the thrift, chartered jet-set parties to Las Vegas, gala excursions to Europe, luxurious yachts, oceanfront mansions, and Rolls-Royce's—princely life-styles built on mountains of bad loans and bad investments. The state's long-standing liberal thrift and banking practices, the oil and real estate booms of the late 1970's, and the state's entrepreneurial, wild-cat business traditions had all combined to make Texas a hothouse for deregulated thrifts, and the signs of abuse were starting to show. In the newly deregulated environment new thrifts had sprouted throughout Texas like rye grass after a spring rain. Old, long-established thrifts were snatched up by young speculators eager for the opportunity to wheel and deal with insured deposits. Even out-of-state thrifts, many from California, opened loan offices in Texas hoping to catch a ride on the Texas wave.
Within a year of Garn-St Germain's passage Texas was embroiled in a construction-loan feeding frenzy. Acquisition and Development Loans (A.D.L's) and Acquisition, Development, and Construction Loans (A.D.C's), for commercial projects, were the main-line products. Home loans went begging. The money, in large part, flowed into construction. Yet thrift's were not doing sufficient market surveys to see if the marketplace could absorb the new office buildings and condos, and they were not coordinating with other thrifts to make sure they weren't all going to flood the market at the same time with the same kinds of projects. In Texas in the early 1980's the emphasis was on building, and the future would take care of itself because the boom would never end.Building permits in Texas increased from $4.5 billion in 1976 to about $17 billion in 1983.
Texas thrifts lived only for today: today's deals, today's profits, today's kickbacks. By 1985 the Dallas and Houston skylines were filled with what locals began to refer to as "see-through office buildings." So much commercial construction had been financed by thrifts that it far outstripped the local market demand, and glass skyscrapers stood empty. There were so many unsold condos littering Houston and Dallas and their suburbs that a favorite joke among lenders went: "Whats the difference between V.D. and condominiums?" The answer: "You can get rid of V.D."
With supply vastly exceeding demand in 1985, many Texas thrifts kept from going under only by turning more deals and inflating their financial statements with more fees and up-front interest. Their portfolios became little more than huge pyramid schemes, Ponzi's, that required constant trades, refinancing, swaps, participation's, and loans on yet more new projects. They had to take in more brokered deposits to fund more loans so it would appear that they were making more profit, even though the loans were risky (risky loans carried the potential for the highest profits—and losses). As a result Texas thrifts grew at an astronomical rate. In 1984 and 1985 they grew three times faster than the national average.19 As long as the S&Ls could keep pedaling, they wouldn't fall. But every day that passed they had to pedal faster and faster to maintain the illusion that they were moving forward. Gray's proposed limits on direct investments and growth were going to be very unpopular with thrift owners in Texas—men like Don Dixon, who owned Vernon Savings and Loan, headquartered in Dallas. By 1985 Don Dixon was living like a king, and Gray's new rules threatened his kingdom.
Don Dixon, his petite blond wife, Dana, clinging tightly to his arm, strode proudly toward the front of the crowd of 40,000 assembled in the piazza in front of St. Peter's Basilica in the Vatican. Pope John Paul II, dressed entirely in white, had just made his weekly Wednesday address in six languages and was now descending the white throne to mingle with the special guests seated around the platform.
The Bishop of San Diego, the Reverend Leo T. Maher, was hosting the Dixon's for their personal meeting with the Pope. Dixon was in his late forties. Expensively dressed, and with collar-length gray curls around a tanned face, he stood out as a businessman in the crowd of worshipers. He had a drooping mustache and beady eyes that could look warm and trustworthy or calculating and condescending. He had the air of a let's-shake-on-it kind of guy.
Dixon noted the grandeur of the 300-year-old piazza surrounded by Gian Lorenzo Bernini's grand colonnade. It is one of the most awesome places on earth, and Dixon noticed that the normally loquacious Dana was uncharacteristically silent. As the Pope neared, Dixon, too, felt the uniqueness of the moment. He was not a Catholic, and he had an arrogant self-confidence, but even he could not resist this Pope's stature and personal power.
"I was very well aware of everything I said and that I was in the presence of someone very special," he would later recall. Pope John Paul II greeted the Dixon's with a handshake and his characteristic off-to-one-side nod. Dixon thanked the Pope for the opportunity to meet with him and presented him with a gift he had brought for the occasion, a $40,000 Olaf Wieghorst original oil painting of an Indian on horseback, "Night Sentry." The Pope admired the painting and said it would hang in the Vatican Museum. Dixon told the Pope how much that meant to him. What Don failed to tell His Holiness was that the painting was not his to give. He had "borrowed" it from Vernon Savings and Loan back home.20
After their stop at the Vatican the Dixon's continued their European fling with visits to Bulgari and Guzzi spas. They stayed at the finest European hotels, such as the Grosvenor House in London, the Hotel Ritz in Madrid, and the Bristol Hotel in Paris, and while in the neighborhood they stopped by the Palais de Margaux in Bordeaux, a chateau Dixon and some partners were converting into a restaurant and hotel. Then it was time to head for home. The Dixon's made their May 1985 European jaunt in Vernon Savings' tri-jet Falcon 50 and, regulators later discovered, charged the trip's expenses on Vernon's tab.
Flying into Dallas on the last leg of their trip, the Dixon entourage looked out of the windows of their private jet at the city where the Dixon's had made their fortune. Dallas, the eighth largest city in the United States, was an exciting town of soaring glass buildings, wild night spots, and businessmen in gray suits and cowboy boots. Business had traditionally been done differently in Dallas than in the rest of the country—on gambling instincts, eternal optimism, and the myth of the reliability of a Texas man's word. In the early 1980's the brash city vibrated with the pulse of money being pumped into the local economy from a booming oil business and mushrooming real estate speculation.
Don and Dana must have enjoyed the view as their private jet swooped down over North Dallas, a cluster of about 20 high-rise office buildings that had sprung up 15 miles due north of downtown Dallas. North Dallas straddled the Dallas Tollway just north of its intersection with the LBJ Freeway. It was the hub of a new Dallas financial center, and Dixon's Vernon Savings and Loan owned the 15-story high rise right in the middle.
There, too, was State Savings and Loan of Lubbock, under the control of Dixon's friend Tyrell Barker. And Sunbelt Savings and Loan, playfully known around town as Gunbelt Savings for its quick-draw deals. Sunbelt was run by Ed McBirney, nicknamed "Fast Eddie"—a man people said was "so smart it was frightening." McBirney became famous in Dallas for lavish parties filled with wine, women, and debauchery at places LIke the Dunes Hotel and Casino in Las Vegas. Near Sunbelt were a host of other entrepreneurial thrifts. North Dallas was Texas-thrift mecca.
Also in North Dallas was Jason's, the famous restaurant that became a favorite watering hole for deal makers who flocked to Dallas from around the world. At Jason's the manager, in desperation, had to co\er some tables with butcher paper to prevent speculators from scribbling deals on the linen tablecloths. And, finally, in North Dallas were the swanky homes and condos where many of the S&L deal-makers (including Dixon, Barker, and McBirney) lived. The setting was right out of the script for the popular TV nighttime soap opera Dallas, which was shot on location at the South Fork Ranch about five miles away. North Dallas buzzed 24 hours a day with the frenetic seven-days-a-week pace of millionaires chasing their next million. For entrepreneurs in the early 1980's, North Dallas was where it was at.
The Dixon's gathered their belongings as the Vernon Savings jet dropped down into Addison Municipal Airport (also in North Dallas) where Vernon Savings kept its fleet of planes. The clerical staff that had accompanied the Dixon's to Europe settled back in their seats for the landing. It had been a tiring but rewarding trip, and it was good to be home. Europe was terrific, but no place in the world could quite compare at that time to the brave new world of Dallas.
Don Dixon was a man in a big hurry and he had made it to the top fast. Even as a child Dixon had been in a hurry, always looking for ways to cut corners, always trying to get from here to there in the quickest and easiest way. He grew up in Vernon, Texas, a small town 150 miles northwest of Dallas and 10 miles from the Oklahoma border, and his Type A tendencies had first shown themselves in high school, where, eager to get on to college, Dixon combined his junior and senior years so he could graduate a year early. His mother reinforced this "go get em " behavior by presenting young Don with a brand-new, money-green, 1956 T-Bird two seat convertible for graduation. Dixon reportedly once told a high school friend that his goal was to make so much money he'd "never be able to put a dent in it."
From high school Dixon went to Rice Institute in Houston, where he studied architecture for two years. Then he transferred to the University of California at Los Angeles and began a lifelong love affair with the Pacific beaches of Southern California. In June 1960 Dixon graduated from UCLA with his degree in business administration. That same year, over a thousand miles away in Dixon's hometown, R. B. Tanner cut the ribbon to open his little Vernon Savings and Loan. No one could have imagined how intertwined the two disparate launching's would become.
Dixon went from college straight to where the money was in those days —residential development. The year 1960 marked the height of the migration to the suburbs. Like honeysuckle vines, freeways sprouted from crowded cities and turned once-flat farm and grazing lands into sprawling residential developments. The tide was rushing out and Dixon was there to catch the crest of the wave.
He formed Raldon Homes with an associate, Raleigh Blakely, and the company did well until the 1973-74 recession hit. Like most development companies, Raldon depended upon a steady stream of loans to provide the capital the company needed to buy land and build homes. With the recession the bottom dropped out of the housing market, and, according to published reports, Raldon found itself stuck with millions in development loans it could not pay off. Bankers complained about business cycles but didn't accept them as excuses for nonpayment, so, in a deal worked out between Raldon and its creditors, "Ral and Don" were forced to resign.
With Raldon's liabilities off his back, Dixon waited the recession out, and when the real estate market picked up again, he formed Dondi Construction (DON Dixon), in short order he was back on the top of the heap. Hundreds of homes bearing Dondi's unique signature trademark—Spanish styling topped with red tile roofs—began to pop up in the suburbs of Dallas. By 1981, at 45 years of age, Dixon was the head of a large, successful construction company that employed hundreds of people. He took to wearing gold chains, leather vests, and open-collared shirts around the office. People often said he reminded them of entertainer Kenny Rogers. Texas Monthly reported that his office staff handed out phony $3 bills with Dixon's picture on the front, under which was inscribed "Chairman of the Bored" and "In Don We Trust. " The reverse side featured a picture of one of Dondi Construction's homes with the caption, in mock Latin, "Red Tilebus Roofum."
Dixon was riding high in the saddle when he teamed up with soul mate Tyrell Barker. Barker was a Northern California builder who had come to Texas recently when someone reportedly told him, "Hey, come on down to Dallas. We're making lots of money down here." Barker had already done very well in California real estate, and even after he moved to Dallas, government investigators said, he continued to maintain his $1.5 million home in Hillsborough, an exclusive community 20 miles south of San Francisco. He had purchased the home from the millionaire Hearst family. Barker was in his early forties, about three years younger than Dixon. He was noticeably hyperactive, an energetic workaholic with no family. Friends said he lived to "do deals. " He was stocky, wore glasses and a mustache, and he talked a lot—except when he was with Dixon, to whom he deferred. He was smart and articulate, a man who had learned to compensate for a potentially crippling dyslexia that had kept him from graduating from high school or, he later told a judge, being able to read beyond a third-grade level.
Both Dixon and Barker were "deal junkies," as one FBI agent later described them, but their motivations were slightly different. Dixon had an appetite for the good life. He liked money and the pleasures it could buy. Barker, on the other hand, thrilled to the deal-making game and money was just the way he kept score. Dixon was a showman who enjoyed the parties and social amenities of his power. Barker was a loner who lived for his job. But neither of them was ever satisfied. Dixon and Barker measured themselves by the Texas oil yardstick of the day, which rated one's personal fortune in "units," with one unit equaling $100 million. At chic Dallas cocktail parties each new arrival was sized up in whispered rankings, such as "I hear he's a four-unit man." Dixon and Barker were "no-unit men," and they wanted to change that. A partnership Barker formed soon after he came to Texas in 1980 left no doubt where his priorities lay. He called it "M.L.M.Q#1"—Make Lots of Money Quick #1.
Though Texans traditionally made their money in oil, neither Dixon nor Barker knew one end of an oil rig from the other so they could not hitch their wagons to that star. What they did know was development and. through that, the banking and thrift business. They had also heard about thrift deregulation, which had begun in 1980. And while as developers they had always had to go begging to lenders for money, they knew that if they could own their own S&L they would have ready access to all the cash (deposits) they wanted. So if they couldn't pump oil, maybe they could pump something better—money.
They each decided to buy a savings and loan.
Buying a savings and loan would cost more money than they had on hand, but Dixon had a close friend who was only too willing to help with the financing. He had become friends with a wealthy Shreveport, Louisiana, businessman, Herman K. Beebe. Beebe must have been everything Dixon wanted to become. He traveled in a chauffeured limo and lived on a gracious southern-style plantation estate near Shreveport. He also had homes and businesses in Dallas and Southern California. Dixon and Beebe had met about five years earlier, and Dixon had become an unofficial member of the Beebe family. He often visited Beebe on his Louisiana plantation and the two men frequently traveled together, playing gin rummy and drinking bourbon on Beebcs plane.
Beebe's flagship company, A.M.I, Inc. , was an enormous conglomerate whose primary interests were insurance and nursing homes. One of the products A.M.I specialized in was credit life insurance. (Banks making large loans often required a borrower to take out a life insurance policy in the amount of the loan. If the borrower died, the insurance would pay off the loan. ) Selling credit life insurance policies was a lucrative business, and Beebe had built close ties with many Texas and Louisiana banks. Dixon was so taken with Beebe that he introduced Tyrell Barker to him and soon they were a threesome.
"Terry and Beebe were on the phone to each other all the time," a friend said later. When Dixon and Barker decided they wanted to make their move into the soon-to-be-deregulated thrift industry, Beebe said he'd get them started by helping to finance their acquisitions.
next
Going Home
notes
Later the Las Vegas media reported that the Gaming Control Board was checking into Anderson's relationship with Eureka Federal Savings and Loan and Kenneth Kidwell. Following the Dunes deal, the Gaming Control Commission declared Eureka Federal an unacceptable source of funds for future casino acquisition. They gave no explanations for their action, but Kidwell complained in a letter to his attorney that the Dunes deal had caused him to become "trapped in Shenker's shadow."
Kidwell wrote that it had surprised him to read in the newspapers that he had ties to Morris Shenker and various mobsters. He complained that even some of his Eureka Federal customers thought he was working with the mob. He said that John Anderson called him one day and asked if it were true that he (Kidwell) was "washing money for one of the families."
Whatever problems there may have been at Eureka Federal Savings may never be known. Although the Nevada Gaming Control Commission was clearly concerned, the F.H.L.B.B was not. Even though some of the most prominent thrift looters we investigated were borrowers at Eureka Federal, even though one employee received phone threats just before she was to be deposed, even though a director told us he had been threatened by an officer, even though 170 loans were in default at Eureka Federal, regulators told us they had investigated Eureka Federal and found no evidence of fraud there. Mitchell Brown, a ubiquitous borrower who had also been co-owner of First National Bank of Marin in San Rafael, California, until he was forced out by regulators, felt differently.26 Just before Brown was indicted for bank fraud in Oregon, according to investigators, he asked the U.S. attorney if he could cut a deal. He wanted blanket immunity he said, for what he had done at Eureka Federal, but he would not tell regulators what he had done there (and they did not cut him a deal). His trial was pending as of this writing.
Like many other ambitious Anderson ventures, the Dunes turned out to be a giant money loser. Anderson put the Dunes into bankruptcy in September 1985 for protection from creditors, who were owed $117 million. Anderson would eventually leave Eureka Federal Savings stuck with nearly S?2 million in his delinquent loans. A source close to the Eureka Federal Savings case said in late 1988 that Anderson was attempting to bring the loans current by making monthly payments of $500,000.
According to media accounts, Anderson also defaulted on $22 million in loans from Crocker Bank and $2. 1 million borrowed from Aetna Life Insurance Company. He had $43 million in debts on his various real estate holdings and owed $68.6 million to Valley Bank of Nevada. After tapping out these sources Anderson headed north to Oregon, where authorities said loan broker Al Yarbrow helped him get $25 million in loans out of State Savings of Corvallis. Yarbrow also introduced Anderson to Charles Bazarian and Anderson later borrowed money through Bazarian's CB Financial. We would find Anderson's footprints at Vernon Savings in Dallas as well. (See Texas chapters.)
Jack Bona and his partner, Frank J. Domingues, got $200 million in loans from San Marino Savings and Loan in San Marino, California,27 in ten months, even though tax records showed that three years earlier they had reported combined incomes of less than $30,000.28 (Remember that the next time a banker tells you you don't earn enough to qualify for a $9,000 car loan.) The plan they submitted to San Marino was to convert apartment units to condos and sell them as tax-shelter rentals to investors in high income-tax brackets. When San Marino failed in December 1984 29 regulators charged that the properties on which San Marino lent Bona and Domingues $200 million were worth only about $100 million. Most of the loans were in deep default, and the properties turned out to be in such bad neighborhoods in Dallas and Los Angeles that even an internal memorandum at San Marino showed that the thrift's staff referred to them as "the Zulu projects." A California thrift director who went to Texas to look at the condos for himself sent back a memo with this discouraging word: "They are NOT convertible [into condos) except to a BLIND investor." Regulators claimed Bona and Domingues pocketed up to $50 million for themselves on these projects. Domingues told reporters that they made only about $10 million.
Remarkably, even as regulators were wringing their hands over what Bona and Domingues had done to San Marino Savings, the two new millionaires were buying their own savings and loan nearby. South Bay Savings. "Apparently the left hand didn't know what the right hand was doing," deputy California Savings and Loan Commissioner William Davis said later (he became deputy commissioner after the South Bay affair). The San Diego Union reported that Domingues said he would never allow his thrift, South Bay, to make the kinds of loans that San Marino had made to him and Bona. Be that as it may regulators later revealed that the day the two men bought South Bay, they had the thrift loan them $6 million.30
Shortly after opening South Bay, Jack Bona 31 split with Domingues. He sold out his share in South Bay to Domingues 32 and in 1983 purchased another kind of financial institution, Morris Shenker's troubled 664-room Atlantic City Dunes Hotel and Casino project. Shenker had begun the project just before defaulting on millions in loans from union pension funds. Now it was little more than a rusting abstract sculpture of I-beams in the middle of town. Shenker sold the project to Bona shortly before John B. Anderson bought Shenker out at the Las Vegas Dunes. Bona kept the Atlantic City Dunes for a couple of years, during which time he added a few more millions in loans to the project's crushing debt,33 and then he defaulted and filed for bankruptcy in 1985.
The Dunes was put up for sale by the bankruptcy trustee and sold in 1988 to Royale Group Ltd., run since 1981 by Leonard Pelullo. We remembered Pelullo because his name had shown up without explanation in documents regulators had seized from Consolidated Savings. The handsome, swarthy Pelullo, who was 37 in 1988, worked out of an office in the Carlyle Hotel in Miami Beach's Art Deco district. Business Week reported that he described himself as a "workout" specialist, a consultant who helped companies drowning in debt. The still not built Atlantic City Dunes project certainly qualified.
But Pelullo may have had a darker side. Business Week also reported that he had recently worked under the alias Bob Paris because, Pelullo reportedly said, he wanted to avoid drawing attention to a New Jersey State Commission of Investigation report on boxing that described him as "a key organized crime associate from Philadelphia." Pelullo denied any ties to the mob.
In June 1989 a Cincinnati grand jury handed down an indictment against Pelullo and David A. Friedmann, a Houston businessman who from 1983 to 1985 was owner and CEO of Savings One, a thrift in Gahanna, Ohio (Mario Renda and Martin Schwimmer attempted to purchase Savings One in 1983). The indictment charged the two men with conspiring to obtain loans from the thrift that were used for purposes other than stated on the loan application. The indictment also charged that Pelullo paid Friedmann $145,000 in kickbacks for arranging the loans. Pelullo said the money was pre-paid interest on a loan extension he expected to receive. The case was pending at this writing.
We had run into the casino connection at Consolidated as well. One of Consolidated Saving's problem loans, regulators claimed, was a $614,311 loan to Robert Shearer and Llewellyn Mowery for refurbishing the Treasury Hotel and Casino in Las Vegas. Shearer and Mowery refused to repay the loan, according to regulators, unless Consolidated loaned them $3 million more.
Consolidated Saving's owner, Robert Ferrante, got into the casino act personally, court records showed, when he and Mario Renda teamed up for a casino project in Puerto Rico that they called the Palace Hotel and Casino.34 After Consolidated failed and Renda found himself enmeshed in all manner of criminal and civil difficulty, the Palace Casino was allowed to go into bankruptcy and Las Vegas newspapers reported that the project was purchased out of bankruptcy by the Pratt Hotel chain, a division of Southmark, Inc.. a Dallas-based conglomerate that also owned San Jacinto Savings and Loan in Houston (see Chapter 21).
By far the most frequent casino connection we ran into at failed thrifts around the country was the Las Vegas-based Dunes Hotels and Casinos company and its chairman, Morris Shenker. Shenker, born in Russia in 1907, had been an attorney in St. Louis since 1932. He first came to national attention in the early 1950's during the congressional hearings of the Kefauver committee, which investigated the influence of organized crime in interstate commerce. Twenty years later Life magazine detailed his alleged mob ties in an expose of a former St. Louis mayor (by then, ironically, Shenker had been appointed chairman of the St. Louis Commission on Crime and Law Enforcement, a position he held from 1969 to 1972). In 1975 Penthouse magazine said Shenker was under investigation by a federal strike force and grand jury in St. Louis and added, "His Byzantine financial maneuvering astounds investigators in and out of government."
The source of Shenker's power appeared to be his lengthy and well-publicized relationship as chief attorney and confidant of Teamster union president Jimmy Hoffa. Hoffa was Teamster boss from 1957 until he went to prison in 1967, and he continued to run the union from prison for several years. (He was released from prison in 1971 and disappeared in 1975 as he was attempting to regain control of the Teamsters. Authorities believe he was murdered.) The President's 1986 Commission on Organized Crime reported that the Teamsters, the nation's largest union, had been 'firmly under the influence of organized crime since the 1950's." In 1989 the FBI released material collected for the FBI by Teamster president Jackie Presser during the nine years he was an FBI informant, until he died in 1988 of brain cancer. The documents showed a union dominated by organized crime and corruption.
As Teamster leader, Hoffa controlled the massive ($400 million in 1967, $1.6 billion in 1977) Teamsters' Central States Pension Fund. He directed that millions of the fund's dollars be loaned to associates and mobsters, and over the years the fund became, as author Steven Brill wrote in The Teamsters, "a special bank where loans depended almost always on the right kickbacks or the right organized crime connections." By 1974 Shenker had more than $100 million in loans from the fund, for the Las Vegas Dunes and other properties, according to Brill. The President's 1986 Commission on Organized Crime said that Shenker received the largest single loan ever made by the fund, a portion of which had never been repaid. With that access to millions came, apparently, tremendous power.
Hoffa pioneered the use of Teamster pension funds to finance casinos in 1960. The Penthouse piece said Michael Rapp's buddy Moe Dalitz helped persuade Hoffa to finance Nevada hotels and casinos.35 In Las Vegas the Teamsters at one time backed Dalitz's Desert Inn, Circus Circus, the Fremont, the Lodestar, the Plaza Towers, the Stardust, the Landmark Hotel, the Four Queens, the Aladdin, and Caesar's Palace; in Lake Tahoe, the King's Castle, the Lake Tahoe, and the Sierra Tahoe; in Riverside, the Riverside; and in Overton, the Echo Bay, according to investigative reporters Jonathan Kwitny and Steven Brill. Presser told the FBI that profits from Las Vegas casinos were illegally skimmed and mob couriers took the cash away in suitcases.
Shenker got control of the Las Vegas Dunes with the promise of a $40 million advance from the Teamsters' Fund, and we came across him or the Dunes numerous times in our investigation. Erv Hansen at Centennial gambled at the Dunes regularly, reportedly sometimes dropping $10,000 at the roulette table in a single night. Norman B. Jenson had been a Shenker business associate. Shenker made the Dunes a hospitable place for thrift officials and even occasionally provided suites where deals could be cut, as when Winkler, Daily, and Russo met there to formalize their Indian Springs State Bank project. The Dunes Hotel and Casino and several of Shenker's associates received loans from Indian Springs State Bank. Jack Bona bought the Atlantic City Dunes from Shenker and John Anderson bought the Las Vegas Dunes, both using S&L credit, when Shenker was in deep financial trouble. Shenker was mentioned in Renda's 1981 desk diary. Nevada gaming documents revealed Philip Schwab was a Shenker associate, as was Eureka Federal Savings President Kenneth Kidwell, who also knew Jackie Presser well.
When Sun Savings in San Diego failed in July 1986, court documents showed that the president, Daniel W. Dierdorff, had loaned Shenker almost $2 million, which he never repaid. Shenker often entertained Dierdorff at the Dunes, regulators said, and Dierdorff used Shenker's jet for gambling trips to the Dunes and other personal trips. Shenker maintained a $25,000 line of credit in Dierdorffs name at the Dunes. Also around that time Dierdorff opened an account at another savings and loan under an assumed name and deposited more than $200,000 to that account in 1983. Dierdorff later pleaded guilty to two felony bank fraud charges, but the source of the money remained a mystery. He was sentenced to eight years in prison in 1989.
Why would Shenker, who appeared to have a direct pipeline to limitless Teamster pension-fund money, be so solicitous of his connections within the S&L industry? Because in 1983 the Labor Department finally wrestled control of the Teamster Central States Pension Fund away from the mob. With its immense appetite for money, Shenker's empire was in crisis. How serendipitous for Shenker, then, that at that very moment Congress was obligingly deregulating savings and loans. Without missing a beat Shenker swung into his savings and loan mode, and when he had to sell the Dunes in 1984 (a massive court judgment against him, on behalf of a pension fund he owed millions, forced him into bankruptcy), his hunt for fresh money intensified. Legitimate bankers wouldn't loan to him, so he needed insiders like Dierdorff, over whom he had some control. Better yet, suppose he could use a beard to front for him and take control of a thrift? That's apparently when he thought of Charles Bazarian, a heavy gambler at the Dunes (his 1987 bankruptcy filing revealed he owed the Dunes $174,000).
In early 1985 Bazarian was buying stock in savings and loans as a way to meet lenders. (Not until his indictment in September 1986 at Florida Center Bank with Rapp and Renda did his wheeling and dealing begin to catch up with him. ) He bought 9.9 percent of Freedom Savings in Tampa (the maximum that could be acquired without regulatory approval), where he met Philip Schwab. A month later he bought 9.9 percent of Bloomfield Savings and Loan (for a reported $731,000) in a ritzy suburb of Detroit, and two weeks later, in early April 1985, he showed up there with his hand out for a loan. He didn't come alone, however. With him were Shenker and loan broker Al Yarbrow. Bazarian later said in court depositions and in conversations with acquaintances that the Bloomfield connection was Shenker's idea. He said Shenker had a friend with connections to the chairman of Bloomfield, and Shenker wanted Bazarian to get control of the thrift, make Shenker's friend chief execuhve officer, and approve loans to Shenker.
A former Bloomfield official told Detroit Free Press reporter Bernie Shelkim, who dug up much of the Bloomfield story, that Bazarian's approach at the meeting was that he was a partner in the thrift, he wanted to help it make money, and one important step it should take was to loan to his company in Oklahoma City. The former thrift official said Bazarian was "loud and aggressive—a pound-the-table type guy" whose message was, "Here's what you should do, you dummies." The thrift's chairman evidently agreed, saying in a memo to thrift directors that Bazarian would bring "the huge loan demand and deep pocket which we have been trying to find."
Bank records show that on April 22 the thrift approved a $15 million loan for Bazarian (the loans-to-one-borrower limit at Bloomfield at that time was $3.5 million) backed primarily by real estate that regulators later said turned out to be over appraised or already pledged as collateral for another loan someplace else. Court records showed Shenker was to share in a finder's fee for taking Bazarian to Bloomfield.
The new president at Bloomfield (promoted to the position in February), unfortunately for Shenker, was a career banker who vehemently opposed the Bazarian loan, and within two weeks the thrift was trying, without success, to get its money back.36 By late 1988 Bloomfield was hopelessly insolvent and regulators seized control.
Shenker's assault on the thrift industry was massive. No one will ever know its true extent. As this book was going to press, we learned that Shenker had tried to borrow from Freedom Savings in Tampa, and a highly placed law- enforcement official told us he had just discovered that Shenker had borrowed from Liberty Federal Savings in Leesburg, Louisiana (Liberty later collapsed), a thrift with connections to an incestuous Texas banking network we discuss later in this book.
In 1988 Shenker, 82, suffered two heart attacks, and when we tried to contact him at his St. Louis office, a spokeswoman told us he was in poor health in a St. Louis hospital. In February 1989 he was indicted in Nevada on two counts: conspiracy to commit bankruptcy fraud (by concealing money from creditors) and conspiracy to defraud the IRS. A Nevada Gaming Control Board investigator told us that when he had investigated Shenker years ago he found him to be "a financial Svengali with over 105 corporations between which he was shuttling money."
In 1982 Congress passed the Carn-St Germain Act, which allowed thrifts to begin to invest in areas other than home mortgages so they could diversify their portfolios of investments and protect themselves against swings in interest rates and other market fluctuations. No one suggested that casinos were a great hedge against inflation, deflation, or stagnation, but within months after thrifts were deregulated, millions of dollars in loans were flowing into casino operations. Casinos also used junk bonds, many arranged through Drexel Burnham Lambert, to finance their acquisitions and expansion, and some of those junk bonds, we discovered, ended up in the portfolios of troubled thrifts who bought them hoping that their potentially high returns would pull their thrifts out of trouble.37 [Pervert Steve Wynn's 'Mirage' and Empire started on those JUNK bonds,karma...DC]
"These guys are going to have a rude awakening when the day comes that junk bonds live up to their name," one thrift analyst told us.[Indeed quite the reckoning it was...DC]
Of all the thrift/casino deals we discovered, not a single one resulted in anything but substantial losses for the thrifts. Like the union pension funds that came before them, thrifts were always the losers in the casino game, while the high rollers—some with long-standing mob ties—emerged unscathed. The casino connection was a financial black hole that sucked millions in insured deposits off to who knows where.
CHAPTER FIFTEEN
Gray; Stockman
and the
Red Baron
In the summer of 1984 swindlers like Mike Rapp were looting thrifts like Flushing
Federal with wild abandon, unobserved and unobstructed. But some isolated
cases of abuse had begun to surface, enough to convince F.H.L.B.B Chairman Ed
Gray that deregulation had been carried too far. No sooner had Empire Savings
in Dallas collapsed in March 1984 than the problems at San Marino Savings
in Southern California came to his attention 1 (the failure of the two thrifts cost the FSLIC an estimated total of $600 million), and on their heels came word
from the San Francisco F.H.L.B to brace for more of the same. At least a dozen more San Marino's were in various stages of insolvency, they told Gray, and
Gray's people in Texas were sending back the same message. In the first half of
1984, Gray faced one crisis after another. In April the industry got unwanted publicity when the San Francisco Examiner reported on what it said was a land flip orchestrated by San Francisco loan broker J. William Oldenburg at State Savings of Salt Lake City. Reportedly Oldenburg bought 363 acres of land in Richmond, California, in 1977 for $874,000 (he actually paid only $80,000 in down payment, the paper reported). In 1979 he hired an appraiser who appraised the land at $32.5 million. Just a little over two years later, in 1982, the same appraiser decided the land was worth $83. 5 million. In 1983 Oldenburg bought State Savings for $10.5 million. In 1984 he sold the Richmond property to State Savings for $55 million, the Examiner reported.2 Oldenburg resigned as chairman of State soon after a searing article appeared in The Wall Street Journal in June 1984.3
On July 31 a congressional committee released a report that made public for the first time the causes for the collapse in March of Empire Savings near Dallas. Pressure on Gray to do something about the emerging problem was building. But do what? The growing number of insolvencies presented Gray with a heads-I-win, tails-you-lose dilemma. If he ordered all the insolvent institutions closed, as the law required, the FSLIC would be liable for billions of dollars in losses. If the dying thrifts were allowed to continue operating, they would only sink deeper into the red. Gray began to gear up for an extended battle to get the thrift industry back under control and to try to develop a plan for responding to the emerging crisis.
The last thing he needed then was a run-in with Charlie Knapp. Knapp was dashingly handsome, a young, self-styled financial visionary whose gold-plated faucets, in the lavatory of his company's $14 million Lear jet, have become part of the lore of those go-go S&L years. He ran Financial Corporation of America (F.C.A) in Irvine, California, south of Los Angeles. F.C.A in turn owned American Savings and Loan of Stockton, California, which was at the time the largest thrift association in the country. F.C.A was one of Gray's rapidly emerging headaches. The company was on a growth curve that pointed straight up. in just one year, 1983 to 1984, F.C.A had grown from an already staggering $22 billion in assets to an unbelievable $32 billion. Regulators said Knapp used brokered deposits and jumbo CD's sold through his own money desk" 4 to invest in fixed rate mortgages and sophisticated hedging instruments that regulators and the Securities and Exchange Commission had a very difficult time understanding or evaluating. They couldn't see how F.C.A was coming up with the profits it was reporting while at the same time it was drowning in repossessed real estate.
F.C.A had invested billions in old, fixed-rate loans at the very time the rest of the industry was rushing to safe adjustable-rate loans. And court documents later revealed that F.C.A had its share of risky commercial development projects in California and Texas as well. Delinquencies piled up and regulators said F.C.A was making outrageous deals in order to sell the properties it had already had to repossess. At one time, Knapp told us, he had 300 people working in F.C.A's repossessed properties department. 5
Among Knapp's borrowers was the ubiquitous Morris Shenker. F.C.A had loaned millions to the Las Vegas-based Dunes Hotels and Casinos when Shenker was chairman. (When Shenker ran into financial woes. F.C.A was partly bailed out by Jack Bona, who purchased the Atlantic City Dunes project in 1983.6 However, as of October 1985 F.C.A was reportedly the Dunes' largest creditor with a $51 million mortgage on the Las Vegas Dunes' building.)
Another borrower was Leonard Pelullo. Pelullo and American Savings and Loan eventually became entangled in litigation over a $13 million mortgage. (The Atlantic City Press reported that circumstances surrounding Pelullo's business relationship with American prompted a grand jury investigation in 1986 but no indictments resulted." In 1988 Pelullo's Royale Group Ltd. bought the Atlantic City Dunes.)
Gray didn't like Charlie Knapp's way of doing business and wanted him out of the thrift industry. If F.C.A failed, the weight of its $32 billion portfolio would pull the FSLIC fund down in one swoop.
From Washington, Gray called Knapp at his offices in Irvine, California, and said he wanted to see him in Washington as soon as possible. Knapp flew straight to Washington to confront the chairman on his own ground.
"Mr. Gray will see you now," the receptionist told Knapp, a dapper dresser nicknamed "the Red Baron" by his friends because he flew a vintage P-38 World War II fighter. But this was one dogfight Knapp wasn't going to win. The meeting between Gray and Knapp began at 2:15 p.m. and Gray had another meeting scheduled for 2:30 that he could not miss. Gray told us he read Knapp the riot act, quoting chapter and verse on everything he disliked about F.C.A's operations. He accused Knapp of running F.C.A in an "unsafe and unsound manner." The phrase was a provocative one and Knapp could not miss its significance—it was the very phrase the F.S.L.I.C used when it closed thrifts and sued former owners for the losses.
"Because of your irresponsible actions," Gray said he continued, "you've placed in jeopardy the entire savings and loan industry, Mr. Knapp, and I'll do everything in my power to make sure you are removed from this industry. I'm putting you on notice." Gray looked down at his watch. It was 2:30, and he was a busy man.
Knapp remembered the meeting a little differently. He told us Gray greeted him with, "I understand that your loan portfolio is not sound."
Knapp said he asked Gray, "What do you base that on?"
Gray pulled out of his shirt pocket an article from the business section of The New York Times and started reading. As Knapp later recalled it to us, "I just threw up my hands and said, 'The hell with this, I've gotta get out of here.' I couldn't get out of there fast enough."
Regardless of the version you believe, it was clear that the normally flamboyant, self-assured Knapp was caught by surprise by the vigor of Gray's attack. This was not the dopey "Mr. Ed" his friends in the industry had told him to expect. The Red Baron had been shot down in flames.
"I fly all the way from California and the guy gives me 15 minutes and shows me the goddamn door," Knapp told us later.
Shocked, Knapp returned to California, formulated a plan, and called Gray to make a proposal. This time Gray had to listen because F.C.A was too big to shut down, no matter how rotten it may have been. Somehow Gray had to keep the company going, like a ward of the F.H.L.B.B, until its problem assets could be disposed of in an orderly manner over a long period of time. Knapp knew the bind that Gray was in and offered him a deal. Knapp agreed to leave voluntarily on two conditions: first, that he be allowed to select his successor, pending Bank Board approval, and, second, that Gray agree to a $2 million golden parachute for Knapp. Gray agreed.
Knapp hung up the phone and called Washington again. This time he phoned the Office of Management and Budget.
"David Stockman, please. Tell him Charlie Knapp's on the line."
Knapp told us he called Stockman 8 and said that Gray had forced him out of F.C.A. Knapp asked Stockman if he would be interested in the job. Stockman had been President Ronald Reagan's spokesman on budget matters since Reagan took office in 1981, and he had made it known he was getting tired of taking the heat—outspoken and opinionated, he had attracted a lot of press coverage. He also may have been getting tired of taking trips to the Oval Office woodshed whenever he "misspoke." The prospect of running a $32 billion company must have seemed an easy matter after what he'd been through. He agreed to Knapp's proposal. Knapp told Stockman to get Ed Gray's approval. Stockman called Gray.
"Come on over, David," Gray said.
Within 30 minutes Stockman had arrived at Gray's office. Gray told us Stockman said he had talked to Knapp about the F.C.A job and was interested. He said he was tired of Washington and wanted to return to the private sector, and the F.C.A job was an attractive challenge. Gray listened patiently, thinking to himself that Knapp must have offered Stockman a lot of money to take the job and to act as Knapp's mouthpiece. But Gray let Stockman present his case. Gray's friend and the F.H.L.B.B's general counsel. Norm Raiden, sat quietly in a corner chair. Finally Gray spoke up. Out of curiosity he asked, "How soon could you leave your job at OMB, David?"
"Five days," Stockman shot back. But Gray had already made up his mind.
"I understand you're a nice man and a quick study, David, but you've never operated a thrift before. I'm sorry, but I've already lined up Bill Popejoy for the job.'" 9 A half hour after Stockman left Gray's office, James Baker, the president's chief of staff, phoned and Gray told us he asked angrily:
"Why are you trying to hire Stockman away from us? There's an election coming up. We need him." "I didn't," Gray answered. "He wanted the job and I suggested he forget all about it." Baker hung up the phone. Later that day Stockman called Gray and said he didn't want the job anyway. He was going to stay at OMB. (As of early 1989 Knapp had not been charged criminally or civilly in connection with F.C.A's huge insolvency. However, F.C.A's troubles cost the FSLIC over $2 billion and spawned nearly 1,200 separate lawsuits, many naming Knapp, and he had sued F.C.A. By press time about half the suits had been settled, ruled on, or dismissed.)
As Gray mapped his strategy for stopping the abuses at thrifts and dealing with the damage already done, he realized he could not do the job with regulations alone. He would need help from Congress. He knew he was pushing a stick into a beehive, but he felt the situation was deteriorating so fast that he had little choice. To get Congress to act he would have to have public support. so he took his battle pubic. In speech after speech Cray attacked some of the elements he identified as being at the root of the industry's problems. Among them were: brokered deposits, risky lending, direct investments,10 and inaccurate appraisals. He proposed restrictions, and he even introduced the idea of a risk based premium program that would require individual thrifts to pay special assessments to the FSLIC if they engaged in risky behavior.
His candor produced a vigorous counterattack in Washington. Gray claimed Don Regan had the Treasury Department 11 back a bill in Congress that would actually further deregulate the thrift industry. Gray was appalled and vigorously opposed the bill, it was defeated. Score one for Gray.
"No," Regan shot back. Pressed by Strachan, Regan categorically ruled out any kind of Treasury backing for F.C.A. That public statement created exactly the kind of turmoil Gray had been trying to avoid by moving slowly on the FCA matter. He had eased Knapp out and Popejoy in with as little fanfare as possible. So far his strategy had worked—until Don Regan's remarks. The next day there was a run on F.C.A and $400 million in deposits walked (or ran) out the door as customers and deposit brokers rushed to remove their money. It was the largest one-day run in thrift history, and Ed Gray was furious at Regan. Regan's careless remarks had been devastating to Gray's F.C.A rehabilitation program. Gray shot off an angry letter to Regan, asking him to check with the F.H.L.B.B the next time he planned to speak out like that.
Regan replied with an angry letter of his own in which he said, "I was surprised and frankly displeased by your letter. . . . Candidly, I do not have to be reminded of my responsibilities in areas of concern to you or, for that matter, any of the other areas of government in which economics and finance play a role."
Soon Regan had another opportunity to throw stumbling blocks in Ed Gray's path. To repair the damage done at F.C.A by the massive outflow of deposits in the wake of Regan's remarks. Gray turned to brokered deposits as a quick fix. Ironically, Gray, the very man who was death on brokered deposits, was now turning to them to buy time. For help he approached his predecessor at the Bank Board, Richard Pratt, now an executive with Merrill Lynch, and Pratt agreed to have Merrill Lynch place $1 billion in deposits with F.C.A within days. But he soon called Gray back with the news that he'd been overruled by his superiors at Merrill Lynch and the deal was off. Gray was forced to raise the money from other brokerage houses. Later Pratt told Gray privately that Don Regan had personally intervened at Merrill Lynch to kill the deal. It was almost as if Regan were taunting Gray for his opposition to brokered deposits. Gray thought Regan was trying to get back at him for Gray's suggestion that Regan check with him before commenting public about S&L matters.12 Regan, who had promised he would not involve himself with matters relating to his former employer Merrill Lynch after he joined the Reagan cabinet, denied intervening with Merrill Lynch about the $1 billion in brokered deposits for F.C.A. Pratt declined to comment.
After Gray's brokered-deposit regulation was rejected by a federal court, which ruled that only Congress could make such a prohibition. Gray decided that if he couldn't limit brokered deposits, he'd better limit what thrifts did with those federally insured deposits. At every insolvent S&L, Gray found both excessive brokered deposits and risky direct investments. In Gray's view thrifts chartered in states with liberal thrift regulations were using federally insured deposits to take far too many risks.13 The thrift industry was turning into a crap shoot, with the bets insured by the FSLIC. Gray thought that was wrong, and he made it known that his next move would be to draft new regulations that would curb direct investments by FSLIC-insured state thrifts 14 and limit thrifts' growth.15
"It had to stop," he was telling everyone who would listen. S&Ls were padding their financial statements with too many direct investments that seemed on the books to be worth millions but whose quality couldn't really be determined until the project was completed. If the project was a ripoff, no one would know until it was too late.
Gray had first proposed a new direct investment regulation in May 1984. In early December 1984, shortly before he actually issued the new regulation. Gray said Bill O'Connell of the U.S. League of Savings Institutions phoned and pleaded with him not to go through with it.
"If he had been at Gray's office, you can guarantee that O'Connell would've been down on his hands and knees," an aide said later.
O'Connell denies he asked Gray to kill the whole regulation, but only to modify it. Whatever the case. Gray was unmoved.
In January the regulation was finally enacted, to go into effect in March. In general it would limit direct investments to just 10 percent of a thrift's total assets,16 and it would also limit a thrift's rate of growth to 25 percent a year.17 Some thrifts had been growing at rates of 100 to 500 percent a year.18
Gray says that the U.S. League again tried to kill the regulation. O'Connell remembers events differently, repeating that, rather than wanting to kill Gray's growth restrictions, the League had simply wanted them modified and calling Gray's version "overkill." Gray says "nonsense." He believes O'Connell is trying to rewrite history.
"During the late afternoon of the day before both of these reg's [the growth regulation and the direct investment regulation] were proposed in open hearing of the Bank Board, Mr. O'Connell called me," Gray recalled. "My recollection is that the calls came in at around 5 to 6 p.m. Mr. O'Connell begged me to not go through with the growth regulation, not to propose it the next day, and he said if I did so my career would be ruined if I ever decided to go back to the thrift industry. The call was a long one, as I recall, probably 30 to 40 minutes. I told him that if I had to be the son-of-a-bitch to do it so be it. It would be done."
Regarding the direct investment regulation. Gray said it was only after the regulation was adopted by the Board that the U.S. League "grudgingly" supported it.
As 1985 dawned it was beginning to appear to Ed Gray in Washington that Texas was especially out of control. Gray's shorthanded and underpaid examiners were coming in from the field with stories about Texas thrift owners and managers that made J. R. Ewing look like a minister. They told Gray about thrift board meetings attended by hookers whose services were paid for by the thrift, chartered jet-set parties to Las Vegas, gala excursions to Europe, luxurious yachts, oceanfront mansions, and Rolls-Royce's—princely life-styles built on mountains of bad loans and bad investments. The state's long-standing liberal thrift and banking practices, the oil and real estate booms of the late 1970's, and the state's entrepreneurial, wild-cat business traditions had all combined to make Texas a hothouse for deregulated thrifts, and the signs of abuse were starting to show. In the newly deregulated environment new thrifts had sprouted throughout Texas like rye grass after a spring rain. Old, long-established thrifts were snatched up by young speculators eager for the opportunity to wheel and deal with insured deposits. Even out-of-state thrifts, many from California, opened loan offices in Texas hoping to catch a ride on the Texas wave.
Within a year of Garn-St Germain's passage Texas was embroiled in a construction-loan feeding frenzy. Acquisition and Development Loans (A.D.L's) and Acquisition, Development, and Construction Loans (A.D.C's), for commercial projects, were the main-line products. Home loans went begging. The money, in large part, flowed into construction. Yet thrift's were not doing sufficient market surveys to see if the marketplace could absorb the new office buildings and condos, and they were not coordinating with other thrifts to make sure they weren't all going to flood the market at the same time with the same kinds of projects. In Texas in the early 1980's the emphasis was on building, and the future would take care of itself because the boom would never end.Building permits in Texas increased from $4.5 billion in 1976 to about $17 billion in 1983.
Texas thrifts lived only for today: today's deals, today's profits, today's kickbacks. By 1985 the Dallas and Houston skylines were filled with what locals began to refer to as "see-through office buildings." So much commercial construction had been financed by thrifts that it far outstripped the local market demand, and glass skyscrapers stood empty. There were so many unsold condos littering Houston and Dallas and their suburbs that a favorite joke among lenders went: "Whats the difference between V.D. and condominiums?" The answer: "You can get rid of V.D."
With supply vastly exceeding demand in 1985, many Texas thrifts kept from going under only by turning more deals and inflating their financial statements with more fees and up-front interest. Their portfolios became little more than huge pyramid schemes, Ponzi's, that required constant trades, refinancing, swaps, participation's, and loans on yet more new projects. They had to take in more brokered deposits to fund more loans so it would appear that they were making more profit, even though the loans were risky (risky loans carried the potential for the highest profits—and losses). As a result Texas thrifts grew at an astronomical rate. In 1984 and 1985 they grew three times faster than the national average.19 As long as the S&Ls could keep pedaling, they wouldn't fall. But every day that passed they had to pedal faster and faster to maintain the illusion that they were moving forward. Gray's proposed limits on direct investments and growth were going to be very unpopular with thrift owners in Texas—men like Don Dixon, who owned Vernon Savings and Loan, headquartered in Dallas. By 1985 Don Dixon was living like a king, and Gray's new rules threatened his kingdom.
Don Dixon, his petite blond wife, Dana, clinging tightly to his arm, strode proudly toward the front of the crowd of 40,000 assembled in the piazza in front of St. Peter's Basilica in the Vatican. Pope John Paul II, dressed entirely in white, had just made his weekly Wednesday address in six languages and was now descending the white throne to mingle with the special guests seated around the platform.
The Bishop of San Diego, the Reverend Leo T. Maher, was hosting the Dixon's for their personal meeting with the Pope. Dixon was in his late forties. Expensively dressed, and with collar-length gray curls around a tanned face, he stood out as a businessman in the crowd of worshipers. He had a drooping mustache and beady eyes that could look warm and trustworthy or calculating and condescending. He had the air of a let's-shake-on-it kind of guy.
Dixon noted the grandeur of the 300-year-old piazza surrounded by Gian Lorenzo Bernini's grand colonnade. It is one of the most awesome places on earth, and Dixon noticed that the normally loquacious Dana was uncharacteristically silent. As the Pope neared, Dixon, too, felt the uniqueness of the moment. He was not a Catholic, and he had an arrogant self-confidence, but even he could not resist this Pope's stature and personal power.
"I was very well aware of everything I said and that I was in the presence of someone very special," he would later recall. Pope John Paul II greeted the Dixon's with a handshake and his characteristic off-to-one-side nod. Dixon thanked the Pope for the opportunity to meet with him and presented him with a gift he had brought for the occasion, a $40,000 Olaf Wieghorst original oil painting of an Indian on horseback, "Night Sentry." The Pope admired the painting and said it would hang in the Vatican Museum. Dixon told the Pope how much that meant to him. What Don failed to tell His Holiness was that the painting was not his to give. He had "borrowed" it from Vernon Savings and Loan back home.20
After their stop at the Vatican the Dixon's continued their European fling with visits to Bulgari and Guzzi spas. They stayed at the finest European hotels, such as the Grosvenor House in London, the Hotel Ritz in Madrid, and the Bristol Hotel in Paris, and while in the neighborhood they stopped by the Palais de Margaux in Bordeaux, a chateau Dixon and some partners were converting into a restaurant and hotel. Then it was time to head for home. The Dixon's made their May 1985 European jaunt in Vernon Savings' tri-jet Falcon 50 and, regulators later discovered, charged the trip's expenses on Vernon's tab.
Flying into Dallas on the last leg of their trip, the Dixon entourage looked out of the windows of their private jet at the city where the Dixon's had made their fortune. Dallas, the eighth largest city in the United States, was an exciting town of soaring glass buildings, wild night spots, and businessmen in gray suits and cowboy boots. Business had traditionally been done differently in Dallas than in the rest of the country—on gambling instincts, eternal optimism, and the myth of the reliability of a Texas man's word. In the early 1980's the brash city vibrated with the pulse of money being pumped into the local economy from a booming oil business and mushrooming real estate speculation.
Don and Dana must have enjoyed the view as their private jet swooped down over North Dallas, a cluster of about 20 high-rise office buildings that had sprung up 15 miles due north of downtown Dallas. North Dallas straddled the Dallas Tollway just north of its intersection with the LBJ Freeway. It was the hub of a new Dallas financial center, and Dixon's Vernon Savings and Loan owned the 15-story high rise right in the middle.
There, too, was State Savings and Loan of Lubbock, under the control of Dixon's friend Tyrell Barker. And Sunbelt Savings and Loan, playfully known around town as Gunbelt Savings for its quick-draw deals. Sunbelt was run by Ed McBirney, nicknamed "Fast Eddie"—a man people said was "so smart it was frightening." McBirney became famous in Dallas for lavish parties filled with wine, women, and debauchery at places LIke the Dunes Hotel and Casino in Las Vegas. Near Sunbelt were a host of other entrepreneurial thrifts. North Dallas was Texas-thrift mecca.
Also in North Dallas was Jason's, the famous restaurant that became a favorite watering hole for deal makers who flocked to Dallas from around the world. At Jason's the manager, in desperation, had to co\er some tables with butcher paper to prevent speculators from scribbling deals on the linen tablecloths. And, finally, in North Dallas were the swanky homes and condos where many of the S&L deal-makers (including Dixon, Barker, and McBirney) lived. The setting was right out of the script for the popular TV nighttime soap opera Dallas, which was shot on location at the South Fork Ranch about five miles away. North Dallas buzzed 24 hours a day with the frenetic seven-days-a-week pace of millionaires chasing their next million. For entrepreneurs in the early 1980's, North Dallas was where it was at.
The Dixon's gathered their belongings as the Vernon Savings jet dropped down into Addison Municipal Airport (also in North Dallas) where Vernon Savings kept its fleet of planes. The clerical staff that had accompanied the Dixon's to Europe settled back in their seats for the landing. It had been a tiring but rewarding trip, and it was good to be home. Europe was terrific, but no place in the world could quite compare at that time to the brave new world of Dallas.
Don Dixon was a man in a big hurry and he had made it to the top fast. Even as a child Dixon had been in a hurry, always looking for ways to cut corners, always trying to get from here to there in the quickest and easiest way. He grew up in Vernon, Texas, a small town 150 miles northwest of Dallas and 10 miles from the Oklahoma border, and his Type A tendencies had first shown themselves in high school, where, eager to get on to college, Dixon combined his junior and senior years so he could graduate a year early. His mother reinforced this "go get em " behavior by presenting young Don with a brand-new, money-green, 1956 T-Bird two seat convertible for graduation. Dixon reportedly once told a high school friend that his goal was to make so much money he'd "never be able to put a dent in it."
From high school Dixon went to Rice Institute in Houston, where he studied architecture for two years. Then he transferred to the University of California at Los Angeles and began a lifelong love affair with the Pacific beaches of Southern California. In June 1960 Dixon graduated from UCLA with his degree in business administration. That same year, over a thousand miles away in Dixon's hometown, R. B. Tanner cut the ribbon to open his little Vernon Savings and Loan. No one could have imagined how intertwined the two disparate launching's would become.
Dixon went from college straight to where the money was in those days —residential development. The year 1960 marked the height of the migration to the suburbs. Like honeysuckle vines, freeways sprouted from crowded cities and turned once-flat farm and grazing lands into sprawling residential developments. The tide was rushing out and Dixon was there to catch the crest of the wave.
He formed Raldon Homes with an associate, Raleigh Blakely, and the company did well until the 1973-74 recession hit. Like most development companies, Raldon depended upon a steady stream of loans to provide the capital the company needed to buy land and build homes. With the recession the bottom dropped out of the housing market, and, according to published reports, Raldon found itself stuck with millions in development loans it could not pay off. Bankers complained about business cycles but didn't accept them as excuses for nonpayment, so, in a deal worked out between Raldon and its creditors, "Ral and Don" were forced to resign.
With Raldon's liabilities off his back, Dixon waited the recession out, and when the real estate market picked up again, he formed Dondi Construction (DON Dixon), in short order he was back on the top of the heap. Hundreds of homes bearing Dondi's unique signature trademark—Spanish styling topped with red tile roofs—began to pop up in the suburbs of Dallas. By 1981, at 45 years of age, Dixon was the head of a large, successful construction company that employed hundreds of people. He took to wearing gold chains, leather vests, and open-collared shirts around the office. People often said he reminded them of entertainer Kenny Rogers. Texas Monthly reported that his office staff handed out phony $3 bills with Dixon's picture on the front, under which was inscribed "Chairman of the Bored" and "In Don We Trust. " The reverse side featured a picture of one of Dondi Construction's homes with the caption, in mock Latin, "Red Tilebus Roofum."
Dixon was riding high in the saddle when he teamed up with soul mate Tyrell Barker. Barker was a Northern California builder who had come to Texas recently when someone reportedly told him, "Hey, come on down to Dallas. We're making lots of money down here." Barker had already done very well in California real estate, and even after he moved to Dallas, government investigators said, he continued to maintain his $1.5 million home in Hillsborough, an exclusive community 20 miles south of San Francisco. He had purchased the home from the millionaire Hearst family. Barker was in his early forties, about three years younger than Dixon. He was noticeably hyperactive, an energetic workaholic with no family. Friends said he lived to "do deals. " He was stocky, wore glasses and a mustache, and he talked a lot—except when he was with Dixon, to whom he deferred. He was smart and articulate, a man who had learned to compensate for a potentially crippling dyslexia that had kept him from graduating from high school or, he later told a judge, being able to read beyond a third-grade level.
Both Dixon and Barker were "deal junkies," as one FBI agent later described them, but their motivations were slightly different. Dixon had an appetite for the good life. He liked money and the pleasures it could buy. Barker, on the other hand, thrilled to the deal-making game and money was just the way he kept score. Dixon was a showman who enjoyed the parties and social amenities of his power. Barker was a loner who lived for his job. But neither of them was ever satisfied. Dixon and Barker measured themselves by the Texas oil yardstick of the day, which rated one's personal fortune in "units," with one unit equaling $100 million. At chic Dallas cocktail parties each new arrival was sized up in whispered rankings, such as "I hear he's a four-unit man." Dixon and Barker were "no-unit men," and they wanted to change that. A partnership Barker formed soon after he came to Texas in 1980 left no doubt where his priorities lay. He called it "M.L.M.Q#1"—Make Lots of Money Quick #1.
Though Texans traditionally made their money in oil, neither Dixon nor Barker knew one end of an oil rig from the other so they could not hitch their wagons to that star. What they did know was development and. through that, the banking and thrift business. They had also heard about thrift deregulation, which had begun in 1980. And while as developers they had always had to go begging to lenders for money, they knew that if they could own their own S&L they would have ready access to all the cash (deposits) they wanted. So if they couldn't pump oil, maybe they could pump something better—money.
They each decided to buy a savings and loan.
Buying a savings and loan would cost more money than they had on hand, but Dixon had a close friend who was only too willing to help with the financing. He had become friends with a wealthy Shreveport, Louisiana, businessman, Herman K. Beebe. Beebe must have been everything Dixon wanted to become. He traveled in a chauffeured limo and lived on a gracious southern-style plantation estate near Shreveport. He also had homes and businesses in Dallas and Southern California. Dixon and Beebe had met about five years earlier, and Dixon had become an unofficial member of the Beebe family. He often visited Beebe on his Louisiana plantation and the two men frequently traveled together, playing gin rummy and drinking bourbon on Beebcs plane.
Beebe's flagship company, A.M.I, Inc. , was an enormous conglomerate whose primary interests were insurance and nursing homes. One of the products A.M.I specialized in was credit life insurance. (Banks making large loans often required a borrower to take out a life insurance policy in the amount of the loan. If the borrower died, the insurance would pay off the loan. ) Selling credit life insurance policies was a lucrative business, and Beebe had built close ties with many Texas and Louisiana banks. Dixon was so taken with Beebe that he introduced Tyrell Barker to him and soon they were a threesome.
"Terry and Beebe were on the phone to each other all the time," a friend said later. When Dixon and Barker decided they wanted to make their move into the soon-to-be-deregulated thrift industry, Beebe said he'd get them started by helping to finance their acquisitions.
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Going Home
notes
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