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 SIXTEEN
Going Home
Don Dixon and his friend Tyrell Barker each began a search for an established
thrift they could acquire with the minimum of fuss. Herman Beebe had solved
their financing problems—all they had to do was find willing sellers. Barker hit pay dirt first when he landed State Savings and Loan of Lubbock, Texas. Lubbock
(population 178,500) was a cattle town in West Texas at the center of prime
Texas ranching country, about 300 miles west of Dallas. There 22 local citizens owned State Savings and Loan, a small, conservative thrift with $65 million in
assets, primarily mortgages on single-family homes. But State/Lubbock was struggling
because the interest it had to pay to attract deposits was higher than the
interest it was earning on its 30-year home mortgages. State/Lubbock's owners
were in the throes of a classic 1980-81 thrift squeeze.
With financial backing from Beebe, Barker gained formal control of State/
Lubbock on December 3, 1981. Two weeks after buying State, Barker removed
much of the thrift's management, and regulators later said that from then on
Barker and his attorney, Lawrence B. Vineyard, were in control. (Later Barker would tell the FBI that Vineyard was the guy who read his paperwork for him,
since Barker, because of his dyslexia, had only a third-grade reading ability.) Barker wasted no time opening a headquarters office in Dallas, where the action was, and he bought two corporate planes for State so he could fly back and
forth, even though it cost only $34 to fly from Dallas to Lubbock on a commercial
airline.
Barker later said he felt like a kid in a candy store. His oak-paneled office was on the first floor of a North Dallas high rise, and outside the sliding glass doors he had a miniature swimming pool built for his two dogs, an English
bulldog and a Labrador retriever, who traveled with him wherever he went.
Inside, he had a bar, a kitchen, and a fireplace, all the comforts of home. He
even had a pull-down bed, just in case. He often entertained customers dressed in his jogging suit or jeans and suspenders. He worked from 7 a.m. until 11 p.m. Newsweek quoted him as saying his motto was "if I rest, I rust."
Word quickly spread among Dallas speculators, and Barker's waiting room
was soon jammed with developers waiting their turn to pitch projects. Barker's message to them, some said later, was simple: "You bring the dirt, I bring the money. We split 50-50." The easy money produced a rush of customers eager
to take advantage of Barker's lenient loan policies.
"How do you know what property to buy?" someone reportedly asked a
developer scurrying to get one of Barker's loans.
"Wherever my dog lifts his leg I buy that rock and all the acreage around
it," came the reply.
With his friend Tyrell Barker up and running, Don Dixon was searching in
earnest for his place in the sun. That search took him back to his roots in little Vernon, Texas, where, the same spring Dixon had graduated from college in
California, R. B. Tanner had opened Vernon Savings and Loan. Dixon decided
to ask Tanner if he'd like to sell out to a local boy.
Vernon Savings and Loan, with $82 million in assets and only $90,000 in
delinquent loans, was one of the soundest thrifts in the state. Tanner had run Vernon since he opened it in 1960 as though every paper clip and rubber band
were hard cash. Friends said he even worked an entire year without a salary just
to improve Vernon's balance sheet. Vernon Savings was his baby and he nurtured
it lovingly. His small, modest office was dominated by a large oil painting of
the First State Bank of Dumas, Texas, the very first bank he had audited as a young bank examiner in 1937.
Dixon arrived at Tanner's home that spring day wearing humility on his
sleeve. R.B., dressed in shirt, tie, and suspenders, sat across from the stylishly
dressed Dixon and listened to Don talk lovingly about his roots in Vernon. (Later
Mrs. Tanner would recall sadly that Dixon displayed "perfect manners.") Dixon
said he had benefited greatly from his wholesome upbringing there and he wanted
to give something back to the community. He showed Tanner some of the
plaques he had been awarded for his real estate developments. Though R.B. had not known the Dixon family well, young Don had grown up with the
reputation of someone who would amount to something, so Tanner wasn't
surprised that the successful young developer had the will and means to buy his
savings and loan. But he was surprised at the generosity of Dixon's offer. The
deal: Dixon would pay $5.8 million for Vernon's outstanding shares, $1.2 million
in cash. The balance, Dixon told him, would be secured not only by Vernon
stock but also by a rich business friend of his from Louisiana, Herman K. Beebe.
How could Tanner lose?
Tanner took Dixon's offer to the other Vernon shareholders, who agreed it was generous, and on January 10, 1982, the deal was done. Don Dixon now
owned Vernon Savings and Loan. Dixon told Tanner and the other board members that he was busy with his construction company and really had no
interest in running Vernon. He asked if they would stay on board. They agreed. But Tanner was in for a rude awakening.
A month later the Vernon Savings board of directors held their first meeting
since the change of ownership. Dixon did not attend, but he sent word to an
astonished board that he had purchased, with the thrift's money, a $125,000
three-foot-tall bronze sculpture of a squatting Indian. Art was a great investment,
he said, especially Western art, and he wanted the board to rubber-stamp the
purchase. The slack-jawed directors looked around in stunned silence and then glumly approved the purchase. For the prudent, conservative Tanner, the shock
of this extravagance was too much. He resigned his position on Vernon's board
and went home to reflect, he told us later, upon the man to whom he had sold
his pampered thrift.
Dixon soon forgot any gratitude for his wholesome small-town roots and
promptly moved Vernon's administrative offices to a 15-story building in North
Dallas. His business plan for Vernon was to attract brokered deposits and use them to finance commercial real estate projects (an abrupt departure from Vernon's
traditional role as a local home lender). Our investigation of Mario Renda
had already tipped us that First United Fund had brokered huge deposits into Vernon. Some of Renda's former employees (Manning's Seven Dwarfs) said Vernon Savings was one of First United Fund's "special deal" institutions (which
meant that in exchange for getting the deposits, Vernon agreed to make loans
to designated borrowers).
Dixon, who was above all a developer, not a banker, could have used some
of that financing too. But he was faced with thrift regulations that prohibited
large loans to "affiliated persons," and by owning all of Vernon's stock Dixon
was about as affiliated as a person could be. Later, regulators said that to get
around that thorny problem he created a complex web of some 50 subsidiary
companies, layered in three tiers, at the apex of which was Dondi Financial
Corporation. Dixon was a controlling owner of Dondi Financial and Dondi
Financial was made controlling owner of Vernon Savings. But Dondi's other
subsidiaries did not own Vernon Savings stock so they could promptly take their
place in line to receive loans from the thrift. Dixon had pulled off a brilliant Trojan horse maneuver. And once Vernon Savings' money entered Dixon's maze of subsidiaries, regulators complained, it was rarely seen or heard from
again.1
To run this empire Dixon built a loyal entourage of managers. He refused
to give us his side of the story, but according to court records and federal
regulators, he purchased his employees' loyalty with extravagant perks. Each
head of a subsidiary received a new Mercedes sedan, for example. Offices and
bonus plans were lavish. The result was a go-along, get-along, get-rich-too crew,many of whom asked few questions and did what they were told. Their loyalty
and cooperation allowed Dixon to enjoy the fruits of this enterprise while appearing
to maintain distance from the day-to-day activities that eventually led
to Vernon's demise. One exception to the go-along was Jack Brenner, who, for example, was asked to check out some property Vernon Savings had bought in
California. When Brenner called home he told Vernon president Woody Lemons
that the property was worthless. It was a "boulder farm," he said.
"Now, Jack, you go look at it again," Brenner .said Lemons told him. "You
go look and tell me if you don't see a Gulf Stream 50 [a top-of-the-line corporate
jet] in that land." Brenner said he realized in a flash that the whole project was
just a way to siphon money out of Vernon and into something quite different,
in this case a very expensive toy.
"I just said, 'Aw the hell with ya,' " Brenner recalled.
In just a few months Dixon converted little country-bumpkin Vernon Savings
into a high-rolling, multi tiered corporate conglomerate and for the next four
years he took the S&L for the ride of its life. Vernon Savings had reported assets
of $82.6 million in early 1982. In 1986 it would report assets of $1.3 billion.
Regulators, who had begged entrepreneurs to step in and save the ailing thrift
industry, were delighted. They soon added Vernon Savings to their published
list of "High Performance Associations." Vernon was just one more shining
example of what American business could do when government got out of its way, they said.
Regulators later charged that Dixon and some senior officers at Vernon
wasted no time turning on Vernon's spigots and directing the money flow in
their direction. Between July 6, 1982, and January 3, 1986, Vernon declared $22.95 million in dividends, of which Dondi Financial Corporation received $22 million. Thus millions of dollars were transferred from Dixon's regulated
thrift, which had to account to federal and state regulators for every dollar, to
his holding company, Dondi Financial Corporation, where he could use the money however he chose. But even with his Dondi Financial coffers bulging
with Vernon's money, Dixon seems to have dipped directly from the Vernon
Savings till whenever possible. It appeared that his every need, his every scratched
itch, became a legitimate business expense for Vernon. Regulators later charged
in court that Dixon and his senior officers "wrongly extracted" at least $40 million from Vernon.
In early 1983, for example, one of Vernon's subsidiaries paid $1.9 million
for a Swiss-style chalet, built of stone, in the exclusive Colorado ski community
of Beaver Creek. The 85 homes at Beaver Creek, nestled in the Rocky Mountains
in prime skiing territory, were strictly for the rich and powerful. Homeowners were transported to and from the ski lifts by Beaver Creek's chauffeured limo's, which served hot coffee and doughnuts on the way to the lifts and sparkling
wine on the way back home.
Many of the houses at Beaver Creek, records showed, were built with money
provided by a half dozen go-go Texas thrifts, Vernon among them, and each
S&L made sure it had its own posh retreat there. Western Savings and Loan
owner Jarrett Woods had a $2 million cabin, as did Morton Hopkins, owner of Commodore Savings of Dallas, and Chuck Wilson, owner of Sandia Savings of Albuquerque, New Mexico. According to news accounts, Wilson particularly
liked to watch the skiers from his hot tub in his rooftop cupola with its heated
slate floor. Sandia Savings purchased its stone castle retreat, complete with ponds
and towers and waterfall, with a $5 million loan from Vernon.- All four thrifts, and their management, were inside players in the Texas thrift game, making
loans back and forth to each other, and by 1988 they would all be insolvent or
struggling to survive.
Beaver Creek was fine when Don and Dana were in the mood for snow,
but their first love was Southern California and a $1 million Solano Beach house
just north of San Diego. Dixon's role model, Herman Beebe, had located the house when, in early 1981, his vacation home at La Costa Resort in Southern
California was being redecorated and he needed a place to stay in the interim. When Beebe found the Solano Beach house he had Dixon and Barker fly out
west for a look. They liked it and Dixon entered into a lease option on the six- bedroom, 5,000-square-foot home. Beebe moved in and stayed there until the renovation of his La Costa house was complete. After Don and Dana Dixon
were married in 1982 (regulators later charged Vernon Savings paid for the wedding), the Solano Beach home became their favorite hideaway. They commuted
on Vernon's jet between Dallas and California, spending three and four days a week at Solano Beach. Barker visited on weekends. Dixon had the Solano
Beach house remodeled, and when the work was complete he named two of
the master bedrooms—one the Dixon Suite, the other the Beebe Suite.
Dixon must have realized that deregulation was a gift from Washington,
and what Washington giveth, Washington could taketh away. Vernon needed
a way to show its appreciation and just the item was tied up at a yacht harbor
in Florida. Even the name, High Spirits, was apropos. She was docked in Boca
Raton, Florida, and what a dream boat she was. Built in the late 1920's, she was 112 feet long and she reeked of Gatsby-era charm. Her sleek white hull was
topped by two levels of cabins made of lacquered natural wood. Shining brass handrails enclosed her promenade and poop decks. Her main parlor was as spacious and luxurious as the living room of a country manor. Her staterooms
rivaled those of fine old hotel suites. And to cap it all off she was the sister ship
to the presidential yacht. Sequoia. How was that for a political attention getter?
She was a beauty. She was perfect. She was $2.6 million.
Federal regulators might have found it a bit hard to justify the purchase of
a yacht for a landlocked Dallas thrift, so Vernon executives and customers formed
the High Spirits Limited Partnership. According to the FSLIC, Vernon routed
over $2 million to the "partners" (by over funding on a $10 million loan to a San Antonio shopping center, according to the FSLIC),3 so they could "buy"
their shares of the partnership. FSLIC claimed that the partners were never
required to make any payments whatsoever and that Dixon in turn used the High Spirits as though it were his and Vernon Savings' personal flagship.
High Spirits, with its permanent crew of three, became a migratory bird. In
the cold winter months Dixon docked her in Boca Raton. But as soon as the
cherry blossoms were out up north, he had her moved to Washington, D.C.,
where he used her as a floating party platform to wine and dine some of this
country's best-known and most powerful politicians. The bill for flowers alone was reportedly $800 a day. By far the most frequent sailor on Vernon's yacht was Representative Tony Coelho, who, according to the captain's log, used High
Spirits almost as often as Dixon. (A four-term congressman from California's San Joaquin Valley, Coelho had been a fund-raiser par excellence since becoming
chairman of the House Democratic Campaign Committee in 1981. After
federal bank examiners discovered that Coelho and the campaign committee
had used the High Spirits for 11 political fund-raising events in 1985 and 1986,
Coelho and the committee repaid Vernon $48,450. In 1987 Coelho would
become House majority whip, a position he held until he resigned from Congress
in 1989 rather than face an ethics probe.) Others sailors included Texas Congressmen
Jake Pickle (D-Austin) and Jim Chapman (D-Sulphur Springs), Texas
lobbyist Durward Curlee (who reportedly lived on the High Spirits when he was
in Washington),4 and House Majority Leader Jim Wright (D-Texas).
Yachting was all well and good, as far as it went, but rich people, really rich
people, jetted regularly to the Continent. In 1983 off the Dixon's flew on a private
chartered jet to Europe. Dixon justified the tour as a business trip because, he
told associates, he and Dana were researching three-star restaurants on the possibility
that Vernon might open a French eatery of its own, maybe in Dallas. Dixon said he might even hire a famous French chef to run the place. (The
Wall Street Journal reported that in Lyons Paul Bocuse, a well-known French
chef, actually assembled his 12 sous chefs in the restaurant courtyard for Dixon's
review.) Don and Dana hopscotched across Europe from one three-star Michelin
diner to another, eating their way through France. All in all, they sampled seven
different world-class restaurants, in what Dana described in her diary as a "flying
house party ... a gastronomique-fantastique!"
Dana wrote that as they traveled on their comfortable chartered jet, or in
Rolls-Royce's, in the company of a group of European socialites, their way was
prepared for them by Philippe Junot, the former playboy-husband of Princess Caroline of Monaco. He had found his way onto Vernon's payroll as a "consultant" for all things European. When the trip was over the Dixon's had run up a $22,000 tab—paid for, said an F.H.L.B examiner, by Vernon Savings, even though Dixon was neither an officer nor a director of the thrift. Later, responding
to criticism of the trip, Dixon told James O'Shea of the Chicago Tribune, "You
think it's easy eating in three-star restaurants twice a day six days a week? By the end of a week, you want to spit it [the food] out.
"
Aside from the stress of eating in three-star restaurants twice a day, Dixon
had no real complaints about the trip itself, but using a "rent-a-jet" dulled the
gloss a bit, so when he returned he went jet shopping. He wound up with what
regulators would later call "a small air force." in another apparent effort to keep
frivolous items out of regulatory view, Dixon made a deal with a small company,
Coronado Air, Inc., whereby Vernon Savings loaned Coronado Air the money
to buy the aircraft and Vernon then leased the planes from them. An F.H.L.B
examiner said the first purchase was a Falcon 50, considered the Rolls-Royce
of corporate aircraft. The lease cost Vernon Savings $39,500 a month and
eventually rose to $65,000 a month. Dixon liked the Falcon and quickly made
it his personal aircraft, but that left other Vernon executives facing the disgrace of commercial air travel. So Vernon loaned another $1.7 million to Coronado
Air, this time for the purchase of a 1978 Lear Jet 35A. Vernon then leased the
aircraft back for $23,125 a month. By 1985 the lease had jumped to $35,000 a month. Those two jets alone were costing Vernon nearly $100,000 a month by
1985.
But Vernon's many subsidiaries employed many executives. To make certain none of the loyal troops felt slighted, Vernon bought three airplanes, a Cessna
Citation, a Cessna 414A, and a King Air E-90 long-range twin turbo prop. And
for those short hops to the store, a helicopter. Planes needed pilots, and Vernon
kept six full-time pilots on the payroll in its corporate "ready room" at Addison
Municipal Airport in North Dallas.
Vernon's jets, three of which were baby blue, were rarely idle. The logs of the Falcon, now in possession of the FSLIC, listed only Don and Dana as passengers on at least six flights. Also, like the Dixon navy, the Dixon air force played host to a gaggle of politicians. Among them, according to the logs, were
former President Gerald Ford and his wife, Betty, Vernon's neighbors at Beaver
Creek, who hitched several rides at costs ranging from $6,000 to $1 3.000, Texas Monthly reported. Other high-flying political guests included Representative Jack Kemp of New York; Senator Pete Wilson and Congressman-cum-boatswain's
mate Tony Coelho, both from California; Senator Paul Laxalt of Nevada; and
Representative Jim Wright of Texas (later to become speaker of the House).
Dixon's air force was proving a handy alternative to commercial travel for Dixon's
politician friends. (In just three years this fleet of aircraft cost Vernon Savings
$5,574,942.40 to lease and operate, an F.H.L.B examiner later testified.
A review of the people listed on the flight logs of Vernon's jets turned up many other names familiar to us: Larry Taggart, former California S&L commissioner;
Ed Mittlestet, the president of Charles Bazarian's company, CB Financial;
and Eric Bronk, attorney for Consolidated Savings and Loan's owner
Robert Ferrante 5 We were starting to feel right at home at Vernon. It was becoming clear that whatever the network was that we were piecing together,
Don Dixon had definitely plugged himself and Vernon info it.
One of the Good Old Boys' favorite Texas pastimes was hunting, and as a boy Dixon had particularly enjoyed quail hunting with his dad in West Texas, so a partnership chipped in $2.4 million for a posh hunting club. The huge Sugarloaf Lodge sat atop a loaf-shaped mountain about 30 miles southwest of Vernon. Suites had magnificent views overlooking a canyon, and hot tubs with Jacuzzi's soothed the woodsmen's aching muscles.
To the hunting club's armory were added $40,000 worth of handmade Italian shotguns embellished with gold and silver inlay. But hunting, even with fancy guns, could be a hit-or-miss proposition, as one guest later recalled, so live quail were flown in from Illinois the day before the hunt. Their wings were clipped and tail feathers plucked so they couldn't possibly fly. "Hunters" then stood on Sugarloaf's sweeping deck, overlooking the canyon, while hired hands crouched on a ledge below and threw the quail into the air as the guests blasted away. If a bird survived one volley, it was recycled until someone finally nailed it. A lot of Illinois quail met an ignoble end at Sugarloaf
Although diverting, skiing at Beaver Creek and shooting plucked quail at Sugarloaf did not alter Dixon's preference for California and its sunny beaches. He and Dana threw lavish parties at their Solano Beach home, mixing with Southern California's Who's Who, and it wasn't long before Dixon came to the conclusion that he should become a pillar of the community like other socialites. He had an office there and some real estate projects in the works. Now he should contribute to a worthy cause.
After looking for such a cause he finally settled on the University of San Diego. He wasn't ready to part with money, mind you. Instead he donated Dondi Financial Corporation stock to the university, and he threw in a written commitment that, if asked, he would buy the stock back for $3 million cash. The donation was a stroke of genius. It cost Dixon nothing (and would ultimately be worth nothing, after Dixon filed for bankruptcy in 1987), but it brought instant pillardom and covered nearly every conceivable social, political, and karmic (an important consideration in California) base. Suddenly Dixon was the darling of U.S.D's influential alumni, who in turn plugged him directly into a powerful circle of local, state, and federal politicians. Among them was Congressman Bill Lowery (R-San Diego), for whom Dixon promptly threw a $7,000 campaign fund-raiser. He also took Lowery for rides on Vernon's jet and threw parties for him on the High Spirits. Lowery later told reporters he thought Dixon himself owned the jet and the yacht, but Dixon charged it all to Vernon Savings.
The congressman reimbursed Dixon, but somehow, according to the FSLIC, those reimbursements never made their way back to Vernon.
To enhance their enjoyment of the Southern California scene, the Dixon's joined the private Moonlight Beach Club in Encinitas, just north of Solano Beach. A membership cost them $2, 500. The club wanted to expand and buy a condo project nearby that the Dixon's (and Vernon Savings CEO Woody Lemons) owned. The Moonlight Beach Club didn't have enough money to buy the condos from Dixon so regulators said he helped the club raise the cash this way: When businessmen wanted to borrow money from Vernon, some were told they first had to join the Moonlight Beach Club. Memberships, for them, cost $77,500 to $155,000 depending on how large a loan they wanted from Vernon.
To reward high-performance employees Dixon and Vernon's executive committee decided to distribute Vernon's booty through a Bean Program, regulators later alleged in court. Under the Bean Program, "beans" were awarded instead of bonuses to Vernon executives and employees based on their performance. Between June 1983 and June 1986, a FSLIC lawsuit revealed, Vernon paid out $15 million in beans. $10 million of the beans were subsequently redeemed for cash and Vernon kept $5 million, calling it deferred compensation.
There was a hitch—one that regulators said benefited Dixon at Vernon Savings' expense. Employees participating in the Bean Program were also required to buy stock in Dondi Financial Corporation. Dixon would arrange loans from Vernon for them to buy the stock. (Vernon made over $678,000 in such loans.) Employees were then required to use part of their bean bonuses to make the payments on the loans. Buying stock in Dixon's Dondi Financial was what qualified them to participate in the Bean Program. Eighty employees took part in the plan, which appeared, in fact, to be simply another scheme to funnel money from Vernon to Dondi Financial. The plan seems to have helped turn some of Vernon's top executives into an army of little Jacks ready to climb the magic beanstalk whenever Dixon snapped his fingers.
By the dawn of 1984 the Vernon Savings of 1982, with its $82 million in assets, was a distant memory. The thrift now boasted assets of $450 million, made up of what would later turn out to be a murky stew composed of brokered deposits, bad loans carried as sound ones on the books, and properties Vernon carried on its balance sheet at grossly inflated values. Vernon was wildly making loans without regard to their intrinsic value because the thrift made its money up front, in large origination fees. The S&L charged up to 5 points for originating a loan, so on a $100 million loan Vernon immediately "made " up to $5 million. The thrift also charged 1 percent to 2 percent to renew the loan every six months (once a year was standard practice in the industry). So what if the borrower later defaulted on the loan? Vernon had already made its profit. And who else was to know? The Federal Home Loan Bank Board's $14,000 a-year examiners? Vernon's sophisticated maze of business dealings left those shavetail accountants scratching their heads. Besides, the Federal Home Loan Bank for District 9 (Arkansas, Louisiana, Mississippi, New Mexico, Texas), where there were about 300 S&Ls. had just reduced its agents and supervisors from 34 to 12, in the spirit of deregulation. It now took up to two years just to schedule an examination of a thrift, and some had not been examined in over three years.
Eventually, though, Dixon's ostentatious life-style began to raise questions. When federal auditors got around to examining Vernon's 1983 books, they became alarmed by the institution's headlong dive into brokered deposits, helter skelter development, and loans to the maze of subsidiaries bearing the mark of "Dondi. " Bank records show that in August of 1984 regulators forced Vernon's board to sign a supervisory agreement binding Vernon to strict guidelines. The feds had no idea what was going on at Vernon because it was all moving too fast. They wanted to slow things down until they could figure out whether what they were seeing was the promise of deregulation incarnate or a thrift regulator's darkest nightmare.
The supervisory agreement was a sobering event to Vernon's board of directors, who still conducted their board meetings in Vernon, 150 miles from the Dallas action. All in their sixties and seventies, holdovers from R. B. Tanner's day, they never really understood Dixon's fast-moving deals so they had to trust him and his officers to make the right decisions for the thrift. Their confusion allowed Dixon (who served on the thrift's powerful loan committee, where the decision was made to approve or disapprove a loan or investment, even though he was never an officer at Vernon) and his associates to blunt the effect of the supervisory agreement, as Vernon employees later testified. Deals the board had never approved were added to the minutes of the board meetings after the meetings were held. Boilerplate language, designed solely to comply with the supervisory agreement, was added to the minutes so the directors thought they were complying. After the board meetings the real minutes and tape recordings of the board meetings were destroyed in the Dallas office. The board was also given inaccurate data on the condition of Vernon's loan portfolio, and the list of delinquent loans submitted to the board of directors was woefully incomplete. In short, the supervisory agreement apparently was little more than an annoying roadblock that Dixon and his associates quickly found a detour around. It would take more than regulatory saber rattling to stop the Don Dixon's of Dallas.
Dixon's sidekick, Tyrell Barker, hadn't been idle either. His State Savings of Lubbock had also mushroomed into a mega-thrift using brokered deposits, high-risk lending, direct investments, and—as was later proven in court—fraudulent deals. While federal regulators were focusing on Dixon, Texas state regulators were wringing their hands over Barker, who was not only looting State Savings but was branching out and acquiring other thrifts as well. Barker had bought Brownsfield Savings in Brownsfield, Texas, and Key Savings, located just outside Denver.6
Barker had also struck up a friendship with Tom Nevis, 39, the president of Nevis Industries in Yuba City, California. Nevis Industries described itself in a corporate profile as "a highly diversified real estate development and agribusiness concern with major holdings throughout California as well as in Arizona, Colorado, Kentucky, Mississippi, Oregon and Nevada.'" The company reported that its holdings were worth $100 million in 1981 . Tom Nevis sat astride this mega-business in an elaborate office with a macho Western motif of stuffed trophy animals, pictures of Nevis on hunting trips, pictures of Nevis in a bar riding a mechanical bull.
Nevis Industries had borrowed heavily to acquire this far-flung empire, bellying up, for example, to the troughs of State Federal Savings and Loan of Corvallis, Oregon. Federal investigators said Nevis walked off with about $81 million in loans in a gross violation of loan limits to a single borrower after Beverly Hills loan broker Al Yarbrow introduced him to the thrift. (Federal investigators said State/Corvallis paid Yarbrow $900,000 in commissions for loans he placed there. Yarbrow was later indicted for one deal in which he took his commission in the form of an $88,000 white Rolls Royce.) An FSLIC lawsuit revealed that regulators believed Nevis had participated in defrauding State Savings of Corvallis by using straw borrowers and cash-for-trash schemes.7
U.S. Attorney Lance Caldwell and lone FBI agent Joe Boyer spent nearly three years piecing together the dozens of mind-numbing deals at State/Corvallis, which they said could cost the FSLIC over $150 million. As a result of their work, a grand jury indicted Nevis, Yarbrow, Mitchell Brown, and others on numerous counts of conspiracy, bank fraud, and mail fraud. Nevis was found guilty on 28 counts in May 1989. The Yarbrow and Brown trials were pending as of this writing.
Published reports and regulatory documents indicated that Nevis Industries had run up an impressive loan tab of at least $8 million at Eureka Federal Savings and Loan of San Carlos, California, before showing up at State 8 and had borrowed heavily from Fidelity Savings and Loan of New York, Coast Savings and Loan of San Diego, and American Savings and Loan of Stockton, California. Nevis's S&L take totaled more than $100 million, law enforcement officials told us.
In 1983 a friend had introduced Nevis to Tyrell Barker, to the mutual benefit of both men.9 For example, regulators said, $8 million of the money Nevis got from State/Corvallis went to purchase a Texas resort from Barker. And Barker helped Nevis with a complex transaction that involved the Sioux City Hilton (in Sioux City, Iowa), which Nevis had acquired.
The hotel was losing $50,000 a month, but Nevis wanted to sell it at a profit. To accomplish such a magical maneuver, Barker, records showed, agreed that State/Lubbock would loan a Georgia company the money to buy the Hilton from Nevis. Nevis immediately channeled $2 million of the proceeds to a company called Doc Valley, Inc., that regulators said he controlled. After State/ Lubbock failed and investigators tried to unravel that deal, they couldn't figure out who owned what. The Georgia company said State/Lubbock (Barker) owned the Hilton. Barker said, "Hotel? What hotel?" Nevis said Barker owned Doe Valley. Barker said, "Huh?" Federal investigators dug into Doe Valley's books, only to discover that they were unauditable. (In 1988 a Texas court ruled in favor of State Savings/Lubbock and ordered Nevis to repay $11.3 million in connection with the Sioux City Hilton/Doe Valley case.)
Regulators warned Barker that he had to stop making risky loans and needed to get the thrift's records in shape. Barker reacted by hiring four auditors to straighten out the mess at State/Lubbock, but after a look at the books they just threw their hands up in despair, finding the situation beyond comprehension. Through it all there was one thing that didn't concern Barker in the least, and that was the loss that the FSLIC would sustain if it had to close State/Lubbock and pay off the depositors.
"I bought the institution, and that's what I buy insurance for," he said, referring to the premiums State/Lubbock paid to the FSLIC. With Barker dis- playing that kind of cavalier attitude, the next step was probably inevitable. In May 1984 the regulators kicked him out (though they say they believe he continued to exercise influence over State/Lubbock until they finally closed the institution in December 1985). Barker's unceremonious ouster as the president of State/Lubbock came only two months after Ed Gray in Washington saw the video of Empire Savings' 1-30 condos (the "Martian landing pads" on the outskirts of Dallas) and closed Empire Savings. '" The assault on the two major thrift institutions shocked Texans, and an uneasiness crept into the back rooms of North Dallas's financial district.
With Taggart in Washington singing the company song, the High Spirits docked in Washington keeping politicians happy, and a fleet of planes giving politicians rides home, Dixon must have felt he had his bases covered and had little to fear from the lackluster and politically impotent Ed Gray. Dixon continued to improve his bottom line at Vernon's expense. He decided to abandon the Solano Beach house in favor of more elaborate quarters down the road in Del Mar, where he had one of Vernon's subsidiaries buy a luxurious $2 million home. The house fronted a long expanse of beach. It was two stories, with rounded corner windows and verandas overlooking the Pacific. Tall palms surrounded the porch, and wide steps led to the fine white-sand beach below,
Although the money for the purchase came from Vernon Savings, regulators said Vernon's board of directors was never consulted. Dixon then set up two bank accounts at Vernon Savings and filled them with Vernon money, which he used to pay the $561,874 in living expenses he incurred during his 18 months in the Del Mar house. Some of the items paid out of the accounts, according to regulators, included:
Flowers—$36,780
Pool service —$4,420
Car service—$23,845
Catering—$13,446
Pet services—$386
Graduation Party—$2,408
Telephone—$37,339
Utilities—$29,689
Cable TV—$1,794
Plants—$5,901
Political fund raiser for San Diego Congressman Bill Lowery—$7,238
Miscellaneous—$101,075
Petty cash—$44,095
A bottle of perfume—$110
Life was sweet in California and the Dixon's spent about 40 percent of their time at the Del Mar house, where they became known for their gracious dinner parties and where they kept an extra Rolls-Royce parked in the garage just for weekend guests. Their West Coast homes also served as a political lobbying platform for Dixon, who reportedly hosted political figures such as former Texas Governor John Connally, former Texas Lieutenant Governor Ben Barnes,1 and Edwin Edwards, the colorful governor of Louisiana, among many others.
"It was a real circus," said one who was around at the time. "They had something going at that house every weekend."
A succession of friends stayed at the Solano Beach house after the Dixon's moved to Del Mar. One of those friends was Charles Bazarian of Oklahoma City. Fuzzy, we learned, met Dixon in 1985, thanks to loan brokers Al Yarbrow and Jack Franks, who made the introductions. Once again it was driven home to us the key role played by loan brokers in this drama, as they scurried around the country connecting round-heeled bankers with horny borrowers.2
Bazarian became a prominent figure in the Dixon entourage in both Dallas and Southern California.3 Later Bazarian would tell us that for a time Dixon was a good friend who, he was sure, had never set out purposefully to loot a savings and loan.
Bazarian did agree, though, that Dixon definitely was a high liver.
"Didn't we have wonderful parties?" he sighed.
Jack Brenner, the contractor employed to manage some of Vernon's California assets, confirmed the party rumors. "They were always having parties at that house in California. I went to only one, and we just turned around and walked out. The house was a maze of hookers," Brenner told a reporter. 4
Later an East Coast banker recalled for us the time Dixon paid his expenses to fly to San Diego and had a limousine pick him up at the airport.
"We went to that famous Del Mar beach house of his. Dixon was there with his wife, and there were these women there. I said to Dixon, 'Who are these women? They are gorgeous honeys. ' Dixon told me, 'These are your dates for the night, a little female companionship. You might get a little lonely at the beach house. You might want a little company for the night.'
"I wasn't expecting that. My face turned bright red. I told Dixon, 'Gee, I was thinking of going back to my room to work on this loan deal.' And the subject quickly changed to hunting."
Prostitutes became just another perk for Vernon's employees and customers—sort of human "beans," if you will. Later Vernon's senior vice president, John V. Hill, would be indicted on a federal felony charge of bank bribery (he ultimately pleaded guilty to a conspiracy charge and agreed to cooperate with prosecutors). He was indicted for what the government quaintly termed giving "a thing of value in excess of $100," making "sexual favors . . . available to Vernon officers and directors in connection with their service to Vernon and to Vernon's owner, Don R. Dixon." Hill admitted he had arranged for Vernon Savings to hire two Dallas women and up to ten San Diego women to attend the first and third nights of a three-day celebration during a Vernon Savings board meeting in Southern California in 1985. 5
When Dixon wasn't hosting such affairs he used the Del Mar house to maintain his status with the Southern California upper crust. But not everyone invited to the Del Mar mansion liked what he saw. Old Rolls-Royce money could smell new stretch-limo money a mile away. A wealthy California publisher recalled later, "My wife and I felt very strange about them [the Dixon's]. Everything was too lavish, too big. It seemed to us if they were real they wouldn't be so socially and politically aggressive."
The Dixon's decided to make another trek to the Continent. This time Dixon and the little lady hit the high spots of France, England, and Denmark and justified this trip by forming a new subsidiary, VernonVest, based in Munich. Dixon claimed that VernonVest would attract foreign deposits to Vernon, but records showed all it ever attracted were expense vouchers for the Dixon's trips abroad.
And still Vernon Savings continued to grow. By 1985 Vernon's assets stood at a staggering $1 billion. (Brokered deposits made Vernon look better than the truth would have it.)
Just months after their second European tour the Dixon's decided the time was right for another. This trip took form one day when Dixon was chatting with his new friend, Roman Catholic Bishop of San Diego Leo T. Maher, and discovered that the bishop and Monsignor Brent Eagen, pastor of Mission San Diego de Alaca, were planning a trip to Europe soon. The Dixon's were ready to go again, so they invited the two holy men to ride along with them on Vernon's Falcon. Thus in May 1985 Maher and Eagen were entertained at Vernon's expense in Paris, London, and Rome—where they in turn arranged the Dixon's introduction to the Pope. The trip was charged to Vernon Savings, and Dixon justified the expense as entertainment for Vernon customers. But what customers? The bishop and the monsignor? Perhaps the notation was simply a rare moment of candor by Don and Dana, who most certainly were Vernon's best customers.6
Vernon's records showed that Don and Dana went to Europe again in 1985. This time they visited Ireland, Great Britain, Switzerland, Italy, Spain, France, and Denmark. The stated purpose for the trip was to conduct business,7 of course, but the visible spoils were $489,000 worth of furniture and antiques, paid for by a Vernon subsidiary but delivered to the Dixon's. There was also a 1951 Rolls-Royce Don picked up in London. (Vernon Savings reimbursed the Dixon's over $68,000 for the European trips they made between 1983 and 1985.)8
Don had loved cars since he was a kid, and in May of 1985 he had Vernon buy Symbolic Motors, a Rolls-Royce and Ferrari dealership in affluent La Jolla, just south of Del Mar. Rare and expensive autos stood reflected in the polished tile floors, each car exhibited like a rare gem in its own section of the display room. Dixon justified the purchase of the dealership by saying that it would offer Vernon an opportunity to "break into the consumer lending market."
The Dixon's had moved from the $1 million Solano Beach house to the $2 million Del Mar house in late 1984, but within months they were ready for another move up. In 1985 Dixon decided to build a Spanish-style manor house in the ultra-exclusive Rancho Santa Fe subdivision, a few miles inland from Del Mar in the coastal hills. The land alone, 16 hillside acres, cost Vernon $5 million, regulators complained. The mansion, as he and Dana envisioned it, would sprawl across five acres like a white stucco Spanish castle. It would have a six-car garage and a two-story stable. Several man-made waterfalls would grace the grounds. Dana would do the decorating, starting—an F.H.L.B examiner later charged—with the $489,000 worth of furniture the Dixon's had just brought home from Europe and 514 yards of carpet they ordered for $26,000.
Dixon wasn't alone in his fearless pursuit of the good life. It seemed all of Dallas was on a roll by 1985 and no one was having more fun than young Edwin T. McBirney III at Sunbelt Savings and Loan. McBirney was chairman, CEO, majority shareholder, and ruler of the Sunbelt fiefdom, and Sunbelt was a star sapphire in the Texas crown of thrift debauchery. While careening his institution toward staggering losses that culminated with a shortfall of $1.2 billion, the darkly handsome McBirney threw some wild and crazy parties. Regulators said that in 1984 and 1985 Sunbelt spent over $1.3 million on Halloween and Christmas parties. One Halloween McBirney entertained at his palatial North Dallas home dressed as a king. He served broiled lion, antelope, and pheasant and had a fog machine going for atmosphere. The following Halloween he expanded to a warehouse that he decorated like a jungle, and he wore a pith helmet, khakis, and binoculars. And, yes, the elephant was real —until a magician he had hired made it disappear. That Christmas he decorated a warehouse like a Russian winter, with strolling Russian peasants and a bear.
Gifted with a retentive mind and a sharp intelligence, McBirney often had groups of borrowers in several rooms at one time at Sunbelt Savings' office in North Dallas. Cigar in hand, he could circulate between rooms and never miss a nuance or forget a concession. When a deal couldn't be structured traditionally, "figure a way to paper it" was often his response, observers said. If a borrower didn't qualify for a loan, find someone to "kiss the paper" for him." More than one man who had tried to negotiate a deal with McBirney called him a shark.
Sunbelt had seven aircraft, one of which he bought with financing provided by Don Dixon's Louisiana friend, Herman K. Beebe. McBirney flew business associates on trips to Las Vegas, Kona, and Capo San Lucas. He liked to gamble, and associates told the story of the trip to the Dunes in Las Vegas when he bet $15,000 on one hand of 21 and won. Then he went over to the craps table and won again. And again.
"It was amazing," said a fellow junketeer. "I couldn't figure out how he always won."
Sunbelt later sued McBirney, claiming that in three years Sunbelt spent $61,800 for him on Christmas gifts (including $54,000 at Neiman Marcus), $15,100 for lodging on trips, $100,000 for meals (including $57,000 at Jason's—no wonder they didn't mind taking the time to cover his table with paper so he wouldn't scribble his deals on their tablecloths), $22,000 at the Texas Stadium, and $70,000 for limousine service. According to several firsthand accounts, McBirncy produced whores for his customers the same way an ordinary businessman might spring for lunch. A visiting developer told us he checked into his Dallas hotel room and found a hooker sitting on his bed.
"Hello." she said.
"What arc you doing here?" he asked.
"I'm for you," she purred.
Just then the phone rang. It was McBirncy. "Get my little gift?" he asked.
McBirney prowled one of Dallas's hottest night spots, the Rio Room—along with such jet setters as Sammy Davis, Jr., and Adnan Khashoggi—where $1,000 bar tabs were common and the big sellers were $150 bottles of champagne. Real estate night was Thursday, and many a deal was celebrated or even consummated then. Wheeler Dealers, a 1963 spoof of Texas millionaires that starred James Garner and Lee Remick, showed up on late-night TV and some thought it was a perfect parody of the times, 20 years later. Dallas reporter Byron Harris wrote that a fellow who had been celebrating an especially lucrative deal stumbled out of the Rio Room into the parking lot and kicked in the door of a Rolls-Royce just for fun.
Vernon Savings, State/Lubbock, and Sunbelt were only three of dozens of Texas thrifts running amok at the end of 1985. Deregulation was barely three years old but the level of greed and corruption at Texas thrifts had reached biblical proportions. Questions were being raised about Commodore Savings, Western Savings, Independent American Savings, Sandia Savings, Lamar Savings, Paris Savings, Midland Savings, Mainland Savings, Stockton Savings, Summit Savings, Continental Savings, Mercury Savings, Ben Milam Savings — the list went on and on. Texas was rocking and rolling to the deregulation rag.
"I remember one closing we had," said a real estate salesperson, describing how they flipped land to raise its value. "It was in the hall of an office building. The tables were lined all the way down the hall. The investors were lined up in front of the tables. The loan officers would close one sale and pass the papers to the next guy. It looked like kids registering for college. If any investor raised a question, someone would come over and tell them to leave, they were out of the deal." At the end of the day's flipping, huge loans, based on the inflated values created by the flip sales, would be taken out on the properties.
Texas was careening out of control, but Ed Gray returned from his Christmas break in January 1986 refreshed and optimistic that his direct investment regulation and the limit on growth were bringing excesses like those in Texas to a halt. He couldn't have been more wrong. In 1986 the lid would blow off the Texas pressure cooker.
Gray's illusions were shattered when reports from the field in Texas indicated that the wildcat thrifts had found ways around most of Gray's roadblock regulations and were falling deeper into the morass.
Gray told us later he was surprised to find that the people in charge of supervising Texas thrifts, Joe Settle at the Dallas Federal Home Loan Bank and L. Linton Bowman III, the Texas savings and loan commissioner, were more sympathetic to the Texas thrift owners than to the Federal Home Loan Bank Board.'" Gray claimed Settle was "too chummy" with the Texas thrift establishment, and he told a congressional subcommittee that under Settle's administration, supervision of Texas thrifts had been virtually nonexistent. Gray brought in veteran thrift regulator Roy Green to baby-sit the Dallas district bank, and he needed someone with top-notch credentials to run Green's supervisory staff. Gray's first order of business in 1986 was to get someone with a strong stomach in that job. Green recommended Washington veteran Joe Selby.
About that time Selby was seriously thinking about quietly slipping into semi-retirement. A Texan by birth, he was thinking about returning to his home state to look for some light work, or maybe to do some part-time jobs for the International Monetary Fund. He was 54 years old and had already served 31 of those years as a regulator in the office of the comptroller of the currency. His forte was the supervision of large national commercial banks.
Gray had met Selby at a luncheon in Boston before Christmas. Gray liked what he saw and told Selby he'd be delighted to have him in the F.H.L.B.B camp if he ever decided to leave the comptroller's office. From Gray's vantage point Selby had all the right qualifications for the Texas job. He was a native of Ganado, Texas, 90 miles west of Houston, so the Texas cowboys couldn't accuse him of being a Yankee troublemaker. As a teenager he'd worked as a teller in his father's bank. Then he went on to earn a banking and finance degree from the University of Texas. His co-workers in the comptroller's office had affectionately nicknamed him "The Great White Father"—a reference to his snowy white hair. In January, Green visited Selby in his Washington office and asked him to be executive vice president and head of supervision at the Dallas F.H.L.B. Selby accepted.
Selby moved to Dallas to assume his F.H.L.B position in May 1986. By that time the worsening financial condition of the state's oil and real estate economy was on the front pages almost daily. But the ups and downs of local economies didn't concern Selby. Such cycles were as perennial as the grass. Anyway, he soon discovered that the problems facing Texas thrifts were rooted in a much more troubling soil.
It was only about a month after Selby got on the job that he met Don Dixon. Dixon strolled arrogantly into Selby's office one Monday morning wearing his permanent California tan, beige suit, and alligator shoes. Roy Green and Selby greeted Dixon and asked him what he had on his mind. Green had briefed Selby about the deep concerns he had about Vernon, so both men were shocked when Dixon confronted them with his plan. Dixon had heard all about "the troubles" the Bank Board was having with insolvent thrifts, and he was there to help them out. He wanted them to allow Vernon to absorb about ten ailing thrifts and, in so doing, create one giant $9 billion super-thrift.
Selby later said that he and Green fought to keep a straight face while Dixon smoothly explained his plan. They thanked him for his concern over the F.S.L.l.C's well-being and told him they'd get back to him. When Dixon left the two men burst out laughing. Was this guy for real? Ironically, two years later, in 1988, the Bank Board's own plan for dealing with failed thrifts in Texas would closely resemble Dixon's plan. Regulators called Dixon's idea crazy. They called theirs "The Southwest Plan."
Dixon was among the most visible of the ostentatious S&L rogues, and he justified his good life by pointing to Vernon's profits. But those profits were built on shifting sand. For example, Vernon had loaned millions to Dondi Residential Properties, Inc. (D.R.P.l) to build condos all over Dallas and the suburbs. By 1985 D.R.P.I (or "Drippy," as it was called) was stuck with over 700 unsold units (nicknamed "the Drippies") on which, examiners warned, Vernon faced a potential $11 million loss. But Vernon kept right on loaning and D.R.P.I kept right on building.
Vernon also made huge loans to favorite developer friends of Dixon's like Jack Atkinson, who borrowed tens of millions of dollars from Vernon ($56 million of which went into default, bank records showed). Atkinson owned his own Gulfstream 50 jet, which Dana Dixon was rumored to prefer because she liked its gray leather interior.
To keep those loans from going into default, Vernon Savings—and sister thrifts like State/Lubbock and Sunbelt—made the loans large enough to allow for an interest reserve that could cover the payments for a year or so. When that money ran out Vernon renewed the loan. And each time Vernon renewed a loan it was able to book new loan fees. If examiners were due for a visit, Vernon officers farmed out ("participated") really bad loans to other, like-minded thrifts where the loans would be out of sight until the examiners left.
In June 1985 representatives from 19 Texas savings and loans met secretly in Houston to discuss what mutual actions they could take to keep regulators off their backs. According to a report in the Houston Post the S&L executives discussed;
Selling loans ("participation's") to other S&Ls to get rid of dead wood and to avoid Ed Gray's growth limits.
Using straw borrowers to avoid loans-to-one-borrower limits and to avoid Ed Gray's growth limits.
Selling loans to each other, with agreements to buy them back later.
Sources told the Post the effect of these actions would have been to "move bad loans around to hide them from regulators and make the S&Ls appear to be in better financial shape than they actually were. " (Among those attending the meeting held in Houston were Terry Barker as well as representatives from Vernon, Western, Lamar, Mainland, and Continental Savings. Of the approximately 19 thrifts represented at the meeting, about 15 would later fail.)11
Even after the loans went into default, thrift officials had ways of postponing the day of reckoning. When Vernon officials compiled the thrift's delinquent loan list for regulators at the end of 1985, for example, they reported $36 million in delinquent loans. The accurate figure, regulators later learned, was $212 million.
"It was just a big Ponzi scheme that probably only had four good years in it to begin with," a Dallas contractor later explained, referring to Texas savings and loan operations in the early 1980's. Someday, when the loans finally went into default, a chain reaction would spread the damage from one Texas thrift to the next and into other states as interlocking loans and participation's, buyback agreements, and letters of credit all began coming home to roost at once.
Since even the best juggler reaches the limit of how many balls he can keep in the air at one time, by 1986 no one around Vernon or its subsidiary operations had a clue as to how many balls they were juggling or where those balls were. When the balls started hitting the ground like hailstones in a Texas hailstorm, startled regulators slapped Vernon with a cease-and-desist order that instructed Vernon Savings to clean up its act. Dixon knew that a cease-and-desist order was a serious step in a process that led to almost inevitable seizure by the regulators.
A few days after he got the order in June 1986, Dixon called his employees together for a party in a hangar at the company's facility at the Addison Municipal Airport. Employees of Vernon were accustomed to parties at company expense so they probably didn't find Dixon's sudden party announcement particularly unusual. They were greeted at the hangar with a full bar and hors d'oeuvres. After healthy rounds of drinks and small talk among Vernon's baby-blue air force, Dixon called for everyone's attention.
Employees gathered around their leader, expecting the usual Dixon pep talk. Instead he shocked them with the news that he would be withdrawing from active involvement at Vernon. He would still hold control over Vernon's stock but would not be around the office anymore. Some employees who attended the party said they greeted Dixon's announcement with a secret sigh of relief. They hoped that once the colorful Dixon was gone so, too, would be the regulators.
In the same month McBirney got the same idea, and he resigned as president of Sunbelt Savings. And the U.S. attorney indicted Terry Barker and his seeing eye attorney, Larry Vineyard, for fraud and conspiracy in connection with an exchange of loans they had made with a banker friend.12 June 1986 marked the climax of the most dramatic five years in the history of the Texas thrift industry.
Even these better-late-than-never actions were no match for the harvest of woe regulators would now face. Events were tumbling out of control in Texas, and every agency with an interest in what was happening was scrambling to catch up. In July, Ed Gray rounded up examiners from around the country and sent a "hit squad" of 250 specially trained examiners into Texas to help the Dallas F.H.L.B investigate thrifts suspected of being insolvent. But as pressure was put on the Texas thrift industry by the small army of F.H.L.B.B examiners, Gray and Joe Selby became increasingly unpopular with both crooked thrift owners and honest ones. The crooks feared exposure and indictment while the straight thrift owners feared that the write-downs (reductions in the inflated values crooked thrifts were assigning to their Texas real estate holdings and loan portfolios) would depreciate the value of everyone's real estate holdings and hurt the innocent as well as the guilty.
In August, Nancy Reagan received an anonymous letter saying that Ed Gray was a "Nazi" and that the Bank Board was using "gestapo tactics" in its supervision of Texas thrifts. The president's wife, who was still friendly with Gray, forwarded the letter to him for his growing collection.
Larry Taggart (Gray's former friend and California savings and loan commissioner), working as a lobbyist and consultant for Don Dixon and other thrift owners,13 sent an angry six-page letter to White House Chief of Staff Don Regan with copies to Senator Jake Garn and Representative Doug Barnard. In the letter Taggart complained bitterly about Gray and his policies. Taggart had broken with Gray long ago, as he had sided with California's go-go thrifts against Gray's re-regulation of the industry. They openly feuded in the press. Their relationship had hit rock bottom when Gray forced Charlie Knapp, a close friend of Taggart's, out of E.G.A in August 1984.14 But nothing Taggart had said before compared with the vitriol of this letter.
Taggart's letter all but demanded that Don Regan kick Gray out of office. Taggart wrote that "the attitude of the F.H.L.B.B and Chairman Gray has been contrary to that of the Reagan administration." He noted that Gray's regulation of the industry was "likely to have a very adverse impact on the ability of our party to raise much needed campaign funds in the upcoming elections. Many who have been very supportive of the Administration arc involved with S&'Ls which are either being closed by the Bank Board or threatened with closure ..." Taggart also stated that Gray's contention that there was widespread fraud occurring at thrifts was not true and that fraud was a factor "at very few of the thrifts" being closed by the Bank Board. Taggart parroted the Texas thrift industry party line . . . any problems the thrift industry was having were due to the temporary downturn in the state's oil-based economy and Ed Gray's regulations, not fraud.15
Around the time that Taggart's letter reached Washington, Selby testified before the Bank Board, seeking approval to close Dallas-based Western Savings and Loan, owned by Jarrett Woods. Board member Don Hovde asked Selby whether the mess in Texas was the fault of the economy or the fault of the people who had run the thrifts down there. Selby didn't have to search for an answer.
"I think a majority are a result of poor underwriting and basically it might be said that even if the economy were good, these loans would never be good."
Selby's straight talk and tough enforcement policies were not winning him any friends in Texas. Between May 1986, when he went to work at the Dallas F.H.L.B, and December 1986, the Dallas F.H.L.B placed at least 100 supervisory actions on thrifts. By September constituents' cries of anguish were ringing in Texas congressmen's ears, and then House Majority Leader Jim Wright (D-Texas) called Gray over to his office. 16 When Gray and his party arrived he was surprised to find Congressmen Steve Bartlett (R-Texas), John Bryant (D-Texas), and Martin Frost (D-Texas) lounging about. Gray felt like he was being ambushed. He was right.
The meeting, on September 15, lasted almost two hours, though Wright had to leave unexpectedly after half an hour. The congressmen minced no words. "Gestapo tactics—bullying examiners—hit squads—Joe Selby's a financial Rambo—what the hell are you trying to do to Texas?" They all took their turn beating on Gray, parroting complaints they'd heard from such financial wizards as Don Dixon, Tyrell Barker, and Ed McBirney. Like a beaten boxer in the tenth round. Gray absorbed each punch without complaint and tried to reassure them that the F.H.L.B.B was being circumspect and cautious and fair. Gray said he left the meeting deeply depressed. He was amazed that the congressmen had so little understanding of what the Bank Board was up against in trying to protect the F.S.L.I.C fund.
A few days later Wright 17 called Gray to say that he'd been contacted by fellow Texan Craig Hall, who was having problems renegotiating loans with a thrift that the Bank Board had taken over, Westwood Savings and Loan in California.18 Wright asked Gray if he would check into the matter, and he particularly complained that Scott Schultz, the regulator responsible for Westwood, was not as "flexible or understanding" as he should be. Gray told Wright he'd check out the Hall loans and see what all the flap was about.
Hall was a slick young Dallas real estate syndicator who owned one of the nation's largest private real estate limited partnership firms and was one of the biggest owners of real estate in Texas. He also controlled at least one thrift and had interests in others. He had been hit hard by the downturn in the Texas economy and was now stuck with nearly $500 million in syndication loans he couldn't repay. He claimed that so many of the loans were from S&Ls that if he went bankrupt, 29 thrifts would immediately be insolvent. Gray asked Bank Board negotiators to do what they could for Hall, but Gray later noted, "If a piece of real estate was only worth $1 million and an S&L had it on its books as having a value of $2 million, then what were we supposed to do? Look the other way?"
On September 26 Wright tightened the screws. Gray's bill to replenish the FSLIC fund, seriously depleted after covering so many costly thrift failures, was scheduled to be considered by the House soon, but Wright removed it from the calendar. Through scuttlebutt and media reports Gray and his people got what they later said they considered to be the clear message that Wright would take care of the FSLIC recapitalization bill (the "recap") when Gray took care of Hall.
Gray had begun to feel desperate about the recap bill. Almost a year earlier he had realized that the FSLIG would not have enough money to close and liquidate all the insolvent thrifts that regulators were now identifying. When a thrift was liquidated all its deposits up to $100,000 each had to be repaid to depositors, and that money came out of the FSLIC fund. A single mediumsized thrift liquidation could cost the FSLIC $500 million. There had already been several, and the fund would soon be running on empfy. It was down to a reserve of only $2.5 billion to cover deposits of $800 billion in 3,249 S&Ls. At the time 252 thrifts, with assets of almost $95 billion, were in serious trouble. If the FSLIC fund did not have enough money to close insolvent thrifts, they would be left open and continue to lose millions of dollars a month. The specter of insolvent S&Ls continuing to operate around the country had driven Gray to propose the recap bill in the spring of 1986. Now the year was almost over and Gray's apprehension had increased daily.19
For the sake of the recap bill. Gray decided to replace Schultz at Westwood with someone he hoped would be more acceptable to Wright. He selected a highly respected official from the F.H.L.B in New York ("I felt that I would not be caving in by asking a person of very high stature in the Federal Home Loan Bank system to come out and do this, " Gray later explained to a congressional investigator) and instructed him to see if there was any way to justify restructuring Hall's loans. Schultz's replacement ultimately did agree not to foreclose on the $200 million in Hall syndication loans at Westwood Savings,thereby giving him some breathing room. Wright told the Associated Press that Gray's action "saved Hall's business, saved several S&Ls, and saved the market from panic."
The move was very unpopular at the F.H.L.B.B, however. Replacing an official in Schultz's position (conservator of an insolvent thrift) just wasn't done. It was a slap in the face to the F.H.L.B.B's enforcement staff, and the Bank Board chief of staff later said, "We didn't like what we did. . . . We felt terrible about the choices posed for us and I personally took a great deal of time to torment over the fact that from our perspective ... we felt we crossed a line between what we felt was permissible or not. On the other hand . . . there was a very difficult problem getting Wright to release the recap bill that we were trying to address."
Gray called Wright to report that the Hall matter had been tended to and asked for a private meeting with the majority leader. Gray had decided that Wright's problem was that he just didn't understand how the thrift regulatory business ran, so on October 3 he went to Wright's office to give him what Gray called a "civics lesson on FSLIC." The meeting lasted about 20 minutes. Gray told Wright the FSLIC was almost broke. "We need your support on the recap, " he said.
Wright once again mentioned that people he trusted in Texas were saying Gray and Selby were acting like the gestapo in dealing with insolvent S&'L's down there. Once again Wright likened the F.H.L.B.B to the Nazis and added that Texas examiners were operating like hit squads in his home state. He said he was afraid the F.H.L.B.B would use the extra money from the recap bill to crack down unfairly on Texas S&L's and cause needless bankruptcies. Sitting on a couch in Wright's office. Gray told Wright point-blank, "Whether you like it or not, there are too many crooks in this business."
In parting, and with an eye toward prying the recap bill loose. Gray told Wright to let him know if he ever needed anything further. Three days later Wright released his hold on the recap bill.
On October 10 Wright wrote to Gray saying that he had received a letter from Scott Mann, chairman of Credit-Banc Savings in Austin,20 that detailed some "very inappropriate actions by regulators." Wright said he'd been hearing many such complaints since his discussions with Gray had "come to the public's attention." Wright was especially concerned, he wrote, about Mann's detailed charges that Selby and other regulators in the F.H.L.B.B of Dallas had unreasonably harassed Credit-Banc and were threatening to declare the thrift insolvent without good reason and in spite of an agreement reached between Credit-Banc and Texas Savings and Loan Commissioner Bowman. Mann had complained in his letter to Wright, "The F.H.L.B of Dallas had become a high-handed adversary of Texas savings and loan associations and has effectively usurped the authority of the Texas Savings and Loan Commissioner to regulate state-chartered institutions in Texas."
Wright wrote to Gray, "This kind of high-handed and arbitrary attitude can only create fear, mistrust and a climate of great instability. " He said the regulators' actions, as described by Mann, "would seem clearly outside the realm of acceptable regulatory behavior. . . . Some in the regulatory force seem not to understand the fundamental principle that it is government's aim and objective to save legitimate businesses, not to destroy them." Wright later said the letter was intended as an expression of concern about the Texas S&L industry as a whole, not a particular S&L, and was "a very common thing" for a congressman to send to "a bureaucrat."
This time Gray could not deliver. CreditBanc was too far gone. By the time Gray wrote back to Wright four months later, after what he called a lengthy investigation, he reported that CreditBanc was nearly insolvent because of "deep seated financial problems, most of which have surfaced since Mr. Mann acquired control of CreditBanc in July 1985" and as "a direct result of the failure of CreditBanc's management to invest in safe and sound assets." Regulators later forced Mann to resign and reported CreditBanc had a net worth of minus $216 million.
The political pressure from Texas thrift owners intensified daily. On October 21 Wright hosted a catered luncheon at the Ridglea Country Club in Fort Worth, arranged by Wright's good friend and business partner Fort Worth developer George Mallick. The purpose of the get-together was to give about 20 of Wright's S&L constituents a chance to recount directly to the majority leader the unspeakable things the Bank Board, Joe Selby, and Ed Gray were doing to their lives. Advance word of the luncheon meeting spread quickly throughout the Texas thrift community and soon Mallick was besieged with phone calls from people who wanted to attend. By the time Wright got to the country club he faced a veritable lynch mob of 110 angry Texas S&L executives and developers.
As lunch got under way each stood and told his or her own horror stories. They said that Ed Gray and Joe Selby were kicking their teeth in and forcing them to list their real estate at its true current value rather than at its projected inflated value. They complained that they were being vilified and accused of being corrupt. Local sheriffs were being used to escort deposed S&L chiefs out of their institutions right in front of the whole world. A minister who was building a nursing home complained that he was almost finished with the project but couldn't complete the building because S&L regulators had told thrifts to stop lending to him. After the meeting a Wright aide reported that Wright's office was besieged with calls from other people in the industry who had heard that Wright had expressed an interest in their problems.
A week or two after the Ridglea meeting, Wright called Gray again.
"Congressman Jim Wright's on the phone for you, Mr. Gray."
Lighting a cigarette. Gray wondered what it would be this time. He took a deep drag and punched the lighted button on the phone.
This time Wright asked Gray to meet with his friend Tom Gaubert, who owned Independent American Savings Association in Irving, between Dallas and Fort Worth, and who was also under the regulators' gun —in January 1986 the Bank Board had banned him from ever operating an FSLIC-insured thrift.
Scrappy Tom Gaubert reminded many of George C. Scott with a beard. He had a gruff voice and he smoked cigars, a Texas-type man's man, a real roll- up-the-sleeves kind of guy. Gaubert was a tough negotiator. He had been waging a war against S&L regulators since they had criticized his management of Independent American and his involvement with what appeared to be a land flip in connection with a loan from Capitol Savings and Loan in Mount Pleasant, Iowa. He had agreed to resign in December 1984. Independent American had then continued under the leadership of Gaubert's brother and others until May 1986, when the F.H.L.B.B installed a team of its own. But Gaubert went on fighting for reinstatement. 21
Gaubert told us that he believed most of the troubles he and his friends were having were because regulators had first encouraged developers to own savings and loans in the early 1980's to revitalize the industry, and then they suddenly panicked and switched gears four years later, throwing the industry into a tailspin by "re-regulating" it. Everything he had done, he said, had been approved by regulators who had encouraged him every step of the way. It was a familiar theme. Without exception, virtually every deposed thrift officer we spoke to, beginning with Erv Hansen at Centennial, claimed that deregulation was a trap, a trick, that there never had been any real deregulation of the thrift industry, and that thrifts were in trouble because they believed what regulators had first told them, only to have the rules changed later and the ground pulled out from under them. (No doubt much of that was true. In the early 1980's regulators did encourage many of the behaviors that they later forbade. ) Tom Gaubert made no secret of his hatred for thrift regulators. In his mahogany-paneled office, adorned with stuffed birds, he kept a toy shooting gallery where he had tacked pictures of regulators Ed Gray, Rosemary Stewart (who headed the Bank Board's enforcement division in Washington), and Roy Green (president of the F.H.L.B.B in Dallas).
The Wall Street Journal reported that in 1985 Gaubert had organized a political action committee for Democratic candidates that raised $101,000 from 66 Texas thrift owners, officers, borrowers, and wives. Donations came from Gaubert, Dixon, McBirney, other Vernon Savings and Sunbelt Savings officers, and Dallas developers who had borrowed hundreds of millions of dollars from the clique of Texas S&L's. The Wall Street Journal said Sunbelt Savings may have paid fees to its directors to subsidize their contributions to the fund.
Besides raising funds for his little thrift owners' defense fund, Gaubert had other fund-raising positions that gave him even more political pull. In 1986 Gaubert was treasurer of the Democratic Congressional Campaign Committee, when Representative Tony Coelho was chairman, and in his 12 months as treasurer he raised $9 million for House candidates, according to Newsweek magazine.22 In 1987 he was chairman of an event that grossed $1 million for his good friend Representative James Wright, who became speaker of the House in January 1987.
Gaubert told us, in fact, that it was he who arranged Wright's 1984 flight from Los Angeles through Dallas to Shreveport and back on the Vernon Savings jet, a flight that would make headlines a few years later and cause Wright considerable political embarrassment. Gaubert said he arranged Wright's flight on the Vernon plane because other transportation was not available on short notice. He said he had always expected Vernon Savings to bill Wright for the flight. Wright did not know at the time that he was on a Vernon plane, Gaubert added.
"Bullshit," said an FBI agent when we told him Gaubert's story.
When it came to being the queen bee of Texas thrift activists, no one could hold a candle to Tom Gaubert. And he had a real friend in Jim Wright. When Wright spoke to Ed Gray on Gaubert's behalf, Wright told Gray he had known Gaubert for a long time and had total confidence in him. Selby wanted to boot Gaubert out of Independent American Savings permanently, and Wright complained that Gaubert was being treated unfairly. Gaubert had assured Wright he had done nothing wrong. Instead, the Bank Board had violated its rules and abused its authority, Gaubert said. He ridiculed the regulators who removed the Dixon's and McBirney's and then caused even more losses when they themselves tried to run the S&Ls.23
It was highly unusual for a congressman to intervene directly in F.H.L.B.B regulatory matters, as Wright was doing, and it was against Bank Board rules for Gray to meet with anyone involved in action before the Board, but since Congress had not yet acted on the recap bill and the bill was therefore still vulnerable to Wright's displeasure. Gray agreed to meet with Gaubert and listen to his complaints. For over two hours Gaubert bent Gray's ear. According to Gray, Gaubert alternately buttered Gray up and evoked Wright's name to remind Gray who his patron was. Gaubert asked Gray to review Gaubert's removal as CEO of Independent American. Gray bit his tongue and agreed—for the recap, he told himself. Gaubert left Gray's office a happy man.24
Later Gaubert told us that he advised Wright not to pass the recap while Gray was in office. "I told the Speaker it would be stupid to give Ed Gray $15 billion. He'd just piss it away."25
Not long after Wright called Gray on behalf of Tom Gaubert, he called Gray yet again to repeat his concern for the way thrifts in Texas were being treated. He especially complained to Gray about what he considered to be Joe Selby's heavy-handed methods. He asked if Gray could get rid of the man. Gray refused. When reasoning failed him Wright turned to hardball again. He said he had heard from his people in Texas that Selby was a homosexual and that he was hiring homosexual lawyers to work for the Federal Home Loan Bank in Dallas. Again Wright wondered pointedly if Gray couldn't find someone more suitable for the job.
Gray replied, "I feel he is doing a fine job in Texas and I see no justification for firing him."
Wright had to call his friends in Texas and tell them he had been unable to dislodge Selby from his job at the F.H.L.B.B of Dallas.
Later, when we asked Wright in writing about the above incident, he replied by having his attorney write to McGraw-Hill, the publisher of this book, and deny that any such conversation took place. Wright's attorney wrote, "Mr. Wright does not and would not presume to tell the head of any agency who should be hired or fired." He wrote that Wright had no specific knowledge concerning Selby's personal life "and never would express any judgments about him without such knowledge."
The 1989 report of a congressional ethics probe of Speaker Wright, however, concluded that the conversation did indeed take place. The report noted that Selby's sexual orientation, whatever it might have been, was "completely irrelevant to his qualification for employment in the Federal Home Loan Bank System." Every credible witness who knew Selby "had only the highest praise for the man's character and ability " and none believed "the incredible rumor embraced by Wright" that Selby "had established a ring of homosexual lawyers" to do the F.H.L.B.B's supervisory work in Dallas. The report concluded that Wright's request that Gray get rid of Selby "greatly exceeded the bounds of proper congressional conduct. . . . An attempt to destroy the distinguished career of a dedicated public servant because of his rumored sexual orientation or because of a wild accusation hardly reflects creditably on the House. Such an attempt is a direct violation of House Rule XLIII."
Selby continued to be a particular target of Texas thrift owners, who viewed him as a colonial governor representing the imperialist power in Washington, Ed Gray.26 If Wright had made life hot for Ed Gray in Washington, Wright's friends in Texas turned Joe Selby's life into a living hell. Soon after Selby returned from a Washington meeting with the Bank Board, in which he had obtained approval for the closure of Jarrett Woods's Western Savings and Loan in Dallas, one of the Dallas F.H.L.B.B examiners noticed his home phone was not functioning properly. He unscrewed the mouthpiece and discovered the problem—an electronic listening device—a bug. Selby knew he had annoyed some powerful people, but not until now had he imagined how deep those waters were. Selby wasn't taking any chances. He had his office and the entire supervisory floor swept for bugs. None were found.
A few weeks later Selby received a call from a Dallas savings and loan executive whom he respected." "Joe, can we get together for lunch? I have something I think you should know, but I don't want to talk about it on the phone."
Over lunch the bank president recounted a strange occurrence.
"I was attending a thrift conference last week and walked in on a meeting full of Texas savings and loan guys from around town here. I only picked up the end of the conversation, but I can tell you they were talking about hiring somebody to kidnap you, Joe."
Selby thought for a moment. If someone had told him that story a few weeks earlier, he would have considered them nuts, but now, after the phone bug, he wasn't so sure. "Don't tell me any more. I don't want to hear about it," Selby told his friend. "I don't even want to know who was at the meeting." Selby said later he felt like he was in the cross hairs of a rifle scope.
"God, it was an electric atmosphere during those days," Selby told us. "I feared for my mental and physical health. I was afraid for my own life. There were bad guys robbing millions from S&Ls. ... I had no idea I'd run into the crooks I ran into when I got down to Dallas."
Next
The Last Squeezing of the Grapes
One of the Good Old Boys' favorite Texas pastimes was hunting, and as a boy Dixon had particularly enjoyed quail hunting with his dad in West Texas, so a partnership chipped in $2.4 million for a posh hunting club. The huge Sugarloaf Lodge sat atop a loaf-shaped mountain about 30 miles southwest of Vernon. Suites had magnificent views overlooking a canyon, and hot tubs with Jacuzzi's soothed the woodsmen's aching muscles.
To the hunting club's armory were added $40,000 worth of handmade Italian shotguns embellished with gold and silver inlay. But hunting, even with fancy guns, could be a hit-or-miss proposition, as one guest later recalled, so live quail were flown in from Illinois the day before the hunt. Their wings were clipped and tail feathers plucked so they couldn't possibly fly. "Hunters" then stood on Sugarloaf's sweeping deck, overlooking the canyon, while hired hands crouched on a ledge below and threw the quail into the air as the guests blasted away. If a bird survived one volley, it was recycled until someone finally nailed it. A lot of Illinois quail met an ignoble end at Sugarloaf
Although diverting, skiing at Beaver Creek and shooting plucked quail at Sugarloaf did not alter Dixon's preference for California and its sunny beaches. He and Dana threw lavish parties at their Solano Beach home, mixing with Southern California's Who's Who, and it wasn't long before Dixon came to the conclusion that he should become a pillar of the community like other socialites. He had an office there and some real estate projects in the works. Now he should contribute to a worthy cause.
After looking for such a cause he finally settled on the University of San Diego. He wasn't ready to part with money, mind you. Instead he donated Dondi Financial Corporation stock to the university, and he threw in a written commitment that, if asked, he would buy the stock back for $3 million cash. The donation was a stroke of genius. It cost Dixon nothing (and would ultimately be worth nothing, after Dixon filed for bankruptcy in 1987), but it brought instant pillardom and covered nearly every conceivable social, political, and karmic (an important consideration in California) base. Suddenly Dixon was the darling of U.S.D's influential alumni, who in turn plugged him directly into a powerful circle of local, state, and federal politicians. Among them was Congressman Bill Lowery (R-San Diego), for whom Dixon promptly threw a $7,000 campaign fund-raiser. He also took Lowery for rides on Vernon's jet and threw parties for him on the High Spirits. Lowery later told reporters he thought Dixon himself owned the jet and the yacht, but Dixon charged it all to Vernon Savings.
The congressman reimbursed Dixon, but somehow, according to the FSLIC, those reimbursements never made their way back to Vernon.
To enhance their enjoyment of the Southern California scene, the Dixon's joined the private Moonlight Beach Club in Encinitas, just north of Solano Beach. A membership cost them $2, 500. The club wanted to expand and buy a condo project nearby that the Dixon's (and Vernon Savings CEO Woody Lemons) owned. The Moonlight Beach Club didn't have enough money to buy the condos from Dixon so regulators said he helped the club raise the cash this way: When businessmen wanted to borrow money from Vernon, some were told they first had to join the Moonlight Beach Club. Memberships, for them, cost $77,500 to $155,000 depending on how large a loan they wanted from Vernon.
To reward high-performance employees Dixon and Vernon's executive committee decided to distribute Vernon's booty through a Bean Program, regulators later alleged in court. Under the Bean Program, "beans" were awarded instead of bonuses to Vernon executives and employees based on their performance. Between June 1983 and June 1986, a FSLIC lawsuit revealed, Vernon paid out $15 million in beans. $10 million of the beans were subsequently redeemed for cash and Vernon kept $5 million, calling it deferred compensation.
There was a hitch—one that regulators said benefited Dixon at Vernon Savings' expense. Employees participating in the Bean Program were also required to buy stock in Dondi Financial Corporation. Dixon would arrange loans from Vernon for them to buy the stock. (Vernon made over $678,000 in such loans.) Employees were then required to use part of their bean bonuses to make the payments on the loans. Buying stock in Dixon's Dondi Financial was what qualified them to participate in the Bean Program. Eighty employees took part in the plan, which appeared, in fact, to be simply another scheme to funnel money from Vernon to Dondi Financial. The plan seems to have helped turn some of Vernon's top executives into an army of little Jacks ready to climb the magic beanstalk whenever Dixon snapped his fingers.
By the dawn of 1984 the Vernon Savings of 1982, with its $82 million in assets, was a distant memory. The thrift now boasted assets of $450 million, made up of what would later turn out to be a murky stew composed of brokered deposits, bad loans carried as sound ones on the books, and properties Vernon carried on its balance sheet at grossly inflated values. Vernon was wildly making loans without regard to their intrinsic value because the thrift made its money up front, in large origination fees. The S&L charged up to 5 points for originating a loan, so on a $100 million loan Vernon immediately "made " up to $5 million. The thrift also charged 1 percent to 2 percent to renew the loan every six months (once a year was standard practice in the industry). So what if the borrower later defaulted on the loan? Vernon had already made its profit. And who else was to know? The Federal Home Loan Bank Board's $14,000 a-year examiners? Vernon's sophisticated maze of business dealings left those shavetail accountants scratching their heads. Besides, the Federal Home Loan Bank for District 9 (Arkansas, Louisiana, Mississippi, New Mexico, Texas), where there were about 300 S&Ls. had just reduced its agents and supervisors from 34 to 12, in the spirit of deregulation. It now took up to two years just to schedule an examination of a thrift, and some had not been examined in over three years.
Eventually, though, Dixon's ostentatious life-style began to raise questions. When federal auditors got around to examining Vernon's 1983 books, they became alarmed by the institution's headlong dive into brokered deposits, helter skelter development, and loans to the maze of subsidiaries bearing the mark of "Dondi. " Bank records show that in August of 1984 regulators forced Vernon's board to sign a supervisory agreement binding Vernon to strict guidelines. The feds had no idea what was going on at Vernon because it was all moving too fast. They wanted to slow things down until they could figure out whether what they were seeing was the promise of deregulation incarnate or a thrift regulator's darkest nightmare.
The supervisory agreement was a sobering event to Vernon's board of directors, who still conducted their board meetings in Vernon, 150 miles from the Dallas action. All in their sixties and seventies, holdovers from R. B. Tanner's day, they never really understood Dixon's fast-moving deals so they had to trust him and his officers to make the right decisions for the thrift. Their confusion allowed Dixon (who served on the thrift's powerful loan committee, where the decision was made to approve or disapprove a loan or investment, even though he was never an officer at Vernon) and his associates to blunt the effect of the supervisory agreement, as Vernon employees later testified. Deals the board had never approved were added to the minutes of the board meetings after the meetings were held. Boilerplate language, designed solely to comply with the supervisory agreement, was added to the minutes so the directors thought they were complying. After the board meetings the real minutes and tape recordings of the board meetings were destroyed in the Dallas office. The board was also given inaccurate data on the condition of Vernon's loan portfolio, and the list of delinquent loans submitted to the board of directors was woefully incomplete. In short, the supervisory agreement apparently was little more than an annoying roadblock that Dixon and his associates quickly found a detour around. It would take more than regulatory saber rattling to stop the Don Dixon's of Dallas.
Dixon's sidekick, Tyrell Barker, hadn't been idle either. His State Savings of Lubbock had also mushroomed into a mega-thrift using brokered deposits, high-risk lending, direct investments, and—as was later proven in court—fraudulent deals. While federal regulators were focusing on Dixon, Texas state regulators were wringing their hands over Barker, who was not only looting State Savings but was branching out and acquiring other thrifts as well. Barker had bought Brownsfield Savings in Brownsfield, Texas, and Key Savings, located just outside Denver.6
Barker had also struck up a friendship with Tom Nevis, 39, the president of Nevis Industries in Yuba City, California. Nevis Industries described itself in a corporate profile as "a highly diversified real estate development and agribusiness concern with major holdings throughout California as well as in Arizona, Colorado, Kentucky, Mississippi, Oregon and Nevada.'" The company reported that its holdings were worth $100 million in 1981 . Tom Nevis sat astride this mega-business in an elaborate office with a macho Western motif of stuffed trophy animals, pictures of Nevis on hunting trips, pictures of Nevis in a bar riding a mechanical bull.
Nevis Industries had borrowed heavily to acquire this far-flung empire, bellying up, for example, to the troughs of State Federal Savings and Loan of Corvallis, Oregon. Federal investigators said Nevis walked off with about $81 million in loans in a gross violation of loan limits to a single borrower after Beverly Hills loan broker Al Yarbrow introduced him to the thrift. (Federal investigators said State/Corvallis paid Yarbrow $900,000 in commissions for loans he placed there. Yarbrow was later indicted for one deal in which he took his commission in the form of an $88,000 white Rolls Royce.) An FSLIC lawsuit revealed that regulators believed Nevis had participated in defrauding State Savings of Corvallis by using straw borrowers and cash-for-trash schemes.7
U.S. Attorney Lance Caldwell and lone FBI agent Joe Boyer spent nearly three years piecing together the dozens of mind-numbing deals at State/Corvallis, which they said could cost the FSLIC over $150 million. As a result of their work, a grand jury indicted Nevis, Yarbrow, Mitchell Brown, and others on numerous counts of conspiracy, bank fraud, and mail fraud. Nevis was found guilty on 28 counts in May 1989. The Yarbrow and Brown trials were pending as of this writing.
Published reports and regulatory documents indicated that Nevis Industries had run up an impressive loan tab of at least $8 million at Eureka Federal Savings and Loan of San Carlos, California, before showing up at State 8 and had borrowed heavily from Fidelity Savings and Loan of New York, Coast Savings and Loan of San Diego, and American Savings and Loan of Stockton, California. Nevis's S&L take totaled more than $100 million, law enforcement officials told us.
In 1983 a friend had introduced Nevis to Tyrell Barker, to the mutual benefit of both men.9 For example, regulators said, $8 million of the money Nevis got from State/Corvallis went to purchase a Texas resort from Barker. And Barker helped Nevis with a complex transaction that involved the Sioux City Hilton (in Sioux City, Iowa), which Nevis had acquired.
The hotel was losing $50,000 a month, but Nevis wanted to sell it at a profit. To accomplish such a magical maneuver, Barker, records showed, agreed that State/Lubbock would loan a Georgia company the money to buy the Hilton from Nevis. Nevis immediately channeled $2 million of the proceeds to a company called Doc Valley, Inc., that regulators said he controlled. After State/ Lubbock failed and investigators tried to unravel that deal, they couldn't figure out who owned what. The Georgia company said State/Lubbock (Barker) owned the Hilton. Barker said, "Hotel? What hotel?" Nevis said Barker owned Doe Valley. Barker said, "Huh?" Federal investigators dug into Doe Valley's books, only to discover that they were unauditable. (In 1988 a Texas court ruled in favor of State Savings/Lubbock and ordered Nevis to repay $11.3 million in connection with the Sioux City Hilton/Doe Valley case.)
Regulators warned Barker that he had to stop making risky loans and needed to get the thrift's records in shape. Barker reacted by hiring four auditors to straighten out the mess at State/Lubbock, but after a look at the books they just threw their hands up in despair, finding the situation beyond comprehension. Through it all there was one thing that didn't concern Barker in the least, and that was the loss that the FSLIC would sustain if it had to close State/Lubbock and pay off the depositors.
"I bought the institution, and that's what I buy insurance for," he said, referring to the premiums State/Lubbock paid to the FSLIC. With Barker dis- playing that kind of cavalier attitude, the next step was probably inevitable. In May 1984 the regulators kicked him out (though they say they believe he continued to exercise influence over State/Lubbock until they finally closed the institution in December 1985). Barker's unceremonious ouster as the president of State/Lubbock came only two months after Ed Gray in Washington saw the video of Empire Savings' 1-30 condos (the "Martian landing pads" on the outskirts of Dallas) and closed Empire Savings. '" The assault on the two major thrift institutions shocked Texans, and an uneasiness crept into the back rooms of North Dallas's financial district.
CHAPTER SEVENTEEN
Dark in the Heart of Texas
Slowly, throughout 1984, the regulation noose tightened in Texas. Ed Gray
sought support for his regulation that would go into effect March 1985, limiting
direct investments and placing a 25 percent annual growth limit on S&'Ls. Regulators also began to demand that thrifts acquire more accurate appraisals. But during the heat of the debate that surrounded these moves, even as it became
increasingly evident that Ed Gray wasn't going to back down, no one would
have guessed a thing was wrong at Vernon Savings and Loan. Vernon looked
great—on paper. Trade journals routinely listed Vernon among the country's
soundest and most profitable institutions, and Vernon itself crowed that it was
the most profitable thrift in America. Vernon looked so hot, in fact, that a month
after California Savings and Loan Commissioner Larry Taggart left that post in January 1985 he went to work for Dixon as a consultant. Taggart had no regrets
for having presided over the deregulation of the California thrift industry, and
he believed Texas thrifts' recent problems were simply caused by the downturn
in the oil economy. He viewed with alarm the frantic attempts by his former
friend Ed Gray to tighten S&L regulations. He felt that, as someone who had
been a regulator, he could help the industry by lobbying politicians in Washington
to remain steadfast in their commitment to thrift deregulation. And he
set off to do just that. With Taggart in Washington singing the company song, the High Spirits docked in Washington keeping politicians happy, and a fleet of planes giving politicians rides home, Dixon must have felt he had his bases covered and had little to fear from the lackluster and politically impotent Ed Gray. Dixon continued to improve his bottom line at Vernon's expense. He decided to abandon the Solano Beach house in favor of more elaborate quarters down the road in Del Mar, where he had one of Vernon's subsidiaries buy a luxurious $2 million home. The house fronted a long expanse of beach. It was two stories, with rounded corner windows and verandas overlooking the Pacific. Tall palms surrounded the porch, and wide steps led to the fine white-sand beach below,
Although the money for the purchase came from Vernon Savings, regulators said Vernon's board of directors was never consulted. Dixon then set up two bank accounts at Vernon Savings and filled them with Vernon money, which he used to pay the $561,874 in living expenses he incurred during his 18 months in the Del Mar house. Some of the items paid out of the accounts, according to regulators, included:
Flowers—$36,780
Pool service —$4,420
Car service—$23,845
Catering—$13,446
Pet services—$386
Graduation Party—$2,408
Telephone—$37,339
Utilities—$29,689
Cable TV—$1,794
Plants—$5,901
Political fund raiser for San Diego Congressman Bill Lowery—$7,238
Miscellaneous—$101,075
Petty cash—$44,095
A bottle of perfume—$110
Life was sweet in California and the Dixon's spent about 40 percent of their time at the Del Mar house, where they became known for their gracious dinner parties and where they kept an extra Rolls-Royce parked in the garage just for weekend guests. Their West Coast homes also served as a political lobbying platform for Dixon, who reportedly hosted political figures such as former Texas Governor John Connally, former Texas Lieutenant Governor Ben Barnes,1 and Edwin Edwards, the colorful governor of Louisiana, among many others.
"It was a real circus," said one who was around at the time. "They had something going at that house every weekend."
A succession of friends stayed at the Solano Beach house after the Dixon's moved to Del Mar. One of those friends was Charles Bazarian of Oklahoma City. Fuzzy, we learned, met Dixon in 1985, thanks to loan brokers Al Yarbrow and Jack Franks, who made the introductions. Once again it was driven home to us the key role played by loan brokers in this drama, as they scurried around the country connecting round-heeled bankers with horny borrowers.2
Bazarian became a prominent figure in the Dixon entourage in both Dallas and Southern California.3 Later Bazarian would tell us that for a time Dixon was a good friend who, he was sure, had never set out purposefully to loot a savings and loan.
Bazarian did agree, though, that Dixon definitely was a high liver.
"Didn't we have wonderful parties?" he sighed.
Jack Brenner, the contractor employed to manage some of Vernon's California assets, confirmed the party rumors. "They were always having parties at that house in California. I went to only one, and we just turned around and walked out. The house was a maze of hookers," Brenner told a reporter. 4
Later an East Coast banker recalled for us the time Dixon paid his expenses to fly to San Diego and had a limousine pick him up at the airport.
"We went to that famous Del Mar beach house of his. Dixon was there with his wife, and there were these women there. I said to Dixon, 'Who are these women? They are gorgeous honeys. ' Dixon told me, 'These are your dates for the night, a little female companionship. You might get a little lonely at the beach house. You might want a little company for the night.'
"I wasn't expecting that. My face turned bright red. I told Dixon, 'Gee, I was thinking of going back to my room to work on this loan deal.' And the subject quickly changed to hunting."
Prostitutes became just another perk for Vernon's employees and customers—sort of human "beans," if you will. Later Vernon's senior vice president, John V. Hill, would be indicted on a federal felony charge of bank bribery (he ultimately pleaded guilty to a conspiracy charge and agreed to cooperate with prosecutors). He was indicted for what the government quaintly termed giving "a thing of value in excess of $100," making "sexual favors . . . available to Vernon officers and directors in connection with their service to Vernon and to Vernon's owner, Don R. Dixon." Hill admitted he had arranged for Vernon Savings to hire two Dallas women and up to ten San Diego women to attend the first and third nights of a three-day celebration during a Vernon Savings board meeting in Southern California in 1985. 5
When Dixon wasn't hosting such affairs he used the Del Mar house to maintain his status with the Southern California upper crust. But not everyone invited to the Del Mar mansion liked what he saw. Old Rolls-Royce money could smell new stretch-limo money a mile away. A wealthy California publisher recalled later, "My wife and I felt very strange about them [the Dixon's]. Everything was too lavish, too big. It seemed to us if they were real they wouldn't be so socially and politically aggressive."
The Dixon's decided to make another trek to the Continent. This time Dixon and the little lady hit the high spots of France, England, and Denmark and justified this trip by forming a new subsidiary, VernonVest, based in Munich. Dixon claimed that VernonVest would attract foreign deposits to Vernon, but records showed all it ever attracted were expense vouchers for the Dixon's trips abroad.
And still Vernon Savings continued to grow. By 1985 Vernon's assets stood at a staggering $1 billion. (Brokered deposits made Vernon look better than the truth would have it.)
Just months after their second European tour the Dixon's decided the time was right for another. This trip took form one day when Dixon was chatting with his new friend, Roman Catholic Bishop of San Diego Leo T. Maher, and discovered that the bishop and Monsignor Brent Eagen, pastor of Mission San Diego de Alaca, were planning a trip to Europe soon. The Dixon's were ready to go again, so they invited the two holy men to ride along with them on Vernon's Falcon. Thus in May 1985 Maher and Eagen were entertained at Vernon's expense in Paris, London, and Rome—where they in turn arranged the Dixon's introduction to the Pope. The trip was charged to Vernon Savings, and Dixon justified the expense as entertainment for Vernon customers. But what customers? The bishop and the monsignor? Perhaps the notation was simply a rare moment of candor by Don and Dana, who most certainly were Vernon's best customers.6
Vernon's records showed that Don and Dana went to Europe again in 1985. This time they visited Ireland, Great Britain, Switzerland, Italy, Spain, France, and Denmark. The stated purpose for the trip was to conduct business,7 of course, but the visible spoils were $489,000 worth of furniture and antiques, paid for by a Vernon subsidiary but delivered to the Dixon's. There was also a 1951 Rolls-Royce Don picked up in London. (Vernon Savings reimbursed the Dixon's over $68,000 for the European trips they made between 1983 and 1985.)8
Don had loved cars since he was a kid, and in May of 1985 he had Vernon buy Symbolic Motors, a Rolls-Royce and Ferrari dealership in affluent La Jolla, just south of Del Mar. Rare and expensive autos stood reflected in the polished tile floors, each car exhibited like a rare gem in its own section of the display room. Dixon justified the purchase of the dealership by saying that it would offer Vernon an opportunity to "break into the consumer lending market."
The Dixon's had moved from the $1 million Solano Beach house to the $2 million Del Mar house in late 1984, but within months they were ready for another move up. In 1985 Dixon decided to build a Spanish-style manor house in the ultra-exclusive Rancho Santa Fe subdivision, a few miles inland from Del Mar in the coastal hills. The land alone, 16 hillside acres, cost Vernon $5 million, regulators complained. The mansion, as he and Dana envisioned it, would sprawl across five acres like a white stucco Spanish castle. It would have a six-car garage and a two-story stable. Several man-made waterfalls would grace the grounds. Dana would do the decorating, starting—an F.H.L.B examiner later charged—with the $489,000 worth of furniture the Dixon's had just brought home from Europe and 514 yards of carpet they ordered for $26,000.
Dixon wasn't alone in his fearless pursuit of the good life. It seemed all of Dallas was on a roll by 1985 and no one was having more fun than young Edwin T. McBirney III at Sunbelt Savings and Loan. McBirney was chairman, CEO, majority shareholder, and ruler of the Sunbelt fiefdom, and Sunbelt was a star sapphire in the Texas crown of thrift debauchery. While careening his institution toward staggering losses that culminated with a shortfall of $1.2 billion, the darkly handsome McBirney threw some wild and crazy parties. Regulators said that in 1984 and 1985 Sunbelt spent over $1.3 million on Halloween and Christmas parties. One Halloween McBirney entertained at his palatial North Dallas home dressed as a king. He served broiled lion, antelope, and pheasant and had a fog machine going for atmosphere. The following Halloween he expanded to a warehouse that he decorated like a jungle, and he wore a pith helmet, khakis, and binoculars. And, yes, the elephant was real —until a magician he had hired made it disappear. That Christmas he decorated a warehouse like a Russian winter, with strolling Russian peasants and a bear.
Gifted with a retentive mind and a sharp intelligence, McBirney often had groups of borrowers in several rooms at one time at Sunbelt Savings' office in North Dallas. Cigar in hand, he could circulate between rooms and never miss a nuance or forget a concession. When a deal couldn't be structured traditionally, "figure a way to paper it" was often his response, observers said. If a borrower didn't qualify for a loan, find someone to "kiss the paper" for him." More than one man who had tried to negotiate a deal with McBirney called him a shark.
Sunbelt had seven aircraft, one of which he bought with financing provided by Don Dixon's Louisiana friend, Herman K. Beebe. McBirney flew business associates on trips to Las Vegas, Kona, and Capo San Lucas. He liked to gamble, and associates told the story of the trip to the Dunes in Las Vegas when he bet $15,000 on one hand of 21 and won. Then he went over to the craps table and won again. And again.
"It was amazing," said a fellow junketeer. "I couldn't figure out how he always won."
Sunbelt later sued McBirney, claiming that in three years Sunbelt spent $61,800 for him on Christmas gifts (including $54,000 at Neiman Marcus), $15,100 for lodging on trips, $100,000 for meals (including $57,000 at Jason's—no wonder they didn't mind taking the time to cover his table with paper so he wouldn't scribble his deals on their tablecloths), $22,000 at the Texas Stadium, and $70,000 for limousine service. According to several firsthand accounts, McBirncy produced whores for his customers the same way an ordinary businessman might spring for lunch. A visiting developer told us he checked into his Dallas hotel room and found a hooker sitting on his bed.
"Hello." she said.
"What arc you doing here?" he asked.
"I'm for you," she purred.
Just then the phone rang. It was McBirncy. "Get my little gift?" he asked.
McBirney prowled one of Dallas's hottest night spots, the Rio Room—along with such jet setters as Sammy Davis, Jr., and Adnan Khashoggi—where $1,000 bar tabs were common and the big sellers were $150 bottles of champagne. Real estate night was Thursday, and many a deal was celebrated or even consummated then. Wheeler Dealers, a 1963 spoof of Texas millionaires that starred James Garner and Lee Remick, showed up on late-night TV and some thought it was a perfect parody of the times, 20 years later. Dallas reporter Byron Harris wrote that a fellow who had been celebrating an especially lucrative deal stumbled out of the Rio Room into the parking lot and kicked in the door of a Rolls-Royce just for fun.
Vernon Savings, State/Lubbock, and Sunbelt were only three of dozens of Texas thrifts running amok at the end of 1985. Deregulation was barely three years old but the level of greed and corruption at Texas thrifts had reached biblical proportions. Questions were being raised about Commodore Savings, Western Savings, Independent American Savings, Sandia Savings, Lamar Savings, Paris Savings, Midland Savings, Mainland Savings, Stockton Savings, Summit Savings, Continental Savings, Mercury Savings, Ben Milam Savings — the list went on and on. Texas was rocking and rolling to the deregulation rag.
"I remember one closing we had," said a real estate salesperson, describing how they flipped land to raise its value. "It was in the hall of an office building. The tables were lined all the way down the hall. The investors were lined up in front of the tables. The loan officers would close one sale and pass the papers to the next guy. It looked like kids registering for college. If any investor raised a question, someone would come over and tell them to leave, they were out of the deal." At the end of the day's flipping, huge loans, based on the inflated values created by the flip sales, would be taken out on the properties.
Texas was careening out of control, but Ed Gray returned from his Christmas break in January 1986 refreshed and optimistic that his direct investment regulation and the limit on growth were bringing excesses like those in Texas to a halt. He couldn't have been more wrong. In 1986 the lid would blow off the Texas pressure cooker.
Gray's illusions were shattered when reports from the field in Texas indicated that the wildcat thrifts had found ways around most of Gray's roadblock regulations and were falling deeper into the morass.
Gray told us later he was surprised to find that the people in charge of supervising Texas thrifts, Joe Settle at the Dallas Federal Home Loan Bank and L. Linton Bowman III, the Texas savings and loan commissioner, were more sympathetic to the Texas thrift owners than to the Federal Home Loan Bank Board.'" Gray claimed Settle was "too chummy" with the Texas thrift establishment, and he told a congressional subcommittee that under Settle's administration, supervision of Texas thrifts had been virtually nonexistent. Gray brought in veteran thrift regulator Roy Green to baby-sit the Dallas district bank, and he needed someone with top-notch credentials to run Green's supervisory staff. Gray's first order of business in 1986 was to get someone with a strong stomach in that job. Green recommended Washington veteran Joe Selby.
About that time Selby was seriously thinking about quietly slipping into semi-retirement. A Texan by birth, he was thinking about returning to his home state to look for some light work, or maybe to do some part-time jobs for the International Monetary Fund. He was 54 years old and had already served 31 of those years as a regulator in the office of the comptroller of the currency. His forte was the supervision of large national commercial banks.
Gray had met Selby at a luncheon in Boston before Christmas. Gray liked what he saw and told Selby he'd be delighted to have him in the F.H.L.B.B camp if he ever decided to leave the comptroller's office. From Gray's vantage point Selby had all the right qualifications for the Texas job. He was a native of Ganado, Texas, 90 miles west of Houston, so the Texas cowboys couldn't accuse him of being a Yankee troublemaker. As a teenager he'd worked as a teller in his father's bank. Then he went on to earn a banking and finance degree from the University of Texas. His co-workers in the comptroller's office had affectionately nicknamed him "The Great White Father"—a reference to his snowy white hair. In January, Green visited Selby in his Washington office and asked him to be executive vice president and head of supervision at the Dallas F.H.L.B. Selby accepted.
Selby moved to Dallas to assume his F.H.L.B position in May 1986. By that time the worsening financial condition of the state's oil and real estate economy was on the front pages almost daily. But the ups and downs of local economies didn't concern Selby. Such cycles were as perennial as the grass. Anyway, he soon discovered that the problems facing Texas thrifts were rooted in a much more troubling soil.
It was only about a month after Selby got on the job that he met Don Dixon. Dixon strolled arrogantly into Selby's office one Monday morning wearing his permanent California tan, beige suit, and alligator shoes. Roy Green and Selby greeted Dixon and asked him what he had on his mind. Green had briefed Selby about the deep concerns he had about Vernon, so both men were shocked when Dixon confronted them with his plan. Dixon had heard all about "the troubles" the Bank Board was having with insolvent thrifts, and he was there to help them out. He wanted them to allow Vernon to absorb about ten ailing thrifts and, in so doing, create one giant $9 billion super-thrift.
Selby later said that he and Green fought to keep a straight face while Dixon smoothly explained his plan. They thanked him for his concern over the F.S.L.l.C's well-being and told him they'd get back to him. When Dixon left the two men burst out laughing. Was this guy for real? Ironically, two years later, in 1988, the Bank Board's own plan for dealing with failed thrifts in Texas would closely resemble Dixon's plan. Regulators called Dixon's idea crazy. They called theirs "The Southwest Plan."
Dixon was among the most visible of the ostentatious S&L rogues, and he justified his good life by pointing to Vernon's profits. But those profits were built on shifting sand. For example, Vernon had loaned millions to Dondi Residential Properties, Inc. (D.R.P.l) to build condos all over Dallas and the suburbs. By 1985 D.R.P.I (or "Drippy," as it was called) was stuck with over 700 unsold units (nicknamed "the Drippies") on which, examiners warned, Vernon faced a potential $11 million loss. But Vernon kept right on loaning and D.R.P.I kept right on building.
Vernon also made huge loans to favorite developer friends of Dixon's like Jack Atkinson, who borrowed tens of millions of dollars from Vernon ($56 million of which went into default, bank records showed). Atkinson owned his own Gulfstream 50 jet, which Dana Dixon was rumored to prefer because she liked its gray leather interior.
To keep those loans from going into default, Vernon Savings—and sister thrifts like State/Lubbock and Sunbelt—made the loans large enough to allow for an interest reserve that could cover the payments for a year or so. When that money ran out Vernon renewed the loan. And each time Vernon renewed a loan it was able to book new loan fees. If examiners were due for a visit, Vernon officers farmed out ("participated") really bad loans to other, like-minded thrifts where the loans would be out of sight until the examiners left.
In June 1985 representatives from 19 Texas savings and loans met secretly in Houston to discuss what mutual actions they could take to keep regulators off their backs. According to a report in the Houston Post the S&L executives discussed;
Selling loans ("participation's") to other S&Ls to get rid of dead wood and to avoid Ed Gray's growth limits.
Using straw borrowers to avoid loans-to-one-borrower limits and to avoid Ed Gray's growth limits.
Selling loans to each other, with agreements to buy them back later.
Sources told the Post the effect of these actions would have been to "move bad loans around to hide them from regulators and make the S&Ls appear to be in better financial shape than they actually were. " (Among those attending the meeting held in Houston were Terry Barker as well as representatives from Vernon, Western, Lamar, Mainland, and Continental Savings. Of the approximately 19 thrifts represented at the meeting, about 15 would later fail.)11
Even after the loans went into default, thrift officials had ways of postponing the day of reckoning. When Vernon officials compiled the thrift's delinquent loan list for regulators at the end of 1985, for example, they reported $36 million in delinquent loans. The accurate figure, regulators later learned, was $212 million.
"It was just a big Ponzi scheme that probably only had four good years in it to begin with," a Dallas contractor later explained, referring to Texas savings and loan operations in the early 1980's. Someday, when the loans finally went into default, a chain reaction would spread the damage from one Texas thrift to the next and into other states as interlocking loans and participation's, buyback agreements, and letters of credit all began coming home to roost at once.
Since even the best juggler reaches the limit of how many balls he can keep in the air at one time, by 1986 no one around Vernon or its subsidiary operations had a clue as to how many balls they were juggling or where those balls were. When the balls started hitting the ground like hailstones in a Texas hailstorm, startled regulators slapped Vernon with a cease-and-desist order that instructed Vernon Savings to clean up its act. Dixon knew that a cease-and-desist order was a serious step in a process that led to almost inevitable seizure by the regulators.
A few days after he got the order in June 1986, Dixon called his employees together for a party in a hangar at the company's facility at the Addison Municipal Airport. Employees of Vernon were accustomed to parties at company expense so they probably didn't find Dixon's sudden party announcement particularly unusual. They were greeted at the hangar with a full bar and hors d'oeuvres. After healthy rounds of drinks and small talk among Vernon's baby-blue air force, Dixon called for everyone's attention.
Employees gathered around their leader, expecting the usual Dixon pep talk. Instead he shocked them with the news that he would be withdrawing from active involvement at Vernon. He would still hold control over Vernon's stock but would not be around the office anymore. Some employees who attended the party said they greeted Dixon's announcement with a secret sigh of relief. They hoped that once the colorful Dixon was gone so, too, would be the regulators.
In the same month McBirney got the same idea, and he resigned as president of Sunbelt Savings. And the U.S. attorney indicted Terry Barker and his seeing eye attorney, Larry Vineyard, for fraud and conspiracy in connection with an exchange of loans they had made with a banker friend.12 June 1986 marked the climax of the most dramatic five years in the history of the Texas thrift industry.
Even these better-late-than-never actions were no match for the harvest of woe regulators would now face. Events were tumbling out of control in Texas, and every agency with an interest in what was happening was scrambling to catch up. In July, Ed Gray rounded up examiners from around the country and sent a "hit squad" of 250 specially trained examiners into Texas to help the Dallas F.H.L.B investigate thrifts suspected of being insolvent. But as pressure was put on the Texas thrift industry by the small army of F.H.L.B.B examiners, Gray and Joe Selby became increasingly unpopular with both crooked thrift owners and honest ones. The crooks feared exposure and indictment while the straight thrift owners feared that the write-downs (reductions in the inflated values crooked thrifts were assigning to their Texas real estate holdings and loan portfolios) would depreciate the value of everyone's real estate holdings and hurt the innocent as well as the guilty.
In August, Nancy Reagan received an anonymous letter saying that Ed Gray was a "Nazi" and that the Bank Board was using "gestapo tactics" in its supervision of Texas thrifts. The president's wife, who was still friendly with Gray, forwarded the letter to him for his growing collection.
Larry Taggart (Gray's former friend and California savings and loan commissioner), working as a lobbyist and consultant for Don Dixon and other thrift owners,13 sent an angry six-page letter to White House Chief of Staff Don Regan with copies to Senator Jake Garn and Representative Doug Barnard. In the letter Taggart complained bitterly about Gray and his policies. Taggart had broken with Gray long ago, as he had sided with California's go-go thrifts against Gray's re-regulation of the industry. They openly feuded in the press. Their relationship had hit rock bottom when Gray forced Charlie Knapp, a close friend of Taggart's, out of E.G.A in August 1984.14 But nothing Taggart had said before compared with the vitriol of this letter.
Taggart's letter all but demanded that Don Regan kick Gray out of office. Taggart wrote that "the attitude of the F.H.L.B.B and Chairman Gray has been contrary to that of the Reagan administration." He noted that Gray's regulation of the industry was "likely to have a very adverse impact on the ability of our party to raise much needed campaign funds in the upcoming elections. Many who have been very supportive of the Administration arc involved with S&'Ls which are either being closed by the Bank Board or threatened with closure ..." Taggart also stated that Gray's contention that there was widespread fraud occurring at thrifts was not true and that fraud was a factor "at very few of the thrifts" being closed by the Bank Board. Taggart parroted the Texas thrift industry party line . . . any problems the thrift industry was having were due to the temporary downturn in the state's oil-based economy and Ed Gray's regulations, not fraud.15
Around the time that Taggart's letter reached Washington, Selby testified before the Bank Board, seeking approval to close Dallas-based Western Savings and Loan, owned by Jarrett Woods. Board member Don Hovde asked Selby whether the mess in Texas was the fault of the economy or the fault of the people who had run the thrifts down there. Selby didn't have to search for an answer.
"I think a majority are a result of poor underwriting and basically it might be said that even if the economy were good, these loans would never be good."
Selby's straight talk and tough enforcement policies were not winning him any friends in Texas. Between May 1986, when he went to work at the Dallas F.H.L.B, and December 1986, the Dallas F.H.L.B placed at least 100 supervisory actions on thrifts. By September constituents' cries of anguish were ringing in Texas congressmen's ears, and then House Majority Leader Jim Wright (D-Texas) called Gray over to his office. 16 When Gray and his party arrived he was surprised to find Congressmen Steve Bartlett (R-Texas), John Bryant (D-Texas), and Martin Frost (D-Texas) lounging about. Gray felt like he was being ambushed. He was right.
The meeting, on September 15, lasted almost two hours, though Wright had to leave unexpectedly after half an hour. The congressmen minced no words. "Gestapo tactics—bullying examiners—hit squads—Joe Selby's a financial Rambo—what the hell are you trying to do to Texas?" They all took their turn beating on Gray, parroting complaints they'd heard from such financial wizards as Don Dixon, Tyrell Barker, and Ed McBirney. Like a beaten boxer in the tenth round. Gray absorbed each punch without complaint and tried to reassure them that the F.H.L.B.B was being circumspect and cautious and fair. Gray said he left the meeting deeply depressed. He was amazed that the congressmen had so little understanding of what the Bank Board was up against in trying to protect the F.S.L.I.C fund.
A few days later Wright 17 called Gray to say that he'd been contacted by fellow Texan Craig Hall, who was having problems renegotiating loans with a thrift that the Bank Board had taken over, Westwood Savings and Loan in California.18 Wright asked Gray if he would check into the matter, and he particularly complained that Scott Schultz, the regulator responsible for Westwood, was not as "flexible or understanding" as he should be. Gray told Wright he'd check out the Hall loans and see what all the flap was about.
Hall was a slick young Dallas real estate syndicator who owned one of the nation's largest private real estate limited partnership firms and was one of the biggest owners of real estate in Texas. He also controlled at least one thrift and had interests in others. He had been hit hard by the downturn in the Texas economy and was now stuck with nearly $500 million in syndication loans he couldn't repay. He claimed that so many of the loans were from S&Ls that if he went bankrupt, 29 thrifts would immediately be insolvent. Gray asked Bank Board negotiators to do what they could for Hall, but Gray later noted, "If a piece of real estate was only worth $1 million and an S&L had it on its books as having a value of $2 million, then what were we supposed to do? Look the other way?"
On September 26 Wright tightened the screws. Gray's bill to replenish the FSLIC fund, seriously depleted after covering so many costly thrift failures, was scheduled to be considered by the House soon, but Wright removed it from the calendar. Through scuttlebutt and media reports Gray and his people got what they later said they considered to be the clear message that Wright would take care of the FSLIC recapitalization bill (the "recap") when Gray took care of Hall.
Gray had begun to feel desperate about the recap bill. Almost a year earlier he had realized that the FSLIG would not have enough money to close and liquidate all the insolvent thrifts that regulators were now identifying. When a thrift was liquidated all its deposits up to $100,000 each had to be repaid to depositors, and that money came out of the FSLIC fund. A single mediumsized thrift liquidation could cost the FSLIC $500 million. There had already been several, and the fund would soon be running on empfy. It was down to a reserve of only $2.5 billion to cover deposits of $800 billion in 3,249 S&Ls. At the time 252 thrifts, with assets of almost $95 billion, were in serious trouble. If the FSLIC fund did not have enough money to close insolvent thrifts, they would be left open and continue to lose millions of dollars a month. The specter of insolvent S&Ls continuing to operate around the country had driven Gray to propose the recap bill in the spring of 1986. Now the year was almost over and Gray's apprehension had increased daily.19
For the sake of the recap bill. Gray decided to replace Schultz at Westwood with someone he hoped would be more acceptable to Wright. He selected a highly respected official from the F.H.L.B in New York ("I felt that I would not be caving in by asking a person of very high stature in the Federal Home Loan Bank system to come out and do this, " Gray later explained to a congressional investigator) and instructed him to see if there was any way to justify restructuring Hall's loans. Schultz's replacement ultimately did agree not to foreclose on the $200 million in Hall syndication loans at Westwood Savings,thereby giving him some breathing room. Wright told the Associated Press that Gray's action "saved Hall's business, saved several S&Ls, and saved the market from panic."
The move was very unpopular at the F.H.L.B.B, however. Replacing an official in Schultz's position (conservator of an insolvent thrift) just wasn't done. It was a slap in the face to the F.H.L.B.B's enforcement staff, and the Bank Board chief of staff later said, "We didn't like what we did. . . . We felt terrible about the choices posed for us and I personally took a great deal of time to torment over the fact that from our perspective ... we felt we crossed a line between what we felt was permissible or not. On the other hand . . . there was a very difficult problem getting Wright to release the recap bill that we were trying to address."
Gray called Wright to report that the Hall matter had been tended to and asked for a private meeting with the majority leader. Gray had decided that Wright's problem was that he just didn't understand how the thrift regulatory business ran, so on October 3 he went to Wright's office to give him what Gray called a "civics lesson on FSLIC." The meeting lasted about 20 minutes. Gray told Wright the FSLIC was almost broke. "We need your support on the recap, " he said.
Wright once again mentioned that people he trusted in Texas were saying Gray and Selby were acting like the gestapo in dealing with insolvent S&'L's down there. Once again Wright likened the F.H.L.B.B to the Nazis and added that Texas examiners were operating like hit squads in his home state. He said he was afraid the F.H.L.B.B would use the extra money from the recap bill to crack down unfairly on Texas S&L's and cause needless bankruptcies. Sitting on a couch in Wright's office. Gray told Wright point-blank, "Whether you like it or not, there are too many crooks in this business."
In parting, and with an eye toward prying the recap bill loose. Gray told Wright to let him know if he ever needed anything further. Three days later Wright released his hold on the recap bill.
On October 10 Wright wrote to Gray saying that he had received a letter from Scott Mann, chairman of Credit-Banc Savings in Austin,20 that detailed some "very inappropriate actions by regulators." Wright said he'd been hearing many such complaints since his discussions with Gray had "come to the public's attention." Wright was especially concerned, he wrote, about Mann's detailed charges that Selby and other regulators in the F.H.L.B.B of Dallas had unreasonably harassed Credit-Banc and were threatening to declare the thrift insolvent without good reason and in spite of an agreement reached between Credit-Banc and Texas Savings and Loan Commissioner Bowman. Mann had complained in his letter to Wright, "The F.H.L.B of Dallas had become a high-handed adversary of Texas savings and loan associations and has effectively usurped the authority of the Texas Savings and Loan Commissioner to regulate state-chartered institutions in Texas."
Wright wrote to Gray, "This kind of high-handed and arbitrary attitude can only create fear, mistrust and a climate of great instability. " He said the regulators' actions, as described by Mann, "would seem clearly outside the realm of acceptable regulatory behavior. . . . Some in the regulatory force seem not to understand the fundamental principle that it is government's aim and objective to save legitimate businesses, not to destroy them." Wright later said the letter was intended as an expression of concern about the Texas S&L industry as a whole, not a particular S&L, and was "a very common thing" for a congressman to send to "a bureaucrat."
This time Gray could not deliver. CreditBanc was too far gone. By the time Gray wrote back to Wright four months later, after what he called a lengthy investigation, he reported that CreditBanc was nearly insolvent because of "deep seated financial problems, most of which have surfaced since Mr. Mann acquired control of CreditBanc in July 1985" and as "a direct result of the failure of CreditBanc's management to invest in safe and sound assets." Regulators later forced Mann to resign and reported CreditBanc had a net worth of minus $216 million.
The political pressure from Texas thrift owners intensified daily. On October 21 Wright hosted a catered luncheon at the Ridglea Country Club in Fort Worth, arranged by Wright's good friend and business partner Fort Worth developer George Mallick. The purpose of the get-together was to give about 20 of Wright's S&L constituents a chance to recount directly to the majority leader the unspeakable things the Bank Board, Joe Selby, and Ed Gray were doing to their lives. Advance word of the luncheon meeting spread quickly throughout the Texas thrift community and soon Mallick was besieged with phone calls from people who wanted to attend. By the time Wright got to the country club he faced a veritable lynch mob of 110 angry Texas S&L executives and developers.
As lunch got under way each stood and told his or her own horror stories. They said that Ed Gray and Joe Selby were kicking their teeth in and forcing them to list their real estate at its true current value rather than at its projected inflated value. They complained that they were being vilified and accused of being corrupt. Local sheriffs were being used to escort deposed S&L chiefs out of their institutions right in front of the whole world. A minister who was building a nursing home complained that he was almost finished with the project but couldn't complete the building because S&L regulators had told thrifts to stop lending to him. After the meeting a Wright aide reported that Wright's office was besieged with calls from other people in the industry who had heard that Wright had expressed an interest in their problems.
A week or two after the Ridglea meeting, Wright called Gray again.
"Congressman Jim Wright's on the phone for you, Mr. Gray."
Lighting a cigarette. Gray wondered what it would be this time. He took a deep drag and punched the lighted button on the phone.
This time Wright asked Gray to meet with his friend Tom Gaubert, who owned Independent American Savings Association in Irving, between Dallas and Fort Worth, and who was also under the regulators' gun —in January 1986 the Bank Board had banned him from ever operating an FSLIC-insured thrift.
Scrappy Tom Gaubert reminded many of George C. Scott with a beard. He had a gruff voice and he smoked cigars, a Texas-type man's man, a real roll- up-the-sleeves kind of guy. Gaubert was a tough negotiator. He had been waging a war against S&L regulators since they had criticized his management of Independent American and his involvement with what appeared to be a land flip in connection with a loan from Capitol Savings and Loan in Mount Pleasant, Iowa. He had agreed to resign in December 1984. Independent American had then continued under the leadership of Gaubert's brother and others until May 1986, when the F.H.L.B.B installed a team of its own. But Gaubert went on fighting for reinstatement. 21
Gaubert told us that he believed most of the troubles he and his friends were having were because regulators had first encouraged developers to own savings and loans in the early 1980's to revitalize the industry, and then they suddenly panicked and switched gears four years later, throwing the industry into a tailspin by "re-regulating" it. Everything he had done, he said, had been approved by regulators who had encouraged him every step of the way. It was a familiar theme. Without exception, virtually every deposed thrift officer we spoke to, beginning with Erv Hansen at Centennial, claimed that deregulation was a trap, a trick, that there never had been any real deregulation of the thrift industry, and that thrifts were in trouble because they believed what regulators had first told them, only to have the rules changed later and the ground pulled out from under them. (No doubt much of that was true. In the early 1980's regulators did encourage many of the behaviors that they later forbade. ) Tom Gaubert made no secret of his hatred for thrift regulators. In his mahogany-paneled office, adorned with stuffed birds, he kept a toy shooting gallery where he had tacked pictures of regulators Ed Gray, Rosemary Stewart (who headed the Bank Board's enforcement division in Washington), and Roy Green (president of the F.H.L.B.B in Dallas).
The Wall Street Journal reported that in 1985 Gaubert had organized a political action committee for Democratic candidates that raised $101,000 from 66 Texas thrift owners, officers, borrowers, and wives. Donations came from Gaubert, Dixon, McBirney, other Vernon Savings and Sunbelt Savings officers, and Dallas developers who had borrowed hundreds of millions of dollars from the clique of Texas S&L's. The Wall Street Journal said Sunbelt Savings may have paid fees to its directors to subsidize their contributions to the fund.
Besides raising funds for his little thrift owners' defense fund, Gaubert had other fund-raising positions that gave him even more political pull. In 1986 Gaubert was treasurer of the Democratic Congressional Campaign Committee, when Representative Tony Coelho was chairman, and in his 12 months as treasurer he raised $9 million for House candidates, according to Newsweek magazine.22 In 1987 he was chairman of an event that grossed $1 million for his good friend Representative James Wright, who became speaker of the House in January 1987.
Gaubert told us, in fact, that it was he who arranged Wright's 1984 flight from Los Angeles through Dallas to Shreveport and back on the Vernon Savings jet, a flight that would make headlines a few years later and cause Wright considerable political embarrassment. Gaubert said he arranged Wright's flight on the Vernon plane because other transportation was not available on short notice. He said he had always expected Vernon Savings to bill Wright for the flight. Wright did not know at the time that he was on a Vernon plane, Gaubert added.
"Bullshit," said an FBI agent when we told him Gaubert's story.
When it came to being the queen bee of Texas thrift activists, no one could hold a candle to Tom Gaubert. And he had a real friend in Jim Wright. When Wright spoke to Ed Gray on Gaubert's behalf, Wright told Gray he had known Gaubert for a long time and had total confidence in him. Selby wanted to boot Gaubert out of Independent American Savings permanently, and Wright complained that Gaubert was being treated unfairly. Gaubert had assured Wright he had done nothing wrong. Instead, the Bank Board had violated its rules and abused its authority, Gaubert said. He ridiculed the regulators who removed the Dixon's and McBirney's and then caused even more losses when they themselves tried to run the S&Ls.23
It was highly unusual for a congressman to intervene directly in F.H.L.B.B regulatory matters, as Wright was doing, and it was against Bank Board rules for Gray to meet with anyone involved in action before the Board, but since Congress had not yet acted on the recap bill and the bill was therefore still vulnerable to Wright's displeasure. Gray agreed to meet with Gaubert and listen to his complaints. For over two hours Gaubert bent Gray's ear. According to Gray, Gaubert alternately buttered Gray up and evoked Wright's name to remind Gray who his patron was. Gaubert asked Gray to review Gaubert's removal as CEO of Independent American. Gray bit his tongue and agreed—for the recap, he told himself. Gaubert left Gray's office a happy man.24
Later Gaubert told us that he advised Wright not to pass the recap while Gray was in office. "I told the Speaker it would be stupid to give Ed Gray $15 billion. He'd just piss it away."25
Not long after Wright called Gray on behalf of Tom Gaubert, he called Gray yet again to repeat his concern for the way thrifts in Texas were being treated. He especially complained to Gray about what he considered to be Joe Selby's heavy-handed methods. He asked if Gray could get rid of the man. Gray refused. When reasoning failed him Wright turned to hardball again. He said he had heard from his people in Texas that Selby was a homosexual and that he was hiring homosexual lawyers to work for the Federal Home Loan Bank in Dallas. Again Wright wondered pointedly if Gray couldn't find someone more suitable for the job.
Gray replied, "I feel he is doing a fine job in Texas and I see no justification for firing him."
Wright had to call his friends in Texas and tell them he had been unable to dislodge Selby from his job at the F.H.L.B.B of Dallas.
Later, when we asked Wright in writing about the above incident, he replied by having his attorney write to McGraw-Hill, the publisher of this book, and deny that any such conversation took place. Wright's attorney wrote, "Mr. Wright does not and would not presume to tell the head of any agency who should be hired or fired." He wrote that Wright had no specific knowledge concerning Selby's personal life "and never would express any judgments about him without such knowledge."
The 1989 report of a congressional ethics probe of Speaker Wright, however, concluded that the conversation did indeed take place. The report noted that Selby's sexual orientation, whatever it might have been, was "completely irrelevant to his qualification for employment in the Federal Home Loan Bank System." Every credible witness who knew Selby "had only the highest praise for the man's character and ability " and none believed "the incredible rumor embraced by Wright" that Selby "had established a ring of homosexual lawyers" to do the F.H.L.B.B's supervisory work in Dallas. The report concluded that Wright's request that Gray get rid of Selby "greatly exceeded the bounds of proper congressional conduct. . . . An attempt to destroy the distinguished career of a dedicated public servant because of his rumored sexual orientation or because of a wild accusation hardly reflects creditably on the House. Such an attempt is a direct violation of House Rule XLIII."
Selby continued to be a particular target of Texas thrift owners, who viewed him as a colonial governor representing the imperialist power in Washington, Ed Gray.26 If Wright had made life hot for Ed Gray in Washington, Wright's friends in Texas turned Joe Selby's life into a living hell. Soon after Selby returned from a Washington meeting with the Bank Board, in which he had obtained approval for the closure of Jarrett Woods's Western Savings and Loan in Dallas, one of the Dallas F.H.L.B.B examiners noticed his home phone was not functioning properly. He unscrewed the mouthpiece and discovered the problem—an electronic listening device—a bug. Selby knew he had annoyed some powerful people, but not until now had he imagined how deep those waters were. Selby wasn't taking any chances. He had his office and the entire supervisory floor swept for bugs. None were found.
A few weeks later Selby received a call from a Dallas savings and loan executive whom he respected." "Joe, can we get together for lunch? I have something I think you should know, but I don't want to talk about it on the phone."
Over lunch the bank president recounted a strange occurrence.
"I was attending a thrift conference last week and walked in on a meeting full of Texas savings and loan guys from around town here. I only picked up the end of the conversation, but I can tell you they were talking about hiring somebody to kidnap you, Joe."
Selby thought for a moment. If someone had told him that story a few weeks earlier, he would have considered them nuts, but now, after the phone bug, he wasn't so sure. "Don't tell me any more. I don't want to hear about it," Selby told his friend. "I don't even want to know who was at the meeting." Selby said later he felt like he was in the cross hairs of a rifle scope.
"God, it was an electric atmosphere during those days," Selby told us. "I feared for my mental and physical health. I was afraid for my own life. There were bad guys robbing millions from S&Ls. ... I had no idea I'd run into the crooks I ran into when I got down to Dallas."
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The Last Squeezing of the Grapes
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