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
TWENTY-ONE
Round Three
After Herman Beebe's 1985 conviction he was assigned five years probation and
ordered to perform 200 hours of community service in Dallas. In early 1987 he was performing that community service at the Dallas Life Foundation, a shelter
for the homeless. He was also selling employee benefit packages out of his office
in a new North Dallas complex near the Addison Municipal Airport, and he
claimed he was making $5,000-a-month payments toward the $1 million restitution
the court had ordered. He divided his week between Dallas and his
California retreat at La Costa, hardly the life-style of a so-called ruined man.
Joe Cage's long arm soon served Beebe with a subpoena, and in February
1987 Beebe was grilled for six hours in front of the Louisiana grand jury that was still investigating his affairs. Shortly thereafter he agreed to an interview with Shreveport reporter Linda Farrar, who had covered his 1984 indictment
and trial. She traveled to Dallas for the interview.
This second grand jury, he said, was also going to indict him. "I asked them
[the jury], 'Just what do you want from me? I need to pay the people I owe . . just what are you seeking? I'm not a liar. If I did something, if you'll ask me,
I'll tell you.'
"
He said to Farrar, "If you give me the money that's been spent on [investigating]
me, I can put you, your mother. President Reagan, and everybody else
in jail."
With a rueful smile he denied again the old allegations of Mafia ties and
casino skimming: "... try to find where I've ever been in the Mafia, where I've been in drugs, where We done anything unethical in business. If I really had,
after ten years, somebody would find something really highly criminal.
"Given a little time to be left alone, I can pay off my debt because I'm smart enough to do that. ... I need the government to leave me alone so I can put
my life back together. I'm a good businessman, I work hard, and I'm smart enough. If they'll leave me alone, I'll he right back on top after two or three
years."
That was exactly what worried Joe Cage, exactly what drove him in his dogged pursuit. The second Beebe grand jury had been in session almost two
years, meeting week after week, examining mountains of tedious evidence. And
then Cage got a real break. Late one winter evening, a Friday night after work.
Cage was sitting on the floor in his office studying documents and he came
upon a smoking gun that would become known as the Bussell notes. Beebe had
been claiming that he was just another victim of the scam Cage was investigating,
but these notes, written by his associate David Bussell,1 appeared to prove otherwise.
The notes consisted of a list of figures with dates and notations like "we
owe half of this because we own one-half of the farm," and Cage believed they
proved Beebe had been a full partner in the deal. '"They were handwritten notes
of a defendant, an admission of what we were trying to prove," Cage told us
later. He could hardly believe his eyes.
In the spring of 1987 Cage's grand jury indicted Beebe and charged him
with fraud involving $30 million in loans from over 16 financial institutions
spread from Colorado to New Orleans.2 The loans had been made in 1983 and
1984—during the very time the grand jury had been investigating Beebe the
first time—to Richard Wolfe, who was also indicted. (Charges against Wolfe
were later dismissed.) The indictment charged that Beebe arranged for Wolfe to
get loans from institutions where Beebe had "influence " (including Continental,
Ponchartrain, Vernon, Key, and State/Lubbock savings and loans) without the
loan papers reflecting that Beebe got a lot of the money. And this time Cage
didn't mince words. The charge, he said, was bank robbery.
Beebe later explained that Ben Barnes had introduced him to Richard Wolfe
10 or 12 years earlier, and a few years later he had run into Wolfe again at Vernon Savings. They decided to do some business together.3 Richard Wolfe
and his Dallas attorney, David Wise, were hip-deep in Beebe's bank network. Wise himself chartered at least five banks that the comptroller's report identified
as Beebe banks.
One of the companies named in the 1987 indictment against Beebe and
Wolfe was League, Inc. We thought there was something familiar about that name. We checked with Cage and, sure enough, at one time a Southern California
developer, G. Wayne Reeder, had discussed becoming a partner in League, Inc. We looked in our files and found a League, Inc., document with
Reeder's signature on it, right next to Beebe's. In fact, said Beebe's former right hand
man Dale Anderson, Beebe and Reeder had tried to do several deals
together. "Herman must have run into Reeder while staying down at La Costa,"
Anderson said. (Both men had homes at La Costa.) We had run into Reeder
often ourselves, beginning months earlier during our investigation of San Marino
Savings in San Marino, California. (San Marino, one of the first thrifts where we ran into Mario Renda, failed in late 1984.) Reeder was a multimillionaire
said to have holdings in 16 states, and the Justice Department confirmed that by mid-1989 he was under FBI investigation in Tennessee, Rhode Island, Arizona,
Texas, California, and Florida in connection with a number of his business deals in those states (no charges had been filed as of this writing). Once
again a trail we had been following had unexpectedly wound up at Beebe's door.4
The walls were closing in on Beebe and his small legion of surrogates. The
FSLIC filed a civil suit in June (Beebe was mentioned but not sued) and claimed
that in 1982 and 1983 State/Lubbock had loaned $4.5 million to Fred Bayles
and others who were straw men for Beebe. Beebe, they said, had actually gotten the money. The comptroller of the currency report listed Fred Bayles as a key
member of Beebe's banking consortium. He had bought stock in several banks
with Beebe's help, including stock in a bank where Judge Reggie was a director. When Beebe needed it Bayles would have his own institution place deposits at Beebe-controlled banks at a very low interest rate. And then when Bayles got
into financial trouble, records showed, AMI absorbed his banks. When asked about his business Bayles replied, "What we are is, we're in the borrowing
business. " In 1985 Bayles pleaded guilty to bank fraud in Mississippi, and in 1988 he was convicted of bank fraud in New Jersey.
"That old boy," said one acquaintance about Bayles, "could sell the Brooklyn Bridge. He was going to court to get sentenced to five years (for the Mississippi bank fraud), and he spent 20 minutes with the judge and
the judge gave him five years probation." He got one year for the New Jersey conviction.
Bayles interested us because we had run across him earlier at North Mississippi
Savings and Loan in Oxford, Mississippi, where he was a big borrower. Some law-enforcement officials wondered out loud to us if he had fronted for Beebe there too. The man who owned the S&L, a Dr. Joseph Villard, claimed
he had been Beebe's physician when Beebe lived in Alexandria, Louisiana,
before he moved to Shreveport. When we talked to Villard he mentioned that San Antonio loan broker John Lapaglia was his friend. In fact, he said, "John
might be a second or third cousin to me, just by accident.'"" (In January 1984
North Mississippi's president and owner were indicted for several counts of wire and bank fraud. They pleaded guilty to some of the counts.)
We had originally taken a look at North Mississippi not because Beebe had
ties there (in fact, when we first looked at North Mississippi, we had never heard
of Herman Beebe) but because Mario Renda's First United Fund was involved
in "special deals" there. Now we learned that both Renda and Beebe, or their
associates, were working deals out of North Mississippi Savings. Apparently when word traveled the thrift grapevine that an S&L was willing to deal, both Renda
and Beebe quickly got the news. An FBI agent investigating thrift failures in the Sunbelt area said it reminded
him of the Depression days when hobos would paint a large "X" on the sides
of a barn to tip other hobos that the barn was a friendly spot to curl up for the
night. Hundreds of S&Ls must have had big X's scrawled on their backsides.
Beebe continued to try to do business out of his office in North Dallas, but
the grand jury indictment in the spring of 1987 and the FSLIC lawsuit filed soon thereafter made it more and more difficult for him to maneuver. And
behind it all, in Beebe's mind, was Joe Cage. Cage was ruining him. He was
dragging him down. Cage was like a mad dog who wouldn't let go of Beebe's
leg. Something had to be done. Beebe decided to hire Gerry Spence.
Spence was a famous millionaire cowboy attorney from Jackson Hole, Wyoming.
He had gotten national recognition in 1979 by winning a $10.5 million
settlement against the Kerr-McGee Corporation in the Karen Silkwood plutonium-contamination
suit. In 1981 he got a huge judgment against Penthouse
magazine for allegedly libeling Miss Wyoming in a cartoon. He was credited
with having mastered a courtroom style that went from the easy manner of a
front-porch philosopher to what Esquire magazine described as the "fevered pitch
of the country preacher in the grip of divine inspiration." Spence said he viewed
the courtroom as a place of "blood and death," and in 30 years as a lawyer, he
claimed to have seldom lost a case. Beebe decided to hire Spence to represent
him in his third round with Cage.
Spence agreed to take Cage on and came out swinging. He filed an 80-page
motion with the Louisiana court in the summer of 1987 requesting that Cage be
disqualified from prosecuting Beebe's case. In his motion he charged Cage with
"prejudicial and vindictive misconduct." He accused Cage of having conducted a
personal vendetta against Beebe. He said the whole witch-hunt was politically
motivated, that Cage was trying to make a name for himself at Beebe's expense,
that Cage showed no sense of justice, fair play, or decency. He told the judge that Cage had harassed Beebe's business associates and had offered Beebe freedom if Beebe would "give to Cage the governor and Judge Reggie." Judge Stagg, who
had presided over the first two Beebe trials, agreed to hear the motion and for six and a half days Spence raked Cage over the coals before the judge.
Spence was in rare form. A massive man, six feet two and more than 200
pounds, he wore a brown suit and cowboy boots and carried a Stetson into the courtroom on the opening day of the hearing. He had long gray hair that was
swept back on the sides in ducktails and hung down over his collar. He stalked
the courtroom, hands in his pockets, at times leaning back on his heels, clutching his glasses in his teeth, his demeanor rich with histrionics. Spence called Cage
to the witness stand and kept him there over two days.
"Isn't it true that one of the overriding compulsions of your life has been the prosecution of Mr. Beebe?" Spence demanded.
"No, sir," Cage replied.
"Would you grant me that it has been the most important case of your career?" Spence asked.
"Yes, sir, that's true," Cage answered.
"In all the Beebe cases, wouldn't you take all the witnesses that Beebe could use to defend himself and threaten them with prosecution?"
"No, that hasn't been my tactic."
Cage kept his cool. Sometimes he appeared amused, sometimes irritated. But he was polite to the bitter end, answering questions with "Yes, sir," and "No, sir" while steadfastly maintaining that his investigation and prosecution of Beebe had been completely fair.
Spence, on the other hand, couldn't seem to think of an analogy too venal for Cage. He accused him of criminal acts, of conspiring with another attorney to set Beebe up. In one two-hour diatribe Spence began by referring to the "blessed liberty" of constitutional rights and the dangers in abuse of prosecutorial power.
"A prosecutor has the power to destroy human beings," he said. "Like mold on an otherwise scrumptious pie, it has to be removed."
He referred to Cage's behavior as "repulsive" and "patently silly." Cage's occasional "I don't remember" he characterized as "a lie that can't be proven."
He equated Cage and a former Beebe defense attorney who was a friend of Cage's as "twin black holes in space. These people should be called the Euripides twins." As with black holes, "information was sucked in and nobody heard or saw anything after." They were, he said, a "double-headed monster." Beebe, he said, "was hog-dressed. The last hair was scraped off his naked hide" by Cage and his team.
"Isn't it true that one of the overriding compulsions of your life has been the prosecution of Mr. Beebe?" Spence demanded.
"No, sir," Cage replied.
"Would you grant me that it has been the most important case of your career?" Spence asked.
"Yes, sir, that's true," Cage answered.
"In all the Beebe cases, wouldn't you take all the witnesses that Beebe could use to defend himself and threaten them with prosecution?"
"No, that hasn't been my tactic."
Cage kept his cool. Sometimes he appeared amused, sometimes irritated. But he was polite to the bitter end, answering questions with "Yes, sir," and "No, sir" while steadfastly maintaining that his investigation and prosecution of Beebe had been completely fair.
Spence, on the other hand, couldn't seem to think of an analogy too venal for Cage. He accused him of criminal acts, of conspiring with another attorney to set Beebe up. In one two-hour diatribe Spence began by referring to the "blessed liberty" of constitutional rights and the dangers in abuse of prosecutorial power.
"A prosecutor has the power to destroy human beings," he said. "Like mold on an otherwise scrumptious pie, it has to be removed."
He referred to Cage's behavior as "repulsive" and "patently silly." Cage's occasional "I don't remember" he characterized as "a lie that can't be proven."
He equated Cage and a former Beebe defense attorney who was a friend of Cage's as "twin black holes in space. These people should be called the Euripides twins." As with black holes, "information was sucked in and nobody heard or saw anything after." They were, he said, a "double-headed monster." Beebe, he said, "was hog-dressed. The last hair was scraped off his naked hide" by Cage and his team.
Spence's attack sounded so vile that shocked courtroom spectators turned to whisper to each other. Several times Judge Tom Stagg admonished Spence,
sometimes calling him to the podium for consultation. At one point during a
particularly thunderous oration by Spence, Stagg pointedly commented that poor hearing wasn't one of his problems.
Spence's charges were more than empty rhetoric or courtroom drama. If the judge had ruled in his favor, there could have been serious career repercussions
for Cage. When Spence finally ran out of steam. Cage was livid and began work on a written response to Spence's allegations, which he filed with the court. "The charge that my professional life has focused on the goal of toppling
the Beebe empire is completely ridiculous. I am accused of questioning almost every person who has ever conducted business or been associated with Mr. Beebe.
Then I'm accused of failure to seek out material evidence favorable to Mr. Beebe
that was readily available to me. If the questioning of almost every person Mr.
Beebe has dealt with would not reveal anything favorable to Mr. Beebe, what
would? . . . If the investigation and resulting 19-count indictment is considered
'Beebe-hunting,' then so be it."
After taking under consideration Spence's motion to remove Cage from the case. Judge Stagg ruled that Cage's investigations had been fairly done and the case could proceed.
"We have excellent lawyers here," he said. "Both sides are intractable in their belief they are right."
The adversaries met again in the courtroom in the fall of 1987—Spence for the defense, Cage for the prosecution. The trial was again being held in Lafayette, 200 miles south of Shreveport, so Cage and his team were staying in a motel near the Lafayette courthouse. This time Cage knew he had Beebe nailed. Along with all the other documentation and evidence he had amassed, he had the Bussell notes, which were an admission of guilt in the handwriting of one of Beebe's close associates.
The trial proceeded as Cage had expected until the day before the case was to go to the jury. In a surprise move Judge Stagg decided in favor of a defense motion that Cage not be allowed to refer to the Bussell notes in his closing arguments. Cage was devastated. The Bussell notes were the key to his case. He had intended to hammer them home to the jury the next day iii his closing arguments. In a moment of frustration he told a Texas reporter that "the judge has sabotaged my case."
The next morning Cage did not show up in the courtroom. His assistant appeared to handle the case. Word spread quickly that Cage had disappeared. Rumors ran wild. Where was he? What had happened? After all these years, the thousands of hours, where was he?
The jury deliberated two days and on the third day sent word that they were unable to reach a verdict. Judge Stagg declared a mistrial. Cage, who had been monitoring the progress of the trial from the motel, saw years of work slip away into nothingness. He couldn't understand why Judge Stagg had made the ruling about the Bussell notes. But he knew why he had refused to go back into the courtroom. It was a matter of principle with him. Even though he knew Judge Stagg would hold him in contempt of court and could even put him in jail, even though he knew he could very well be fired, the Beebe case was too important not to register his protest in the strongest possible manner. He and Blount believed they knew the extent to which Beebe's scams threatened the financial fabric of Louisiana and surrounding states. They also believed they knew how deep within the political power structure Beebe's influence ran. They had successfully prosecuted Becbc once, and they wanted a second felony conviction to make sure he wouldn't be able to worm his way back into action. They had put everything they had into a thorough prosecution of the case.
A sober prosecution team headed back to Shreveport. Judge Stagg found Cage in contempt of court and a panel of judges reprimanded Cage for abandoning the Beebe case to his assistant. But they could have done much worse, and Cage believed their comparatively gentle treatment of him also sent a message to Stagg, who removed himself from further involvement in the case. The ball was once again in Cage's court. Should he go for a retrial? Plenty of people told him he should drop the case, but he decided to go for it. One more time. You could have almost heard Beebe's sigh of despair. Stagg was gone and Cage was back.
Beebe's fourth trial was set for May 31, 1988. But this time Cage had company. The U.S. attorney in Texas had indicted Beebe on charges stemming from Cage's investigation, including a $4.4 million loan Beebe had gotten from State Savings/Lubbock. The one-two punch was too much for Beebe. And with Judge Stagg out of the case, who knew what the new judge would be like?
In March, Beebe told the Shreveport Times he'd done nothing wrong and "this is a bunch of bull." But on April 29 he threw in the towel and cut a deal. ... He agreed to plead guilty to two counts of bank fraud and he agreed to cooperate with the ongoing criminal investigations into fraud at banks and S&L's in Texas and Louisiana. In return the government agreed not to prosecute him for any other fraud then under investigation in northern Texas (which excluded large parts of Texas) or western Louisiana. Beebe's lawyer said Beebe pleaded guilty because he was out of money and wanted to put six years of litigation and harassment behind him.
At his sentencing, before a Louisiana judge, Beebe sat in silence while the three lawyers representing him—former Louisiana Governor David Treen, for- mer Shreveport II. S. Attorney J. Ransdell Keene, and Jim Adams—argued vigorously that Beebe should not have to serve any time in prison. Cage was also mysteriously silent, not challenging Beebe's attorney and not demanding that Beebe do some time. As a result U.S. District Judge John M. Shaw, who could have sentenced Beebe to ten years in prison, gave him instead only a year and a day. Later Shaw said Cage had not asked for any jail time for Beebe, but "I just felt he had to see the inside of a jail. "
When word got out that Beebe would spend, at the most, a year in prison. Cage was widely criticized for devoting so much time to the Beebe pursuit and then not fighting for a stiffer sentence. In response Cage .said Beebe had agreed in the plea bargain to give "complete, truthful, and accurate information and testimony," and Cage expected him to cooperate in the prosecution of other bank frauds that he hoped would land bigger fish. If he didn't. Cage said he and the Texas prosecutor could drop the plea bargain and prosecute Beebe.Besides, Beebe now had three felony convictions (the 1985 conviction and the two included in the 1987 plea bargain) and that ought to be sufficient to keep him out of the banking business.
Bigger fish? What bigger fish? Bigger than Beebe? Carlos Marcello was already in prison. Who was left that was bigger than Beebe?
Cage had turned his sights on Judge Edmund Reggie. He had begun to dig into financial transactions at Judge Reggie's Acadia Savings and Loan in Crowley, Louisiana. Though Cage would not discuss his investigation, which was still in progress when we went to press, the FSLIC filed a civil suit in Augu.st 1988 against Reggie and other officers and directors of the thrift (citing 20 loan transactions, involving over $40 million, that regulators alleged caused the collapse of Acadia in August 1987) and in that suit we could see the direction Cage's case might be taking.[So the Judge ended up getting busted and basically got the old slap of the wrist.Seeing this happen to his dad,one of the apples has proven the old adage about not falling far from the tree here DC]
https://www.nola.com/crime/index.ssf/2015/06/raymond_reggie_given_11-year_p.html
Between 1982 and 1986 Acadia Savings had, according to regulators, made several loans that benefited Beebe and Judge Reggie. (Our favorite was the loan that went to bail Reggie family members out of the Daddy's Money Condominiums.) But even more interesting, regulators said that in June 1985 the Acadia Savings board had loaned Gilbert Beall (of Texas and Florida) and Frederick Mascolo (of Connecticut) each $2.95 million. The collateral for the loans was 106 acres in an area in the Pennsylvania Poconos where gambling was under consideration.
The Poconos property rang a bell with us, and we located it in our Aurora Bank file. Documents in our file showed that Beall and Mascolo had acquired the property from Anthony Delvecchio and Jilly Rizzo, whom we had met at Flushing Federal working with mob stockbroker Mike Rapp. Aurora Bank in Denver had been busted out in 1984 and 1985 by John Napoli, Jr.'s racketeering scheme. The FDIC sued Rizzo and Delvecchio (and others) in the case, alleging that Rizzo and Delvecchio tried to hide their Aurora Bank take from the FDIC by laundering it through the Poconos property. When Rizzo and Delvecchio sold the property to Beall and Mascolo, regulators in Colorado and Pennsylvania filed lawsuits claiming that the sale was a sham attempt to keep the FDIC from confiscating the 106 acres.
Even more troubling to Cage, however, was what Beall and Mascolo allegedly did with the $2.95 million they each borrowed—and never repaid—from Acadia Savings. Regulators alleged they spent only about $700,000 on the Poconos property. The rest, they said, was divided up:
Beall and Mascolo allegedly bought $2 million worth of stock in Louisiana Bank & Trust of Crowley, where Reggie was also a stockholder and was chairman of the board. The bank was about to collapse, regulators said, and they saw this move as a way for Reggie to recapitalize his troubled bank.
They loaned another $490,000 of the money to a Reggie partnership, which secured the loan with an IOU from Beebe's AMI, the FSLIC alleged.
And they bought $1 million worth of stock in a company controlled by themselves in partnership with Mike Rapp's associate Lionel J. Reifler, who was also said to be involved in the plans to develop gambling on the Poconos property. Reportedly they also paid Reifler another $500,000 that Mascolo owed him.
Regulators alleged that Acadia Savings had made another such loan. In May 1985 Acadia loaned $1.8 million to a company to buy 154 St. Tropez tanning beds, but they said much of the money really went to Reifler, Mascolo. and Beall. When regulators tried to file a claim with the company that bonded the loan, it turned out to be an offshore company in the Grand Cayman Islands and it didn't have enough money to pay the claim.
Cage had been untangling these relationships at the very time that Beebe's high-powered attorney, Gerry Spence, had attacked him personally in open court and asked the judge to remove Cage from the Beebe case. At that time Cage had retired from the field of battle and prepared a blistering written rebuttal that not only attacked Beebe but laid out Beebe's relationship with Reggie in damning detail. We obtained a copy of the extraordinary' affidavit, which Cage had filed with the court.
In the affidavit Cage tore into Beebe, Governor Edwards, Judge Reggie and their relationship to each other. He was worried, he said, about their plans to bring casino gambling to Louisiana and he was worried about what he called "the Reggie connection with organized crime, Mafia, or La Cosa Nostra figures."
Cage told in his affidavit about the Acadia Savings loans that he said indirectly benefited Reifler. He said that Reggie's Louisiana Bank & Trust of Crowley in 1985 had made $1.5 million in loans (secured by worthless annuities) that "benefited Reifler and Reggie." He quoted the Woodie Guthrie line—which was the source for the title of Jonathan Kwitny's book. The Fountain Pen Conspiracy—to point out that Reifler appeared in Kwitny's book- as an associate of Edward Wuensche, one of the nation's leading dealers in stolen securities who worked with Reifler at the same time that he (Wuensche) was deeply involved with the New Jersey mob.
In his affidavit Cage pleaded with the court to understand that he was not some obsessed prosecutor:
"My motivation was and is not political but one of grave concern for the stability of the financial institutions in the Western District of Louisiana. The appearance of organized crime in the Western District of Louisiana, likewise, causes me a great deal of concern. The indicia of organized crime is truly frightening and worthy of the most relentless pursuits by those in law enforcement."
The Cage affidavit infuriated judge Reggie. He told coauthor Mary Fricker that he believed Cage was pursuing him for political reasons (Cage was a Republican appointee). "The Cage affidavit is absolutely a lie. That affidavit did more to damage me than anything in my lifetime. ... He [Cage] has made me a target of his investigation for nearly seven years. ... If he thought I had connections with the Mafia, where was his evidence?" Reggie said he met Reifler through Beall, who had been an attorney with Fulbright and Jaworski in Houston. All of the Beall loans were approved in advance by state regulators, he said, and, anyway, by that time he was no longer active in the thrift's affairs.
In regard to the FSLIC civil suit, Reggie told us he had never benefited improperly from any of the S&L's transactions. "I never drew a single expense account. I never charged them a nickle. Never charged them a legal fee. Because we loved the savings and loan. I bet not another law firm in America can say that. That's why my feelings are just crushed. . . . I loved Acadia Savings and Loan."
"Yeah, he loved it to death," one Reggie critic quipped.
Cage agreed. In May 1989 the grand jury indicted Reggie for bank fraud. A week earlier Beall and Reifler had pleaded guilty to violating banking laws and were said to be cooperating with Cage's investigation. Just five months earlier the SEC had charged the two men with fraud in connection with a Boca Raton, Florida, penny stock scam. Both the Acadia Savings and the SEC cases were pending as of this writing. Whatever the outcome, Acadia Savings had clearly been victimized by the hit-and-run gang of swindlers we knew very well.
In July 1988 Herman Beebe finally went to prison, courtesy of Cage and Blount. But his sentence was only one year and a day. We well remembered his words to reporter Linda Farrar, "I'll be right back on top after two or three years," and we didn't doubt it for a minute. Beebe had opened a window for us into the world of banking as it was done "down home" in Texas and Louisiana. The mob was active there, but in addition there was a good-ole-boy "mob" that had been fleecing financial institutions as a matter of birthright for generations. A group of Arkansas-Louisiana-Texas businessmen with the most powerful political connections had been using financial institutions for their own purposes for years. Fiduciary duty meant little to them. They ran their banks the same way they would have run their cattle ranches. They walked the thinnest possible line between legal and illegal, and some of them regularly crossed that line.[If you do some looking into this,you will find Slick Willy in the shadows in Arkansas along with the Bush clan big time DC]
The occasional attempts to blow the whistle on the ring went nowhere. Regulators, prosecutors, and reporters came and went, but the Southern power structure remained.
The wholesale looting that occurred in the thrift industry in Texas and Louisiana (and later spread to surrounding states) in the 1980s would not have been possible in an environment that unambiguously condemned such behavior. Texas and Louisiana, in particular, lacked such an ethic. In fact, when it came to changing management at a bank or thrift, the attitude was perhaps best characterized by what a voter said when Edwin Edwards was finally defeated as governor. Asked if he felt the new governor and his people might be more honest, he replied, "No, it's just turning the fat hogs out and letting the lean hogs in." So it was with Texas and Louisiana banks and thrifts. The U.S. taxpayer will pay a high price for that erosion of ethical business standards—an erosion facilitated and exacerbated by deregulation of the thrift industry, which sent the wrong message to the wrong people.
Ed Gray could not have been prepared for this fire storm. No FHLBB chairman in the entire 50-year history of the post had been faced with the kind of crisis Gray faced. The job had always been an easy one, with clearly defined responsibilities, chief among them being to do the thrift industry's bidding. The chairman was expected to serve out his relatively low-paying post ($79,000 a year), after which he would be rewarded with a well-paying thrift industry position. But these were not ordinary times. The seeds of the thrift crisis had been planted nearly three years before Gray arrived, but it was Ed Gray who faced the bitter harvest.
Texas thrifts had reacted most violently to Gray's restrictive regulations. A "get Gray" movement began to take form in Texas, spearheaded by Texas thrift lobbyist Durward Curlee and loan broker and Republican activist John Lapaglia. Lapaglia, whom we had originally encountered brokering loans for Norman B. Jenson and Philip Schwab, owned Falcon Financial in San Antonio. He fired the opening salvo with a full-page ad attacking Gray's new regulations. ' The ad was entitled "An Open Letter to the Congress of the United States. " It ran in the Dallas Morning News during the Republican National Convention in August 1984. Lapaglia followed up by stalking the halls of the convention handing out copies of his weekly newsletter. Falcon Newsletter, to attendees. The newsletter became a weekly denunciation of Ed Gray and his policies. Lapaglia told us he mailed the letter to 380 Southwestern thrift executives.
In September Lapaglia shot off a letter to President Reagan. He complained bitterly that Ed Gray's policies were strangling the Texas thrift industry, which had been doing just fine before Gray began to interfere. He begged the president to do something about Gray. But he also knew an election approached, and he let the president know that if Reagan didn't fire Gray right away, he would understand:
We are very mindful of our obligations to not raise sensitive issues until November; accordingly, I shall personally take no action that would not be beneficial to the Administration. After that time I expect to lead an industrywide effort, which at this moment consists of fifty-five savings institutions, in bringing a class-action suit against Chairman Edwin J. Gray and the FHLBB. [These crooks just as today,will use every possible threat to put off judgment day.Without a doubt it is this over a century long white collar crime spree that has America with her back to a crumbling wall here in 2018.Some of the founders of this country are rolling over in their graves DC]
Lapaglia kept his word and waited until after the November elections before acting. Then in December, he told us, he organized a trip to Washington D.C. He was accompanied by thrift attorney Robert Posen, John Mmahat, who was CEO of Gulf Federal Savings of Louisiana, and singer Wayne Newton, whom Lapaglia said was "having some problems with millions in loans he had on a resort in the Poconos." Also attending the Washington meeting were Texas thrift lobbyist Durward Curlee and Frank Fahrenkopf, Jr., chairman of the Republican National Committee. They met with Danny Wall in the offices of the Senate Banking Committee, which was chaired by Senator Jake Garn. Wall was Garn's chief administrative aide. (In 1987 Wall would succeed Ed Gray as chairman of the FHLBB.) Posen, who led the meeting, protested to Wall that Gray's new policies were too extreme and they would strangle the industry. Wall listened but did not respond.
Suddenly the secretary stuck her head in the room. "Mr. Newton, the First Lady is on the phone for you." (Newton was a close friend of the Reagans.)
Newton left the room to take Nancy Reagan's call. When he returned the meeting resumed. A few minutes later the secretary knocked. "Mr. Newton, the phone again. It's the president."
Newton left the room again, returning a few minutes later to summon Fahrenkopf. "The president wants to talk to you now, Frank, " he told Fahrenkopf.
When Fahrenkopf returned from talking to the president, he called the meeting to a close, telling the others that he would look into the matter. According to Lapaglia, President Reagan had asked Fahrenkopf to rein in FHLBB chairman Ed Gray. Mmahat later described the meeting in a manuscript he commissioned entitled "To Kill An Eagle." He summed up the outcome of the meeting: "It later became clear that Gray's friend, supporter and sponsor, Attorney General Edwin Meese, prevailed over any influence that Wayne Newton and the Chairman of the Republican National Committee had with the President of the United States. As a result of that support, Edward Gray continued on his course of conduct which, it is now clear, aggravated the present crisis."
Like so many who vilified Gray, Mmahat exaggerated Gray's involvement in day-to-day details. As extraordinary as this meeting and conversations with the president were. Gray later told us he was unaware the meeting even occurred and denied Fahrenkopf ever put any pressure on him about FHLBB policies in Texas. Fahrenkopf himself characterized the above account of the meeting as "pure fiction." Gray did tell us, though, that at about that time he began giving Fahrenkopf regular briefings on his actions in Texas because he felt that Fahrenkopf had the president's ear.
"I'd been told by a high White House staffer to stay away from the White House," Gray told us. "He told me that if I made an appointment with the president, Don Regan would bad-mouth me before I got there, sit in on the meeting, and bad-mouth me after I left." So, Gray said, he hoped he could get his messages to Reagan through Fahrenkopf
The appearance of Frank Fahrenkopf at that meeting was puzzling. What stake could the Republican National Committee have in all this? Maybe Fahrenkopf was responding to Lapaglia's warning that Gray's actions could cost the party the support of the thrift industry. But we learned that he also may have had a business relationship to protect. According to the Colorado Springs Gazette Telegraph, Fahrenkopf and Newton—for whom Fahrenkopf sometimes per- formed legal services' —were at that time involved in a complex transaction with the holding company of United Savings Bank (a thrift) in Wyoming. Fahrenkopf was borrowing $100,000 and Newton $200,000 to invest in an RV park in Bullhead City, Arizona, not far from Las Vegas. The RV investment was being orchestrated by a Las Vegas loan broker, John Keilly, who had shown up in our Centennial investigation—he had introduced Norman Jenson to Sid Shah. (In the 1970s Keilly did 27 months in prison for bribery in connection with a $1.25 million loan from a Teamsters Union pension fund, according to published reports.) Another investor in the Bullhead City RV park was John Pilkington, described to us by a Nevada Gaming Control Board investigator as a longtime associate of Morris Shenker.
So Newton had at least two reasons to support thrift deregulation: one in the Poconos and one with partner Fahrenkopf in Bullhead City, and Farrenkopf may also have had his own investments in mind at the Washington meeting with Wall.
Gray's regulation limiting direct investments and growth had finally taken effect in mid-March 1985 and a lot of thrifts did not measure up. Centennial Savings, Vernon Savings, Flushing Federal—the list ran into the hundreds. The U.S. League had opposed the new regulation fiercely before it was adopted by the Bank Board, but they suddenly changed sides when they saw Gray had Senator William Proxmire, the powerful Senate Banking Committee chairman, on his side. Also, the growing number of thrift failures had begun to scare the League. It was becoming clear that accommodating the bad-boy S&Ls was eventually going to cost the other thrifts billions. In fact, they realized, if the carnage were really severe, it could lead to public pressure to re-regulate the entire industry.
But in Congress the old adage that money was the mother's milk of politics held true. Following deregulation the thrifts became the cows, and there were certain congressmen who never missed a milking. Go-go thrift operators had plenty of money, and they were sharing it with their friends in Washington. We'd already seen that Congressman Tony Coelho (D-Calif. ) had nuzzled right up to Don Dixon at Vernon; Congressman Doug Bosco (D-Calif. ) had Erv Hansen at Centennial; and Speaker Jim Wright (D-Tx. ) had Tom Gaubert at Independent American in Dallas. Now we learned that Charles Keating, Jr., his employees, business associates, friends, and family had donated $220,000 to Arizona politicians, $85,000 to California worthies, $34,000 to Ohioans, and more—$440,000 in all.
While Keating and his associates were giving politicians money, Ed Gray was giving them only headaches. No sooner had Gray's direct investment regulation gone into effect than 220 members of the House of Representatives had signed a resolution asking the Bank Board to delay the implementation of the new rule. Congressional hearings were scheduled for late March 1985:
Representative Frank Annunzio (D-lll.) looked down the long table at Gray,U.S. League President Bill O'Connell, and others who had come to testify in favor of the direct investment regulation.[Illinois,New York,Texas,Florida,California,
"We ask that the agency postpone the effective date of this rule," Annunzio boomed.
"That's impossible, Congressman," Gray said he replied. "It's been in effect since March 18."
Annunzio countered, "The Bank Board is acting too hurriedly in putting the regulation into existence. It could well be the beginning of the end to the dual banking system in this country."
Gray reminded the congressman, "It's the FSLIC, not the states, that has to pick up the tab for thrift failures, Congressman."
Annunzio was unswayed and again demanded that Gray delay applying the new regulation.
"Mr. Annunzio"—Gray bristled —"if it is rescinded or postponed, losses . . . will fall squarely on the shoulders of the Congress itself We cannot delay implementation."
Gray said Annunzio flushed with anger, took a deep breath, glared down the table, and then stormed out of the hearing room in protest. With Annunzio gone, Representative St Germain, chairman of the House Banking Committee, finally came to Gray's aid. He said he agreed with the Bank Board's new regulation, adding, at long last, that he had little sympathy for thrifts that asked for concessions.
"They can just go jump in a lake," St Germain said as he gaveled the hearing to a close.
Everyone knew the fight couldn't be over. There were too many shaky thrifts across the country that would not be able to survive under Gray's new rules. If they had to dispose of some of their direct investments, which they were carrying on their books at inflated prices, their houses of cards would tumble because they would have to take large losses. Still, the regulation went into effect and FHLBB examiners across the country began measuring thrifts by the new yardstick. Then Gray had to turn his attention to another old problem. There weren't enough examiners. Gray needed more eyes and ears in the field if he was to enforce his new regulation. He had 3,200 thrifts (handling a trillion dollars in deposits) but his examination staff numbered only 679. That was about one examiner for every four and a half thrifts. Some institutions had gone over two years without an examination. Gray figured he needed to double his examination staff, at least, if he was to effectively enforce his new regulation—or any of the old ones for that matter.
Gray picked up the phone and called Dave Stockman at the Office of Management and Budget. Stockman held the purse strings and would have to approve any increase in staff at the Bank Board. But Stockman had no interest in helping Gray, who a year earlier had humiliated him by shooting the FCA job out from under him, and Gray had to meet with his assistant, Connie Horner. Horner said she was a busy person, but she said she could squeeze him in over lunch at the White House.
As Gray walked through the iron gates of the White House on the way to the executive lunchroom, he reflected that the root of the thrift problem was the "high fliers," as he liked to call them—the wild and crazy guys like Dixon, McBirney, and Hansen. Gray had made his high-fliers speech many times, and that day he planned to tell Horner again that high fliers were using brokered money to engage in risky and complicated investments, many of them fraudulent. To stop the abuses he needed more examiners to ferret the con men out of the system. Gray had butted heads with Horner over staffing before, but he was sure this time she'd see the wisdom of his case.
As they settled in for lunch at the White House senior mess, an oak-paneled dining room where only the cabinet and senior aides to the president were allowed to dine. Gray laid his cards on the table. He wanted to double the examination staff to 1,400. What's more, with a turnover rate exceeding 30 percent, he needed to raise examiners' base pay from an average of $14,000 a year to a level more competitive with private industry examiners. Gray said Homer ate and let Gray talk. She had been through all this with him before. Like the Dickens character in Oliver Twist, Horner always responded the same way to Gray's requests for additional staff: "You want more examiners?? "
She told him it wasn't a matter of money but of philosophy. The administration's philosophy was one of deregulation. That meant fewer regulators, not more. As Gray listened to her recite the administration mantra, he reflected on her own bloated staff. Each time Horner trooped over to his office for a meeting she dragged with her a staff of eight. They filed in behind her like baby quail behind their mother. He could never understand why she brought them along, since they never seemed to do or say anything.
Gray looked around the lunchroom while Horner lectured, noticing how much the senior mess resembled the interior of a ship. Horner speculated out loud that maybe, just maybe, she could swing 30 more examiners for him if Gray would be more cooperative and get back into step with the administration. Gray said Horner also issued a thinly veiled warning, reminding Gray of his expense account troubles. She even suggested he could go to jail if his overages proved to be a violation of something called the "Anti-Deficiency Act," which mandated how much the Bank Board could spend. Gray was already over that amount, she claimed, way over it. Gray said there must be some mistake and he'd clear it up. (A few months later it was discovered that an OMB accountant had "misplaced" a decimal point and Gray was, in fact, within his budget.) But the message Horner sent was clear: The administration could play hardball with one of its own if that person strayed too far off the reservation.
Gray, however, had a card up his own sleeve. His months of being knocked around by Washington pros had taught him that he wasn't going to make any friends in this job anyway and hardball was the only way to play the game if you wanted to win.
"Okay, Connie." Gray said when she finished her speech. "Then I'm transferring the examiners to the district banks."
Horner was stunned. What Gray was proposing to do was to transfer responsibility for all future thrift examinations and supervision from Washington to the 12 district banks across the country. The district banks, although answerable to the Bank Board in Washington, were independent entities, owned and operated by the thrifts within their district. The FHLBB had oversight over the 12 district banks, but the OMB did not. hi making such a transfer Gray would remove any authority OMB had over the number of examiners the FHLBB had or how much they were paid.
"You mean you're going to have non government employees regulating?" Horner gasped.
"They're already doing it,"
Gray said. "I don't see a problem with it." Horner, Gray recalled, just glared at him across the remnants of lunch. Although decentralization of federal government was one of the goals of Reaganomics, transferring 700 federal examiners away from the interfering hands of the White House and Congress was something else.
"Well, I've got to get back to the office, Connie. Thanks for the lunch." Score another one for Gray.
A week later Horner trooped into Gray's office at the Bank Board, her eight assistants in tow. "I'll offer you a deal, Ed," she snapped, sitting herself down at a large dining-room table Gray had had brought to the office for such meetings. The table sat only six comfortably, so Horner's staff had to squeeze in around the edges. "If you agree not to transfer the examiners to the district banks, I'll give you 39 new ones," Horner said, as though she were making a major arms control proposal.
Gray was flabbergasted. He looked around the table at the blank expressions on the faces of Horner's staff. Finally, running his hand through his thin gray hair, Gray told her it was a deal he simply could not make.
"Really, Connie, I need 1,100 examiners," he insisted.
As soon as Horner and her minions trooped off. Gray, his general counsel. Norm Raiden, and his chief of staff, Ann Fairbanks, finalized the transfer of the examiners to the district banks. The move, effective July 1985, greatly strengthened the district banks and got Washington bureaucracy out of their lives,two things the industry liked. Gray told the district banks to begin making arrangements to bring on board at least 700 new examiners immediately and to raise starting salaries from the current $14,000 to a more competitive $21,000," The transfer of examiners was accomplished just at the same that Centennial Savings and Consolidated Savings were teetering on the brink.
If Gray's end run around OMB made him some new friends outside Washington, it did nothing for his standing on Capitol Hill or for the congressmen's vocal thrift constituency. The last thing in the world Don Dixon and his kind wanted was more examiners. To their mind there were too many regulators poking their noses into thrifts' books already. Those S&L owners, heavy contributors to congressional and senatorial candidates, renewed their call for Gray's ouster. First he had attacked brokered deposits, the lifeblood of the industry, then he had limited direct investments and growth, and now he was sending 700 more examiners into the field. He also was insisting that supervisors on the district level issue supervisory agreements and cease-and-desist orders more firmly and promptly. He was very unhappy with what seemed to him to be a lax enforcement of his new regulations.
In the midst of the intramural skirmishing Gray was making regular trips to Capitol Hill to answer questions from angry congressmen on various committees. He and his general counsel. Norm Raiden, took a particularly tough grilling in July before a House subcommittee investigating the failure of Beverly Hills Savings in April. Before Raiden had become general counsel for the FHLBB he had been an attorney with the Los Angeles firm of McKenna, Connor and Cuneo (one of the top S&L law firms in the country), and he had represented Beverly Hills Savings during the time that Beverly Hills management was making insider loans and speculative investments. Congressmen accused Raiden of "severe and extreme conflict of interest" in his handling of the Beverly Hills case after he became counsel for the FHLBB. Gray defended Raiden (and kept him in his post), and Raiden denied any conflict of interest.
Representative Thomas A. Luken then called Gray on the carpet for not acting sooner against Beverly Hills, saying "Mr. Gray is following an Alice-in- Wonderland approach" to thrift problems. He said the FHLBB "lacks the incentive to take aggressive action."
Gray replied that "a very important contributory factor" to the lack of timeliness in dealing with Beverly Hills was a shortage of examiners, which had now been corrected by transferring them to the FHLB's.
Luken then demanded that Gray "do the decent thing and resign" because he had implied that he couldn't do the job with the personnel he had. [Luken had to be crooked DC]
Representative John D. Dingell (D-Mich.), chairman of the subcommittee, came to Gray's defense, saying that it was "a national disgrace " that the Bank Board lacked the funds to have a sufficient and properly trained examination force. Dingell, on several occasions during the hearings, characterized Gray as "an honorable man, " but he denounced Raiden for his failure to stop the abuses at Beverly Hills when he was the thrift's attorney.
In other appearances on Capitol Hill, Gray testified on the worsening condition of the industry' insurance fund, the FSLIC. The insurance fund. Gray said, did not have enough money left to close all the insolvent thrifts.He projected that the cost would run into the billions of dollars. In July he testified the FSLIC would need $15 billion to clean up the industry. His numbers were based on a report by Bank Board economist Dan Brumbaugh. Congress was stunned. Where would the industry get that kind of money?
Gray was at such a hearing when his driver tiptoed into the hearing room and whispered in his ear. "Sir, there's an urgent call for you on the car phone." It was Bank Board member Mary Grigsby. She asked Gray to call her back on a regular phone. She didn't want to discuss this matter on the car phone where it could easily be monitored by any ham radio operator.
When he returned to the office he called Grigsby.
"Ed, I just got a phone call from someone representing a substantial California savings and loan," she said. "They want to offer you a job." [Yeah trying to buy him off DC]
"Who?" Gray asked, wondering who thought he might be available. Speculation was always floating around Washington that he was leaving office, but he had denied all the rumors.
Grigsby didn't want to be more specific over the phone. Gray said he'd be available to chat later that afternoon, and he set a time for Grigsby to meet him at his office. When she arrived she told him just who the suitor was. It was Charles Keating, Jr. , of American Continental Corporation (which owned Lincoln Savings and Loan in Irvine, California), a leader of the chorus that was singing for Gray's removal.
The offer stunned Gray. He knew regulators were crawling all over Lincoln's books and complaining that Lincoln was in gross violation of his new direct investment regulation. Lincoln was one of Gray's nightmare thrifts. (Lincoln grew from $2.2 billion in deposits in 1984, when Keating's company acquired the thrift, to $4.2 billion by 1987, and some of that money was invested in high risk junk bonds.) In 1985 regulators said Lincoln had only $54 million in passbook accounts and $2. 1 billion in large C.D's.
Gray told us he consulted Bank Board general counsel Norm Raiden on the Keating offer. "He wants to get you out of the way," Raiden told Gray. The offer had been a vague one, so Gray sent Ann Fairbanks to a breakfast meeting with Keating to verify that this was a real offer. She came back and said that it was, though later Keating denied ever making such a proposal, just what Keating might have been prepared to pay Gray was never disclosed. Executives at American Continental Corporation were very well paid. Keating, who earned $1.9 million in bonuses and compensation in 1987 as head of American Continental, was reportedly the second highest-paid executive in the thrift industry. Three other American Continental executives, including Keating's son Charles Keating III, were among the ten highest-paid industry executives. Keating the III made $863,494 in 1987. Another son employed by Keating's American Continental Corporation was Mark Connally, son of the powerful former Texas Governor John Connally.
Keating, with palatial estates in Arizona and the Bahamas, private jets and helicopters, was rich beyond Ed Gray's dreams. He had a reputation as an anti- pornographer and a philanthropist, and one of his favorite charities was politicians. He also encouraged his friends, employees, and business associates to contribute. Keating knew no political party. His largesse flowed equally to Democrats and Republicans alike.
Though now head of a multibillion-dollar thrift empire (Lincoln Savings made up about 85 percent of American Continental Corporation's assets), SEC documents revealed that in 1979 Keating had been accused by the Securities and Exchange Commission of misusing bank funds in Ohio by lending $14 million to friends and associates between 1972 and 1976. The SEC alleged that Keating, Carl Lindner, and Donald Klekamp, all officers of American Financial Corporation of Cincinnati, used Provident Bank, which American Financial controlled, for their own benefit. They accused the three men of a long list of SEC violations, including permitting Provident Bank to make loans to them without collateral, extend them new loans to cover the interest they owed on the old loans, roll over loans as they matured without demanding payment, and guarantee loans that other banks had made to Keating and others.
Keating and two associates consented to the SEC judgment without admitting or denying the allegations in the SEC complaint. After reading the charges, and even knowing that the SEC never had to prove them in court, we still wondered how Keating later got control of a thrift. In late 1988 published reports revealed that Keating, through American Continental, had gotten caught up in another SEC investigation, this one centering around MDC Holdings Inc. (a major borrower at Silverado Savings in Denver and an associate of a Southmark subsidiary), and that the SEC was investigating American Continental's accounting methods.
Gray said he turned down Keating's job offer without ever talking to him. When a reporter from the National Thrift News called Keating and asked if he had tried to hire Gray away from the Bank Board, Keating simply said. "No. That's all I have to say at this time. Good-bye." Click.
Though Gray turned Keating down, he was thinking that it was time for him to keep his promise to his wife and bow out of the Washington scene. After all, he'd already stayed on several months longer than he had meant to. But he had no intention of being forced out. He was determined to orchestrate his own departure from public life. But his enemies were impatient, particularly Don Regan, who now decided it was time to put the pressure on Gray again. He knew Gray was on the outs with a lot of people in the industry, most recently because Gray had told them the insurance fund was down to $3 billion in reserves to cover $1 trillion in deposits and member thrifts were going to have to set aside 1 percent of their assets to make up the shortfall.
That news was a sour pill that thrift officers did not want to take, and Regan seized the moment to leak to The Wall Street Journal the "news" that Gray was resigning. It was Regan's way of saying to Gray, "Here's your hat. What's your hurry?" It was also no secret that Regan wanted his old friend, former stock exchange president James Needhain, in Gray's place.
When reporter Monica Langley of The Wall Street Journal called Gray for comment on the rumor that he was resigning, Gray was stunned.
"I am?" he said. "I think I'd know if I was resigning."
Langley told Gray she had gotten the news "from the highest possible authority."
"You mean the president?" Gray asked, half fearing the answer.
"No," Langley responded, but a very high source.
Ah, Gray thought . . . Don Regan. Gray was tired and mad.
"No, I'm not resigning," he told Langley, and he hung up the phone. At that moment Gray knew he was going to have to break that promise he kept renewing to his wife that he would retire soon. He was staying on.
The decision brought with it more than personal hardship. It meant financial hardship as well. Gray's $79,000-a-year salary was quickly eaten up by the cost of living in Washington and maintaining a home base in San Diego. He also had two daughters in college. Gray said he took out small personal loans from ; Washington banks to support himself. He even borrowed from his mother. (By the time he left the Bank Board his personal loans exceeded $80,000, Gray said.) He chaffed at the thought of having to scrape and beg while people like Don Dixon and Ed McBirney and Charles Bazarian lived the life of Reilly.
But once again Ed Gray had outfoxed the Washington pros. One could almost hear the sighs of frustration when they read Gray's remarks in The Wall Street Journal: "Resigning? Why no. I'm staying on."
A week later White House spokesman Larry Speakes reaffirmed the administration's support for Gray. "Ed Gray can stay as long as he wants," Speakes said.
By the time 1985 rolled to a close it looked to Gray as though he might finally have turned the corner. They'd passed the regulations to curb direct investments and growth, and they'd gotten more examiners in the field—major accomplishments that should at least hold the high fliers in check while regulators and law-enforcement officials mopped up the damage that had already been done. As Gray flew out of Washington to spend the holidays with his family in San Diego, he felt the first optimism he had enjoyed in months. He sat back in his seat and watched from the window as his plane left Washington—and the thrift crisis—behind. He thought maybe the worst was over.
The Department of Justice was understaffed. FBI special agents and U.S. attorneys in field offices around the country were battling a war on drugs that had already stretched them far beyond their resources. It took awhile for them to realize how many swindlers had infiltrated the thrift industry, and once they did they found they were woefully short of FBI agents and U.S. attorneys with accounting backgrounds who could unravel the paper trails of sophisticated bank fraud. Regulators who contacted the FBI for assistance were often put on hold —literally.[So this is how they did it,first they had a member declare a war on drugs,at the same time,another member decided He was going to become the biggest drug dealer/bank robber of all time with the help of his friends in intelligence.Controlling all the major ports and entries into the country,this member could flood America with as much drugs as it takes to keep Justice and Law busy enough looking at the drugs,to not look at what he was doing with the money.It worked,and I do not believe a halt has been put to it yet here in 2018.I believe the member is now with no memory,and they run him out there for pic for whatever nefarious reason,and I would guess that the member's junior is now the biggest Racketeer in the united states history.That would explain some of the off the wall events over the last 10 years.Man I hope some Good guy knows what has to happen for this one.DC]
"I had to phone the Los Angeles FBI office 17 times trying to get them to open a case when North American Savings and Loan failed," California Savings and Loan Commissioner Bill Crawford complained later. "After 17 calls an agent finally returned my call and told me. "Look, if you're telling me that North American is more important to you than Consolidated Savings and Loan, I'll drop my Consolidated investigation and come right over.' " If not, he said, he could get around to North American in about two years.
Particularly in hot spots like Texas and California, the FBI simply did not have enough agents to investigate all the thrift fraud cases. In 1983 the FBI had only 258 agents assigned to bank fraud investigations, and within a year they would have over 7.000 cases to investigate. Three years later there would be only 337 special agents to investigate what by 1987 would increase to over 11,000 cases. To make matters worse, bank fraud was an incredibly complex white collar crime. Each major case took from two to four years to investigate and prosecute. The FBI just didn't have the manpower. In San Francisco, for example, the FBI's white-collar crime unit had only 34 FBI agents to handle not only bank fraud but also drug-money laundering, corruption of public figures, and espionage. Part of their district ( 15 California counties from south of Monterey to the Oregon border) included Silicon Valley, which was waist-deep in spies trying to get information on nearly $7 billion a year in Defense Department projects, the head of the San Francisco FBI office told us he needed nearly twice as many FBI agents (60) for his white-collar crime unit.
Even if the FBI had the manpower, the United States attorneys' offices did not have enough assistant U.S. attorneys to take the cases to court. When an assistant U.S. attorney took on a major thrift fraud case that attorney was lost to the department for up to two years. The cases were backbreakers and budget busters. To make matters worse, there was a lot of turnover in U.S. attorneys' offices. Assistant U.S. attorneys could earn about $70,000 a year prosecuting federal cases for a few years and then retire to the private sector, where they could earn twice (or three times) as much representing the crooks.
But something far more damaging than lack of manpower was undermining the Department of Justice's response to criminality within the thrift industry. The biggest threat to the proper prosecution of these cases—and the hope of deterring further such abuses—was the thrift and bank regulators' penchant for secrecy. Ironically, the best accomplice that thrift crooks had after they were discovered was the federal regulators, who secreted away the evidence of the crime and sat on it.
On an increasingly regular basis, starting in 1985, FBI agents around the country saw thrifts in their jurisdiction being seized by federal regulators. Insiders or informants would tell them of massive fraud at the failed thrift, but regulators were referring only a handful of the cases to the FBI. The agents wondered why their phones weren't ringing off the hook. The Bureau contacted Federal Home Loan Bank officials and asked why they had not reported these alleged crimes to the FBI. The answer they got could have come right out of a Kafka novel.
"We can't discuss these cases with you," they were told. "That would be against the law."
The law the regulators were referring to was the Right to Financial Privacy Act, which Congress passed in 1978. It mandated that a person's business with a financial institution was privileged, like his business with his doctor, attorney, or priest. Regulators told FBI agents that, yes, many of the thrift failures had been caused by insider and customer fraud, but the law forbade regulators to discuss any thrift's relationship with any customer (which regulators interpreted as meaning even fraudulent relationships). And, no, they wouldn't be in a position to supply the agents with any evidence to help them in their investigations. That meant there could be no investigation because when the FSLIC seized an institution it sucked up every atom of information on the spot, and immediately it all became as secret as plans for the stealth bomber. Without the evidence that was in the regulators' possession, no United States attorney could hope for a conviction of a bank swindler. He needed those phony appraisals, postdated documents, fraudulent financial statements, endorsed checks.
The problem wasn't a new one. The Bureau had had earlier problems with banking regulators over the same issue. After the collapse of the Butcher brothers' banks in Tennessee in 1983, the FBI actually had to complain to a Senate subcommittee to get FDIC regulators to release the phony loan documents they needed to convict the brothers. The regulators fought the justice Department every inch of the way, leading The Wall Street Journal to wonder in an editorial if regulators might be worried less about bank secrecy than they were about what the documents said about their own ineptitude.
"Since the FDIC was the main agency keeping watch over the Butchers' banks, its documents afford the best picture of what went on. But every time its files have been subpoenaed it has asked the court for a sweeping protective order. . . . Similar cover-ups blanket a multitude of other cases, including one in which the defendants contend the plaintiff FDIC sought the protective order to 'hide its own culpability.' "
Concerned that serious white-collar criminal investigations involving the theft of hundreds of millions of dollars were going nowhere while FBI agents fought with federal regulators in public over scraps of information, the Justice Department in December 1984 had called for a sit-down with regulators. Together they formed a joint working group to which they gave a $50 name: "The Attorney General's Interagency Bank Fraud Enforcement Working Group. " The group's mission was to mesh the needs of prosecutors, FBI agents, and bank supervisory personnel and to "identify, address, and resolve issues of major significance relating to the detection, reporting and prosecution of bank-related crimes, focusing especially on crimes by insiders of financial institutions."'
The Justice Department began to teach bank examiners how to spot bank fraud, and the FBI began work on a computerized tracking system that would contain the names of known bank swindlers. When crooks moved from one FBI jurisdiction to another, agents could just type in their names and get a complete history on them. Unfortunately that system was not scheduled to go online for several years.
Regulators were told in no uncertain terms that the Right to Financial Privacy Act in no way prohibited them from releasing information to the FBI on suspected criminal activity at a financial institution. They were provided with criminal referral forms and told to file one anytime they had suspicion of a crime. But old habits died hard. To a regulator financial information was as sacred as the Holy Sacrament was to a priest. One just didn't hand something that precious to the uninitiated, the great unwashed—and particularly not to ham-handed FBI agents with lumps under their coats. Agents were still required to get a federal court subpoena for anything they wanted from regulators.
An example of passive-aggressive behavior by Bank Board examiners was their "redacted" criminal referral, which satisfied the letter of the law while totally avoiding the spirit. One veteran FBl agent recalled his first run-in with a redacted criminal referral.
"You would not believe it. It read kind of like this:
Loan officer A made a loan to borrower B. Borrower B supplied fraudulent financial information on the loan application. Loan officer A knew the information to be false. Appraiser C supplied an inflated appraisal on the property. He and Borrower B and Loan Officer A knew the appraisal was false. When the loan was funded Borrower B paid Loan Officer A and Appraiser C $25,000 kickbacks out of the loan proceeds.
"I called that character [the examiner] back and asked him just what he expected me to do with this piece of shit. I told him I couldn't investigate people with code names, that he had to put their real names in the referral. What the hell did those clowns call us for? They wanted us to investigate someone but they wouldn't tell us who?" (The FHLBB is the only agency in government that employs redacted criminal referrals.)
Secrecy at the 12 district banks became an obsession and got even worse after Danny Wall succeeded Ed Gray at the FHLBB. If we called to speak with Bill Black or Mike Patriarca at the San Francisco Bank, at least one "listener" would stay on the line to make sure Bill or Mike didn't spill any unauthorized beans. Black, before Danny Wall took over as FHLBB chairman, was well known to Washington reporters for his good rapport with the press. However, once Wall became chairman that changed. Black reportedly wrote a memo to Wall criticizing the FHLBB's new Southwest Plan (Wall's much-ballyhooed answer to the S&L crisis in Texas that called for selling bankrupt thrifts), which was costing the FHLBB billions of dollars. Wall, according to former regulators, put Black on an informal muzzle, threatening to fire him if he criticized FHLBB policy again. Wall brought in the FBI as a consultant to help the agency keep a lid on information. He hired a security officer to track leaks. This Nixonian paranoia reached its peak when Wall's chief of staff recommended that the FHLBB offer a $20,000 reward for anyone who could turn in a leaker. (Wall decided against the plan.) Washington columnist Jack Anderson reported that the year after Wall took office he convened the FHLBB for only three public meetings but held at least 70 meetings behind closed doors.
Such secrecy inevitably raised suspicions that the regulators had something to hide. We began to wonder why we never found a single instance where federal regulators had filed a criminal referral against one of their own examiners. Were we to believe that, while crooked thrift officials were busily bribing appraisers, accountants, and contractors, and receiving kickbacks and bribes themselves, not a single $14,000-a-year FHLB examiner ever took a bribe to cover up? Regulators said no, but we began to hear differently. One California examiner was quietly fired by the San Francisco FHLB after it was discovered he had received a $6,000 check from a crooked thrift officer. In Texas an officer of a failed thrift actually let a grand jury charge him with perjury rather than repeat to the jury what he had already told two different FBI agents three times in different interviews: Two days before he was subpoenaed to appear before the grand jury, an employee of the FSLIC whom he had known for years had called and told him to "get dumb" if it came to testifying before a federal grand jury. Still, not until 1989 did we find a single FHLB examiner or supervisor charged with wrongdoing.
Then the facade began to crack. We learned that the FSLIC had hired Stuart Jones in Washington to help dispose of Texas S&L assets while he was reportedly being investigated by the FBI in Dallas for alleged criminal wrongdoing at Richardson Savings in Dallas, which had collapsed. Jones was a commercial loan officer at Richardson until he was fired in March 1986. The National Thrift News reported that the FHLB in Dallas had filed not one but two criminal referrals on Jones, both of which the FSLIC was blissfully unaware.
A couple of weeks later the FBI arrested twin brothers Philip and Thomas Noons and charged them with defrauding the FSLIC while employed by the agency to help liquidate insolvent Mainland Savings in Houston. The men were charged with setting up a complex web of offshore banks to acquire assets of Mainland at below-market value. They pleaded not guilty and their trial was pending at press time.
Then the FHLBB announced it had asked the Justice Department to investigate charges that the former head of the FSLIC, Stuart Root, had given Silverado Savings in Denver (where Neil Bush had been a director) advance warning that regulators were going to seize the thrift in December 1988. Root denied the charges.
These were all just allegations. No one had pleaded guilty or been convicted by a jury at this writing. But this cascade of allegations in early 1989 reinforced our own suspicions that all the confusion and sense of urgency surrounding the faltering thrift industry might become fertile ground for a second wave of thrift fraud, this time perpetrated by the very people sent to save the industry.
Apparently we weren't alone in our concerns. In mid- 1989 we learned the FBI had spent over $11,000 flying two suspected Texas thrift swindlers around the country. According to court testimony, the pair met with important elected and appointed officials in Washington under the guise that the two men wanted to acquire troubled Texas thrifts. The FBI wired them and recorded the conversations. In all, 38 hours worth of body tapes were collected by the pair. While in Washington meeting with congressional aides, the pair met in June 1988 with none other than FHLBB Chairman M. Danny Wall, a meeting they said had been arranged for them by Texas Senator Phil Gramm. Wall later confirmed the meeting. When the San Antonio Light ran a story that Wall was a subject of an FBI probe, the FHLB and the Justice Department vehemently denied Wall was a target. The tapes were put under court seal when the U.S. attorney argued that their release could jeopardize the probe. At press time precisely what that probe involved remained under wraps.
Secrecy at the FHLBB succeeded for a long time in keeping the public from finding out that fraud was rampant at S&L's. Occasionally someone on the inside would speak out, but that was rare. In January 1987 William Weld, assistant attorney general and head of the Justice Department's criminal division,' said in a speech to the American Bar Association: "... both FBI and FDIC figures confirm that a large percentage of bank failures involve allegations of criminal misconduct on the part of the bank's senior management. . . . We have even got organized crime types taking a look at thinly capitalized financial institutions which are candidates for takeover, and then using various specified fraudulent schemes to create a paper financial asset which they can then pull the plug on after a year and a half or two, and leave the FDIC or FSLIC, i.e., the taxpayers, holding the bag. . . . Insider fraud thus obviously plays a major role in bank failures, and we now have evidence to suggest a nationwide scheme linking numerous failures of banks and savings and loan institutions throughout the country."
Unfortunately Weld's words didn't get much attention (we didn't hear about them until 18 months later), and regulators continued to play the secrecy game. In late 1988 we called the San Francisco FHLB to ask about complaints we were still getting from FBI agents that they weren't receiving criminal referrals. A public relations person took our message and said she'd have an official call us back. Half an hour later she told us the official was "not comfortable talking to you about this."
We did talk later, but only after we told the PR person that we already had the FBI side of the story and if the FHLB didn't want their side presented, we were "comfortable" with that. Then we were invited to a meeting with the Bank's criminal referral staff. At that meeting we were told that, indeed, the regulators had "fouled things up in the past" when it came to timely criminal referrals and providing information to the FBI. But since April 1988, they said, a new system was in place and the machinery was functioning much better. They, in turn, now criticized the Justice Department, saying that many cases referred to the FBI were not being prosecuted. Congress released the results of a confidential internal FBI audit that painted a bleak picture of the FBI's ability to investigate sophisticated financial crimes. Some federal prosecutors, the report said, were giving their bank fraud cases to IRS agents or Secret Service agents to investigate, and some were going so far as to hire outside accountants to do the sleuthing.
Criminal referrals remained the chafing point between the Justice Department and thrift regulators. But civil suits that the FSLIC filed against thrift abusers, to try to recover some of the FSLIC's dwindling fund, were another important stumbling block in the complicated task of bringing criminal charges against thrift looters, though regulators would never admit it. When a thrift failed the FSLIC hired a high-powered private law firm to represent its interests against the thrift's former management and customers. Those attorneys were called "fee counsel" because the FSLIC paid them a fee for their services— a fat fee. In a short 18-month period between January 1986 and September 1987. the FSLIC reported it paid out a staggering $108 million in legal fees to independent fee counsel working on thrift failures nationwide (prompting one attorney to suggest they rename the Garn-St Germain Act the Lawyer's Relief Act of 1982).
Fee counsels' job was to figure out how the thrift's assets had disappeared and to go after them. They sued thrift officials who were guilty of self-dealing and borrowers who had defaulted on their loans. And they had no interest in seeing those people arrested because the accused might start squirreling their money away to pay for criminal attorneys and say they didn't have enough money to pay the civil judgment. Fee counsel complained further that when they filed a criminal referral, FBI agents flashed badges in the faces of their civil defendants, scaring them, and everyone immediately clammed up. Defendants being deposed in a civil case would suddenly start taking the fifth amendment on the grounds that a criminal investigation was under way and anything they said in the civil action might be used against them in the criminal case. For these reasons many fee counsels just counted to ten whenever they were tempted to file a criminal referral and kept counting until the temptation went away. The issue became one of priorities: Was it more important to collect the missing money or punish the offenders?
At the FHLB in Topeka we ran across a prime example of regulators' reluctance to make criminal referrals to the FBI. After discovering what appeared to be fraud at SISCorp, an Oklahoma thrift servicing company heavily influenced by Charles Bazarian, attorneys met with Kermit Mowbray, president of the Topeka Federal Home Loan Bank, to advise him of their findings. A transcript of the meeting included the following exchange:
"I can't minimize what I feel to be suspicions of criminality."an attorney told Mowbray. But, apparently concerned about the conduct of possible civil proceedings, he quickly added, "I think if there was a stampede now by certain investigating agencies, I wonder if it wouldn't set off somewhat of a situation where people would become immobilized.
"For example, if we called up the FBI . . . they're hot on white-collar crimes anyway. And that if the FBI was to hit the streets and investigating who knows ... I wonder if it would help or harm in the short term . . . everybody retreating into a very defensive posture and not saying anything to anybody without four lawyers and a monsignor present."
Mowbray replied, "I'm not sure that we need that. We usually do not call the FBI in until we have done our own investigation."
"Well, that's fine," the lawyer replied, apparently satisfied that no ham handed FBI agents would be muddying his civil waters.
The end result of the strained relations between regulators and the Department of Justice was clearly visible in the numbers. Even as late as 1987 (three years after the working group's formation) the San Diego division of the FBI would be working on only nine bank fraud investigations in the $100,000 to $250,000 category (a category large enough to exclude garden-variety embezzlements). None of those investigations was referred by the FSLIC or the FDIC. Two were referred by the district attorney, two by an FBI informant, and two were started after agents learned of alleged bank fraud while reading the morning paper over coffee. The other three referrals also did not come from regulators.
In Los Angeles in 1987 the federal prosecutor would receive 78 criminal referrals in cases involving losses between $100,000 and $250,000. None of those cases was referred by the FSLIC. Informants referred seven of the cases and seven more were initiated by the FBI on its own after it stumbled over information while investigating unrelated crimes.
In cases where the loss exceeded $250,000 nine investigations were initiated in the San Diego division, and none of those was referred by the FSLIC. In Los Angeles 14? criminal referrals were filed in the $250,000-plus category, of which the FSLIC was responsible for only five.
When regulators did make criminal referrals and forked over supporting documentation, the Justice Department often refused to keep them informed of the progress of the case (or to give them the information the FBI gathered that might help the FSLIC locate some of its missing money) and prosecutions were uneven, depending entirely upon the individuals called upon to handle the case: the FBI agent, the U.S. attorney, the judge, and the jury. If an FBI agent pursued his suspects with vigor and collected all the necessary information to support an indictment, he then had to "sell" the case to an assistant U.S. attorney who would decide whether or not to prosecute the case. The system worked best when there was a team of an FBI agent and a U.S. attorney who were both dedicated to the prosecution of the case, like U.S. Attorney Joe Cage and FBI Agent Ellis Blount in Louisiana (Herman Beebe) or U.S. Attorney Lance Caldwell and FBI Agent Joe Boyer (State Savings/Corvallis) in Oregon. But those were the rarest of exceptions. (In late 1988 a congressional report stated that 60 cases in which the FBI in the Northern District of California had completed its investigation had gone unprosecuted.)
If the U.S. attorney gave the go-ahead to prepare evidence for a grand jury, and (the grand jury handed down indictments, the U.S. attorney had another chance to decide how much he believed in his case. Could he spare the long months it took to prepare for trial? And then the weeks in court? If the answer was no, the U.S. attorney would dispose of the defendants one by one by offering them relatively light sentences or even probation in exchange for a plea to one count of bank fraud. For the U.S. attorney's career scorecard a plea bargain counted as a conviction, just as if he had sent the crook up the river for 20 years.
But suppose the U.S. attorney decided to bite the bullet and take the case to court. Then he and the FBI agent faced the tedious work of building a case, and they nearly always did so by reinventing the wheel. The fraternity of high fliers and professional white-collar criminals who looted thrifts seldom confined their efforts to one financial institution. Yet FBI investigators rarely looked beyond the thrift in their jurisdiction. Time and again when we asked an FBI agent about a suspect we were investigating we discovered the agent had had no knowledge that the same person was under FBI investigation for bank fraud 1,000 miles away. Crooks networked—FBI agents did not. In fact, we found that reporters like Byron Harris at WFAA-TV in Dallas and Pete Brewton at the Houston Post were far better informed about the network of major players in the thrift bust-out game than many FSLIC attorneys, U.S. attorneys, and FBI agents actually working the cases.
Once FBI agents and the U.S. attorney had gathered their information and made a case, they had to endure the uncertainty of the outcome. Would a jury understand the complicated financial deals? Would they understand what a cash for-trash deal was, what a land flip was, and how they were used to bilk a thrift? And if they got a jury to convict, would the judge hand down a sentence tougher than the prosecutor could have gotten if he'd just plea-bargained at the start? Every inch of the path, from discovery of the crime through prosecution, was littered with uncertainty.
Judges and juries had a hard time dealing with white-collar criminals. White collar criminals didn't look like crooks—they looked like businessmen. In more than one instance we saw them con FBI agents, U.S. attorneys, judges, and juries. Swindlers are by definition likable folks. They'd be damned poor con men if they weren't. A few hours with a Charles Bazarian or a Mario Renda had most folks wondering why everyone was picking on them. All too often we saw people like Beverly Haines and Herman Beebe come before judges who could not bring themselves to view the defendants as serious criminals. Instead, they were treated like characters out of some Greek tragedy . . . victims of fate ... in the wrong place at the wrong time . . . choosing the wrong fork in the road but otherwise fine fellows . . . when in fact they were criminals, plain and simple. They were swindlers who, when given the chance to make a decision between right and wrong, freely chose wrong.
"These guys are con men," complained California Savings and Loan Commissioner William Crawford during congressional testimony in 1987. "First they con the banker, then they con investigators, then they con prosecutors, and lastly they con the judge and the jury."
The odds against the successful prosecution of a bank fraud case were enormous. The vast majority of looters would never see a day in jail or ever have to pay any restitution. Admitting the obvious. Attorney General Richard Thornburgh told Congress in early 1989, "We'd be fooling ourselves to think that any substantial portion of these assets is going to be recovered."
Sometimes the obstacles came from within the Justice Department itself, as when then-Attorney General Ed Meese decided to transfer a million dollars to the department's obscenity unit from the travel budget of the Fraud Section just when it was beginning to make headway in its investigation of failed thrifts in Texas. (Meese was on his way out of office, having resigned after questions were raised about his ethical standards.) Suddenly prosecutors around the country were told there was no money to have witnesses flown in to testify before the grand jury and FBI agents were told they could not go to other states to conduct interviews because there wasn't enough money to pay the air fare. Then in October 1988 it was announced that, because of budget restraints, the Criminal Division at the Department of Justice had a hiring freeze in effect and U.S. attorneys would be cut back by 10 percent in 1989. By the end of 1988 there were still 128 vacant U.S. attorney positions that would apparently go unfilled. As regulators began referring more cases the understaffed Justice Department fell further behind in its investigations and prosecutions. In Chicago the U.S. attorney between 1985 and 1988 charged 300 people with embezzlement (250 were convicted or pleaded guilty) and 120 cases involving losses of perhaps $100 million were under investigation in December 1988. "Despite that," the U.S. attorney said, "the bank frauds continue to grow. " In 1989 Thornburg announced that one-third of the major bank fraud cases were not being pursued because the Justice Department lacked the resources.
The only solution to this crunch was to filter the flood of fraud cases. U.S. attorneys' offices in areas like Los Angeles, San Diego, San Francisco, and Dallas simply established an arbitrary $100,000 cutoff point. If a case under $100,000 was reported to them, it generally went unprosecuted. In some jurisdictions a fraud had to exceed $250,000 before the U.S. attorney would even look at it. One U.S. attorney on the Organized Crime Strike Force told us, "I think sometimes that I could quit this job and go out and do bank scams. As long as I kept my take under $100,000 per scam I know I'd never get prosecuted." In Southern California and Texas, the cutoff became $1 million.
The simple fact remained that whether the mob or just your generic swindler busted out a savings and loan (or bank), the risk he incurred was very low but the potential for gain was staggeringly high. If a person was stupid enough to walk into a thrift and stick a gun in a teller's face, he would get out the door with a couple of thousand dollars at the most, have his picture taken in the process, get caught, and spend years in prison, where, for a handful of cigarettes, he'd become the personal property of the cellblock guerilla. But if he (or she) pulled a well-oiled loan scam, he would walk out the door arm in arm with the thrift president, with a check for a couple of million dollars in hand, if caught, and chances were excellent he would not be, and if convicted, and the odds were against it, he faced a very small chance of ever spending a day behind bars. The problem challenges us as a nation. For some reason our system has seen nothing unjust in slapping an 18-year-old inner-city kid with a 20-year prison sentence for robbing a bank of a couple of thousand dollars while putting a white-collar criminal away for just two years in a "prison camp" for stealing $200 million through fraud.
The average sentence for an executive who defrauds an S&L and gets sentenced to prison is three years, compared to 13 years for someone who sticks up the same institution. Of the 960 people convicted in federal courts of fraud against lending institutions in one year, only 494 were sentenced to prison terms; of 795 people convicted of embezzling, only 227 were sentenced to prison terms. But of 996 people convicted of robbing banks and S&Ls, 932 went to prison.
Even the Justice Department's much-ballyhooed task force of 50 federal law- enforcement officers who moved into Dallas in 1987 to investigate S&L fraud had failed to produce much results almost two years later. They had 25 convictions, but most were for minor violations or were the result of plea agreements. About 25 percent of those sentenced got probation. Hampered by a lack of funds, most of the attorneys on the task force commuted from Washington to Dallas a couple of times a month while many defendants seemed to have huge financial resources and hired teams of high-powered attorneys to represent them.
If Ed Gray hoped that furious prosecution of thrift crooks was going to help him chase the bandits out of the industry, he was destined for disappointment.
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Friends in High Places 305s
After taking under consideration Spence's motion to remove Cage from the case. Judge Stagg ruled that Cage's investigations had been fairly done and the case could proceed.
"We have excellent lawyers here," he said. "Both sides are intractable in their belief they are right."
The adversaries met again in the courtroom in the fall of 1987—Spence for the defense, Cage for the prosecution. The trial was again being held in Lafayette, 200 miles south of Shreveport, so Cage and his team were staying in a motel near the Lafayette courthouse. This time Cage knew he had Beebe nailed. Along with all the other documentation and evidence he had amassed, he had the Bussell notes, which were an admission of guilt in the handwriting of one of Beebe's close associates.
The trial proceeded as Cage had expected until the day before the case was to go to the jury. In a surprise move Judge Stagg decided in favor of a defense motion that Cage not be allowed to refer to the Bussell notes in his closing arguments. Cage was devastated. The Bussell notes were the key to his case. He had intended to hammer them home to the jury the next day iii his closing arguments. In a moment of frustration he told a Texas reporter that "the judge has sabotaged my case."
The next morning Cage did not show up in the courtroom. His assistant appeared to handle the case. Word spread quickly that Cage had disappeared. Rumors ran wild. Where was he? What had happened? After all these years, the thousands of hours, where was he?
The jury deliberated two days and on the third day sent word that they were unable to reach a verdict. Judge Stagg declared a mistrial. Cage, who had been monitoring the progress of the trial from the motel, saw years of work slip away into nothingness. He couldn't understand why Judge Stagg had made the ruling about the Bussell notes. But he knew why he had refused to go back into the courtroom. It was a matter of principle with him. Even though he knew Judge Stagg would hold him in contempt of court and could even put him in jail, even though he knew he could very well be fired, the Beebe case was too important not to register his protest in the strongest possible manner. He and Blount believed they knew the extent to which Beebe's scams threatened the financial fabric of Louisiana and surrounding states. They also believed they knew how deep within the political power structure Beebe's influence ran. They had successfully prosecuted Becbc once, and they wanted a second felony conviction to make sure he wouldn't be able to worm his way back into action. They had put everything they had into a thorough prosecution of the case.
A sober prosecution team headed back to Shreveport. Judge Stagg found Cage in contempt of court and a panel of judges reprimanded Cage for abandoning the Beebe case to his assistant. But they could have done much worse, and Cage believed their comparatively gentle treatment of him also sent a message to Stagg, who removed himself from further involvement in the case. The ball was once again in Cage's court. Should he go for a retrial? Plenty of people told him he should drop the case, but he decided to go for it. One more time. You could have almost heard Beebe's sigh of despair. Stagg was gone and Cage was back.
Beebe's fourth trial was set for May 31, 1988. But this time Cage had company. The U.S. attorney in Texas had indicted Beebe on charges stemming from Cage's investigation, including a $4.4 million loan Beebe had gotten from State Savings/Lubbock. The one-two punch was too much for Beebe. And with Judge Stagg out of the case, who knew what the new judge would be like?
In March, Beebe told the Shreveport Times he'd done nothing wrong and "this is a bunch of bull." But on April 29 he threw in the towel and cut a deal. ... He agreed to plead guilty to two counts of bank fraud and he agreed to cooperate with the ongoing criminal investigations into fraud at banks and S&L's in Texas and Louisiana. In return the government agreed not to prosecute him for any other fraud then under investigation in northern Texas (which excluded large parts of Texas) or western Louisiana. Beebe's lawyer said Beebe pleaded guilty because he was out of money and wanted to put six years of litigation and harassment behind him.
At his sentencing, before a Louisiana judge, Beebe sat in silence while the three lawyers representing him—former Louisiana Governor David Treen, for- mer Shreveport II. S. Attorney J. Ransdell Keene, and Jim Adams—argued vigorously that Beebe should not have to serve any time in prison. Cage was also mysteriously silent, not challenging Beebe's attorney and not demanding that Beebe do some time. As a result U.S. District Judge John M. Shaw, who could have sentenced Beebe to ten years in prison, gave him instead only a year and a day. Later Shaw said Cage had not asked for any jail time for Beebe, but "I just felt he had to see the inside of a jail. "
When word got out that Beebe would spend, at the most, a year in prison. Cage was widely criticized for devoting so much time to the Beebe pursuit and then not fighting for a stiffer sentence. In response Cage .said Beebe had agreed in the plea bargain to give "complete, truthful, and accurate information and testimony," and Cage expected him to cooperate in the prosecution of other bank frauds that he hoped would land bigger fish. If he didn't. Cage said he and the Texas prosecutor could drop the plea bargain and prosecute Beebe.Besides, Beebe now had three felony convictions (the 1985 conviction and the two included in the 1987 plea bargain) and that ought to be sufficient to keep him out of the banking business.
Bigger fish? What bigger fish? Bigger than Beebe? Carlos Marcello was already in prison. Who was left that was bigger than Beebe?
Cage had turned his sights on Judge Edmund Reggie. He had begun to dig into financial transactions at Judge Reggie's Acadia Savings and Loan in Crowley, Louisiana. Though Cage would not discuss his investigation, which was still in progress when we went to press, the FSLIC filed a civil suit in Augu.st 1988 against Reggie and other officers and directors of the thrift (citing 20 loan transactions, involving over $40 million, that regulators alleged caused the collapse of Acadia in August 1987) and in that suit we could see the direction Cage's case might be taking.[So the Judge ended up getting busted and basically got the old slap of the wrist.Seeing this happen to his dad,one of the apples has proven the old adage about not falling far from the tree here DC]
https://www.nola.com/crime/index.ssf/2015/06/raymond_reggie_given_11-year_p.html
Between 1982 and 1986 Acadia Savings had, according to regulators, made several loans that benefited Beebe and Judge Reggie. (Our favorite was the loan that went to bail Reggie family members out of the Daddy's Money Condominiums.) But even more interesting, regulators said that in June 1985 the Acadia Savings board had loaned Gilbert Beall (of Texas and Florida) and Frederick Mascolo (of Connecticut) each $2.95 million. The collateral for the loans was 106 acres in an area in the Pennsylvania Poconos where gambling was under consideration.
The Poconos property rang a bell with us, and we located it in our Aurora Bank file. Documents in our file showed that Beall and Mascolo had acquired the property from Anthony Delvecchio and Jilly Rizzo, whom we had met at Flushing Federal working with mob stockbroker Mike Rapp. Aurora Bank in Denver had been busted out in 1984 and 1985 by John Napoli, Jr.'s racketeering scheme. The FDIC sued Rizzo and Delvecchio (and others) in the case, alleging that Rizzo and Delvecchio tried to hide their Aurora Bank take from the FDIC by laundering it through the Poconos property. When Rizzo and Delvecchio sold the property to Beall and Mascolo, regulators in Colorado and Pennsylvania filed lawsuits claiming that the sale was a sham attempt to keep the FDIC from confiscating the 106 acres.
Even more troubling to Cage, however, was what Beall and Mascolo allegedly did with the $2.95 million they each borrowed—and never repaid—from Acadia Savings. Regulators alleged they spent only about $700,000 on the Poconos property. The rest, they said, was divided up:
Beall and Mascolo allegedly bought $2 million worth of stock in Louisiana Bank & Trust of Crowley, where Reggie was also a stockholder and was chairman of the board. The bank was about to collapse, regulators said, and they saw this move as a way for Reggie to recapitalize his troubled bank.
They loaned another $490,000 of the money to a Reggie partnership, which secured the loan with an IOU from Beebe's AMI, the FSLIC alleged.
And they bought $1 million worth of stock in a company controlled by themselves in partnership with Mike Rapp's associate Lionel J. Reifler, who was also said to be involved in the plans to develop gambling on the Poconos property. Reportedly they also paid Reifler another $500,000 that Mascolo owed him.
Regulators alleged that Acadia Savings had made another such loan. In May 1985 Acadia loaned $1.8 million to a company to buy 154 St. Tropez tanning beds, but they said much of the money really went to Reifler, Mascolo. and Beall. When regulators tried to file a claim with the company that bonded the loan, it turned out to be an offshore company in the Grand Cayman Islands and it didn't have enough money to pay the claim.
Cage had been untangling these relationships at the very time that Beebe's high-powered attorney, Gerry Spence, had attacked him personally in open court and asked the judge to remove Cage from the Beebe case. At that time Cage had retired from the field of battle and prepared a blistering written rebuttal that not only attacked Beebe but laid out Beebe's relationship with Reggie in damning detail. We obtained a copy of the extraordinary' affidavit, which Cage had filed with the court.
In the affidavit Cage tore into Beebe, Governor Edwards, Judge Reggie and their relationship to each other. He was worried, he said, about their plans to bring casino gambling to Louisiana and he was worried about what he called "the Reggie connection with organized crime, Mafia, or La Cosa Nostra figures."
Cage told in his affidavit about the Acadia Savings loans that he said indirectly benefited Reifler. He said that Reggie's Louisiana Bank & Trust of Crowley in 1985 had made $1.5 million in loans (secured by worthless annuities) that "benefited Reifler and Reggie." He quoted the Woodie Guthrie line—which was the source for the title of Jonathan Kwitny's book. The Fountain Pen Conspiracy—to point out that Reifler appeared in Kwitny's book- as an associate of Edward Wuensche, one of the nation's leading dealers in stolen securities who worked with Reifler at the same time that he (Wuensche) was deeply involved with the New Jersey mob.
In his affidavit Cage pleaded with the court to understand that he was not some obsessed prosecutor:
"My motivation was and is not political but one of grave concern for the stability of the financial institutions in the Western District of Louisiana. The appearance of organized crime in the Western District of Louisiana, likewise, causes me a great deal of concern. The indicia of organized crime is truly frightening and worthy of the most relentless pursuits by those in law enforcement."
The Cage affidavit infuriated judge Reggie. He told coauthor Mary Fricker that he believed Cage was pursuing him for political reasons (Cage was a Republican appointee). "The Cage affidavit is absolutely a lie. That affidavit did more to damage me than anything in my lifetime. ... He [Cage] has made me a target of his investigation for nearly seven years. ... If he thought I had connections with the Mafia, where was his evidence?" Reggie said he met Reifler through Beall, who had been an attorney with Fulbright and Jaworski in Houston. All of the Beall loans were approved in advance by state regulators, he said, and, anyway, by that time he was no longer active in the thrift's affairs.
In regard to the FSLIC civil suit, Reggie told us he had never benefited improperly from any of the S&L's transactions. "I never drew a single expense account. I never charged them a nickle. Never charged them a legal fee. Because we loved the savings and loan. I bet not another law firm in America can say that. That's why my feelings are just crushed. . . . I loved Acadia Savings and Loan."
"Yeah, he loved it to death," one Reggie critic quipped.
Cage agreed. In May 1989 the grand jury indicted Reggie for bank fraud. A week earlier Beall and Reifler had pleaded guilty to violating banking laws and were said to be cooperating with Cage's investigation. Just five months earlier the SEC had charged the two men with fraud in connection with a Boca Raton, Florida, penny stock scam. Both the Acadia Savings and the SEC cases were pending as of this writing. Whatever the outcome, Acadia Savings had clearly been victimized by the hit-and-run gang of swindlers we knew very well.
In July 1988 Herman Beebe finally went to prison, courtesy of Cage and Blount. But his sentence was only one year and a day. We well remembered his words to reporter Linda Farrar, "I'll be right back on top after two or three years," and we didn't doubt it for a minute. Beebe had opened a window for us into the world of banking as it was done "down home" in Texas and Louisiana. The mob was active there, but in addition there was a good-ole-boy "mob" that had been fleecing financial institutions as a matter of birthright for generations. A group of Arkansas-Louisiana-Texas businessmen with the most powerful political connections had been using financial institutions for their own purposes for years. Fiduciary duty meant little to them. They ran their banks the same way they would have run their cattle ranches. They walked the thinnest possible line between legal and illegal, and some of them regularly crossed that line.[If you do some looking into this,you will find Slick Willy in the shadows in Arkansas along with the Bush clan big time DC]
The occasional attempts to blow the whistle on the ring went nowhere. Regulators, prosecutors, and reporters came and went, but the Southern power structure remained.
The wholesale looting that occurred in the thrift industry in Texas and Louisiana (and later spread to surrounding states) in the 1980s would not have been possible in an environment that unambiguously condemned such behavior. Texas and Louisiana, in particular, lacked such an ethic. In fact, when it came to changing management at a bank or thrift, the attitude was perhaps best characterized by what a voter said when Edwin Edwards was finally defeated as governor. Asked if he felt the new governor and his people might be more honest, he replied, "No, it's just turning the fat hogs out and letting the lean hogs in." So it was with Texas and Louisiana banks and thrifts. The U.S. taxpayer will pay a high price for that erosion of ethical business standards—an erosion facilitated and exacerbated by deregulation of the thrift industry, which sent the wrong message to the wrong people.
TWENTY-TWO
A Thumb in the Dike
The last three years had been very difficult for Ed Gray. When he took the job
of Federal Home Loan Bank Board chairman on May 1, 1983, he was the
darling of the thrift industry's chief lobbying group, the U.S. League of Savings
Institutions, and a Reagan administration insider. Eighteen months later it would
have been hard to find anyone to say a nice word about him. The U.S. League
worked overtime to lobby against his proposed regulations, and forces high in
the administration worked for his ouster—all because of Gray's attempt to stem
the avalanche of thrift failures by putting a lock on brokered deposits and by
limiting a thrift's direct investments and rapid growth. In an administration where
any form of deregulation was applauded. Gray had become an outcast, "the
great re-regulator." Ed Gray could not have been prepared for this fire storm. No FHLBB chairman in the entire 50-year history of the post had been faced with the kind of crisis Gray faced. The job had always been an easy one, with clearly defined responsibilities, chief among them being to do the thrift industry's bidding. The chairman was expected to serve out his relatively low-paying post ($79,000 a year), after which he would be rewarded with a well-paying thrift industry position. But these were not ordinary times. The seeds of the thrift crisis had been planted nearly three years before Gray arrived, but it was Ed Gray who faced the bitter harvest.
Texas thrifts had reacted most violently to Gray's restrictive regulations. A "get Gray" movement began to take form in Texas, spearheaded by Texas thrift lobbyist Durward Curlee and loan broker and Republican activist John Lapaglia. Lapaglia, whom we had originally encountered brokering loans for Norman B. Jenson and Philip Schwab, owned Falcon Financial in San Antonio. He fired the opening salvo with a full-page ad attacking Gray's new regulations. ' The ad was entitled "An Open Letter to the Congress of the United States. " It ran in the Dallas Morning News during the Republican National Convention in August 1984. Lapaglia followed up by stalking the halls of the convention handing out copies of his weekly newsletter. Falcon Newsletter, to attendees. The newsletter became a weekly denunciation of Ed Gray and his policies. Lapaglia told us he mailed the letter to 380 Southwestern thrift executives.
In September Lapaglia shot off a letter to President Reagan. He complained bitterly that Ed Gray's policies were strangling the Texas thrift industry, which had been doing just fine before Gray began to interfere. He begged the president to do something about Gray. But he also knew an election approached, and he let the president know that if Reagan didn't fire Gray right away, he would understand:
We are very mindful of our obligations to not raise sensitive issues until November; accordingly, I shall personally take no action that would not be beneficial to the Administration. After that time I expect to lead an industrywide effort, which at this moment consists of fifty-five savings institutions, in bringing a class-action suit against Chairman Edwin J. Gray and the FHLBB. [These crooks just as today,will use every possible threat to put off judgment day.Without a doubt it is this over a century long white collar crime spree that has America with her back to a crumbling wall here in 2018.Some of the founders of this country are rolling over in their graves DC]
Lapaglia kept his word and waited until after the November elections before acting. Then in December, he told us, he organized a trip to Washington D.C. He was accompanied by thrift attorney Robert Posen, John Mmahat, who was CEO of Gulf Federal Savings of Louisiana, and singer Wayne Newton, whom Lapaglia said was "having some problems with millions in loans he had on a resort in the Poconos." Also attending the Washington meeting were Texas thrift lobbyist Durward Curlee and Frank Fahrenkopf, Jr., chairman of the Republican National Committee. They met with Danny Wall in the offices of the Senate Banking Committee, which was chaired by Senator Jake Garn. Wall was Garn's chief administrative aide. (In 1987 Wall would succeed Ed Gray as chairman of the FHLBB.) Posen, who led the meeting, protested to Wall that Gray's new policies were too extreme and they would strangle the industry. Wall listened but did not respond.
Suddenly the secretary stuck her head in the room. "Mr. Newton, the First Lady is on the phone for you." (Newton was a close friend of the Reagans.)
Newton left the room to take Nancy Reagan's call. When he returned the meeting resumed. A few minutes later the secretary knocked. "Mr. Newton, the phone again. It's the president."
Newton left the room again, returning a few minutes later to summon Fahrenkopf. "The president wants to talk to you now, Frank, " he told Fahrenkopf.
When Fahrenkopf returned from talking to the president, he called the meeting to a close, telling the others that he would look into the matter. According to Lapaglia, President Reagan had asked Fahrenkopf to rein in FHLBB chairman Ed Gray. Mmahat later described the meeting in a manuscript he commissioned entitled "To Kill An Eagle." He summed up the outcome of the meeting: "It later became clear that Gray's friend, supporter and sponsor, Attorney General Edwin Meese, prevailed over any influence that Wayne Newton and the Chairman of the Republican National Committee had with the President of the United States. As a result of that support, Edward Gray continued on his course of conduct which, it is now clear, aggravated the present crisis."
Like so many who vilified Gray, Mmahat exaggerated Gray's involvement in day-to-day details. As extraordinary as this meeting and conversations with the president were. Gray later told us he was unaware the meeting even occurred and denied Fahrenkopf ever put any pressure on him about FHLBB policies in Texas. Fahrenkopf himself characterized the above account of the meeting as "pure fiction." Gray did tell us, though, that at about that time he began giving Fahrenkopf regular briefings on his actions in Texas because he felt that Fahrenkopf had the president's ear.
"I'd been told by a high White House staffer to stay away from the White House," Gray told us. "He told me that if I made an appointment with the president, Don Regan would bad-mouth me before I got there, sit in on the meeting, and bad-mouth me after I left." So, Gray said, he hoped he could get his messages to Reagan through Fahrenkopf
The appearance of Frank Fahrenkopf at that meeting was puzzling. What stake could the Republican National Committee have in all this? Maybe Fahrenkopf was responding to Lapaglia's warning that Gray's actions could cost the party the support of the thrift industry. But we learned that he also may have had a business relationship to protect. According to the Colorado Springs Gazette Telegraph, Fahrenkopf and Newton—for whom Fahrenkopf sometimes per- formed legal services' —were at that time involved in a complex transaction with the holding company of United Savings Bank (a thrift) in Wyoming. Fahrenkopf was borrowing $100,000 and Newton $200,000 to invest in an RV park in Bullhead City, Arizona, not far from Las Vegas. The RV investment was being orchestrated by a Las Vegas loan broker, John Keilly, who had shown up in our Centennial investigation—he had introduced Norman Jenson to Sid Shah. (In the 1970s Keilly did 27 months in prison for bribery in connection with a $1.25 million loan from a Teamsters Union pension fund, according to published reports.) Another investor in the Bullhead City RV park was John Pilkington, described to us by a Nevada Gaming Control Board investigator as a longtime associate of Morris Shenker.
So Newton had at least two reasons to support thrift deregulation: one in the Poconos and one with partner Fahrenkopf in Bullhead City, and Farrenkopf may also have had his own investments in mind at the Washington meeting with Wall.
☢☢☢☢☢☢☢
Gray was still struggling at that time to get a sense of just how big a problem
he had on his hands. His examiners in the field were giving him one story
—
that the situation was bad and getting worse—while industry "experts" were
saying that the problems were temporary, caused by the recession, and were
nothing to worry about. Gray received a letter from respected economist Alan
Greenspan (later to he appointed Chairman of the Federal Reserve Board) telling
him he should stop worrying so much. Greenspan wrote that deregulation was
working just as planned, and he named 17 thrifts that had reported record profits
and were prospering under the new rules. Greenspan wrote the letter while he was a paid consultant for Lincoln Savings and Loan of Irvine, California, owned
by a Charles Keating, Jr., company.' Four years after Greenspan wrote the letter
to Gray, 15 of the 17 thrifts he'd cited would be out of business and would cost the FSLIC $3 billion in losses. Gray's regulation limiting direct investments and growth had finally taken effect in mid-March 1985 and a lot of thrifts did not measure up. Centennial Savings, Vernon Savings, Flushing Federal—the list ran into the hundreds. The U.S. League had opposed the new regulation fiercely before it was adopted by the Bank Board, but they suddenly changed sides when they saw Gray had Senator William Proxmire, the powerful Senate Banking Committee chairman, on his side. Also, the growing number of thrift failures had begun to scare the League. It was becoming clear that accommodating the bad-boy S&Ls was eventually going to cost the other thrifts billions. In fact, they realized, if the carnage were really severe, it could lead to public pressure to re-regulate the entire industry.
But in Congress the old adage that money was the mother's milk of politics held true. Following deregulation the thrifts became the cows, and there were certain congressmen who never missed a milking. Go-go thrift operators had plenty of money, and they were sharing it with their friends in Washington. We'd already seen that Congressman Tony Coelho (D-Calif. ) had nuzzled right up to Don Dixon at Vernon; Congressman Doug Bosco (D-Calif. ) had Erv Hansen at Centennial; and Speaker Jim Wright (D-Tx. ) had Tom Gaubert at Independent American in Dallas. Now we learned that Charles Keating, Jr., his employees, business associates, friends, and family had donated $220,000 to Arizona politicians, $85,000 to California worthies, $34,000 to Ohioans, and more—$440,000 in all.
While Keating and his associates were giving politicians money, Ed Gray was giving them only headaches. No sooner had Gray's direct investment regulation gone into effect than 220 members of the House of Representatives had signed a resolution asking the Bank Board to delay the implementation of the new rule. Congressional hearings were scheduled for late March 1985:
Representative Frank Annunzio (D-lll.) looked down the long table at Gray,U.S. League President Bill O'Connell, and others who had come to testify in favor of the direct investment regulation.[Illinois,New York,Texas,Florida,California,
"We ask that the agency postpone the effective date of this rule," Annunzio boomed.
"That's impossible, Congressman," Gray said he replied. "It's been in effect since March 18."
Annunzio countered, "The Bank Board is acting too hurriedly in putting the regulation into existence. It could well be the beginning of the end to the dual banking system in this country."
Gray reminded the congressman, "It's the FSLIC, not the states, that has to pick up the tab for thrift failures, Congressman."
Annunzio was unswayed and again demanded that Gray delay applying the new regulation.
"Mr. Annunzio"—Gray bristled —"if it is rescinded or postponed, losses . . . will fall squarely on the shoulders of the Congress itself We cannot delay implementation."
Gray said Annunzio flushed with anger, took a deep breath, glared down the table, and then stormed out of the hearing room in protest. With Annunzio gone, Representative St Germain, chairman of the House Banking Committee, finally came to Gray's aid. He said he agreed with the Bank Board's new regulation, adding, at long last, that he had little sympathy for thrifts that asked for concessions.
"They can just go jump in a lake," St Germain said as he gaveled the hearing to a close.
Everyone knew the fight couldn't be over. There were too many shaky thrifts across the country that would not be able to survive under Gray's new rules. If they had to dispose of some of their direct investments, which they were carrying on their books at inflated prices, their houses of cards would tumble because they would have to take large losses. Still, the regulation went into effect and FHLBB examiners across the country began measuring thrifts by the new yardstick. Then Gray had to turn his attention to another old problem. There weren't enough examiners. Gray needed more eyes and ears in the field if he was to enforce his new regulation. He had 3,200 thrifts (handling a trillion dollars in deposits) but his examination staff numbered only 679. That was about one examiner for every four and a half thrifts. Some institutions had gone over two years without an examination. Gray figured he needed to double his examination staff, at least, if he was to effectively enforce his new regulation—or any of the old ones for that matter.
Gray picked up the phone and called Dave Stockman at the Office of Management and Budget. Stockman held the purse strings and would have to approve any increase in staff at the Bank Board. But Stockman had no interest in helping Gray, who a year earlier had humiliated him by shooting the FCA job out from under him, and Gray had to meet with his assistant, Connie Horner. Horner said she was a busy person, but she said she could squeeze him in over lunch at the White House.
As Gray walked through the iron gates of the White House on the way to the executive lunchroom, he reflected that the root of the thrift problem was the "high fliers," as he liked to call them—the wild and crazy guys like Dixon, McBirney, and Hansen. Gray had made his high-fliers speech many times, and that day he planned to tell Horner again that high fliers were using brokered money to engage in risky and complicated investments, many of them fraudulent. To stop the abuses he needed more examiners to ferret the con men out of the system. Gray had butted heads with Horner over staffing before, but he was sure this time she'd see the wisdom of his case.
As they settled in for lunch at the White House senior mess, an oak-paneled dining room where only the cabinet and senior aides to the president were allowed to dine. Gray laid his cards on the table. He wanted to double the examination staff to 1,400. What's more, with a turnover rate exceeding 30 percent, he needed to raise examiners' base pay from an average of $14,000 a year to a level more competitive with private industry examiners. Gray said Homer ate and let Gray talk. She had been through all this with him before. Like the Dickens character in Oliver Twist, Horner always responded the same way to Gray's requests for additional staff: "You want more examiners?? "
She told him it wasn't a matter of money but of philosophy. The administration's philosophy was one of deregulation. That meant fewer regulators, not more. As Gray listened to her recite the administration mantra, he reflected on her own bloated staff. Each time Horner trooped over to his office for a meeting she dragged with her a staff of eight. They filed in behind her like baby quail behind their mother. He could never understand why she brought them along, since they never seemed to do or say anything.
Gray looked around the lunchroom while Horner lectured, noticing how much the senior mess resembled the interior of a ship. Horner speculated out loud that maybe, just maybe, she could swing 30 more examiners for him if Gray would be more cooperative and get back into step with the administration. Gray said Horner also issued a thinly veiled warning, reminding Gray of his expense account troubles. She even suggested he could go to jail if his overages proved to be a violation of something called the "Anti-Deficiency Act," which mandated how much the Bank Board could spend. Gray was already over that amount, she claimed, way over it. Gray said there must be some mistake and he'd clear it up. (A few months later it was discovered that an OMB accountant had "misplaced" a decimal point and Gray was, in fact, within his budget.) But the message Horner sent was clear: The administration could play hardball with one of its own if that person strayed too far off the reservation.
Gray, however, had a card up his own sleeve. His months of being knocked around by Washington pros had taught him that he wasn't going to make any friends in this job anyway and hardball was the only way to play the game if you wanted to win.
"Okay, Connie." Gray said when she finished her speech. "Then I'm transferring the examiners to the district banks."
Horner was stunned. What Gray was proposing to do was to transfer responsibility for all future thrift examinations and supervision from Washington to the 12 district banks across the country. The district banks, although answerable to the Bank Board in Washington, were independent entities, owned and operated by the thrifts within their district. The FHLBB had oversight over the 12 district banks, but the OMB did not. hi making such a transfer Gray would remove any authority OMB had over the number of examiners the FHLBB had or how much they were paid.
"You mean you're going to have non government employees regulating?" Horner gasped.
"They're already doing it,"
Gray said. "I don't see a problem with it." Horner, Gray recalled, just glared at him across the remnants of lunch. Although decentralization of federal government was one of the goals of Reaganomics, transferring 700 federal examiners away from the interfering hands of the White House and Congress was something else.
"Well, I've got to get back to the office, Connie. Thanks for the lunch." Score another one for Gray.
A week later Horner trooped into Gray's office at the Bank Board, her eight assistants in tow. "I'll offer you a deal, Ed," she snapped, sitting herself down at a large dining-room table Gray had had brought to the office for such meetings. The table sat only six comfortably, so Horner's staff had to squeeze in around the edges. "If you agree not to transfer the examiners to the district banks, I'll give you 39 new ones," Horner said, as though she were making a major arms control proposal.
Gray was flabbergasted. He looked around the table at the blank expressions on the faces of Horner's staff. Finally, running his hand through his thin gray hair, Gray told her it was a deal he simply could not make.
"Really, Connie, I need 1,100 examiners," he insisted.
As soon as Horner and her minions trooped off. Gray, his general counsel. Norm Raiden, and his chief of staff, Ann Fairbanks, finalized the transfer of the examiners to the district banks. The move, effective July 1985, greatly strengthened the district banks and got Washington bureaucracy out of their lives,two things the industry liked. Gray told the district banks to begin making arrangements to bring on board at least 700 new examiners immediately and to raise starting salaries from the current $14,000 to a more competitive $21,000," The transfer of examiners was accomplished just at the same that Centennial Savings and Consolidated Savings were teetering on the brink.
If Gray's end run around OMB made him some new friends outside Washington, it did nothing for his standing on Capitol Hill or for the congressmen's vocal thrift constituency. The last thing in the world Don Dixon and his kind wanted was more examiners. To their mind there were too many regulators poking their noses into thrifts' books already. Those S&L owners, heavy contributors to congressional and senatorial candidates, renewed their call for Gray's ouster. First he had attacked brokered deposits, the lifeblood of the industry, then he had limited direct investments and growth, and now he was sending 700 more examiners into the field. He also was insisting that supervisors on the district level issue supervisory agreements and cease-and-desist orders more firmly and promptly. He was very unhappy with what seemed to him to be a lax enforcement of his new regulations.
In the midst of the intramural skirmishing Gray was making regular trips to Capitol Hill to answer questions from angry congressmen on various committees. He and his general counsel. Norm Raiden, took a particularly tough grilling in July before a House subcommittee investigating the failure of Beverly Hills Savings in April. Before Raiden had become general counsel for the FHLBB he had been an attorney with the Los Angeles firm of McKenna, Connor and Cuneo (one of the top S&L law firms in the country), and he had represented Beverly Hills Savings during the time that Beverly Hills management was making insider loans and speculative investments. Congressmen accused Raiden of "severe and extreme conflict of interest" in his handling of the Beverly Hills case after he became counsel for the FHLBB. Gray defended Raiden (and kept him in his post), and Raiden denied any conflict of interest.
Representative Thomas A. Luken then called Gray on the carpet for not acting sooner against Beverly Hills, saying "Mr. Gray is following an Alice-in- Wonderland approach" to thrift problems. He said the FHLBB "lacks the incentive to take aggressive action."
Gray replied that "a very important contributory factor" to the lack of timeliness in dealing with Beverly Hills was a shortage of examiners, which had now been corrected by transferring them to the FHLB's.
Luken then demanded that Gray "do the decent thing and resign" because he had implied that he couldn't do the job with the personnel he had. [Luken had to be crooked DC]
Representative John D. Dingell (D-Mich.), chairman of the subcommittee, came to Gray's defense, saying that it was "a national disgrace " that the Bank Board lacked the funds to have a sufficient and properly trained examination force. Dingell, on several occasions during the hearings, characterized Gray as "an honorable man, " but he denounced Raiden for his failure to stop the abuses at Beverly Hills when he was the thrift's attorney.
In other appearances on Capitol Hill, Gray testified on the worsening condition of the industry' insurance fund, the FSLIC. The insurance fund. Gray said, did not have enough money left to close all the insolvent thrifts.He projected that the cost would run into the billions of dollars. In July he testified the FSLIC would need $15 billion to clean up the industry. His numbers were based on a report by Bank Board economist Dan Brumbaugh. Congress was stunned. Where would the industry get that kind of money?
Gray was at such a hearing when his driver tiptoed into the hearing room and whispered in his ear. "Sir, there's an urgent call for you on the car phone." It was Bank Board member Mary Grigsby. She asked Gray to call her back on a regular phone. She didn't want to discuss this matter on the car phone where it could easily be monitored by any ham radio operator.
When he returned to the office he called Grigsby.
"Ed, I just got a phone call from someone representing a substantial California savings and loan," she said. "They want to offer you a job." [Yeah trying to buy him off DC]
"Who?" Gray asked, wondering who thought he might be available. Speculation was always floating around Washington that he was leaving office, but he had denied all the rumors.
Grigsby didn't want to be more specific over the phone. Gray said he'd be available to chat later that afternoon, and he set a time for Grigsby to meet him at his office. When she arrived she told him just who the suitor was. It was Charles Keating, Jr. , of American Continental Corporation (which owned Lincoln Savings and Loan in Irvine, California), a leader of the chorus that was singing for Gray's removal.
The offer stunned Gray. He knew regulators were crawling all over Lincoln's books and complaining that Lincoln was in gross violation of his new direct investment regulation. Lincoln was one of Gray's nightmare thrifts. (Lincoln grew from $2.2 billion in deposits in 1984, when Keating's company acquired the thrift, to $4.2 billion by 1987, and some of that money was invested in high risk junk bonds.) In 1985 regulators said Lincoln had only $54 million in passbook accounts and $2. 1 billion in large C.D's.
Gray told us he consulted Bank Board general counsel Norm Raiden on the Keating offer. "He wants to get you out of the way," Raiden told Gray. The offer had been a vague one, so Gray sent Ann Fairbanks to a breakfast meeting with Keating to verify that this was a real offer. She came back and said that it was, though later Keating denied ever making such a proposal, just what Keating might have been prepared to pay Gray was never disclosed. Executives at American Continental Corporation were very well paid. Keating, who earned $1.9 million in bonuses and compensation in 1987 as head of American Continental, was reportedly the second highest-paid executive in the thrift industry. Three other American Continental executives, including Keating's son Charles Keating III, were among the ten highest-paid industry executives. Keating the III made $863,494 in 1987. Another son employed by Keating's American Continental Corporation was Mark Connally, son of the powerful former Texas Governor John Connally.
Keating, with palatial estates in Arizona and the Bahamas, private jets and helicopters, was rich beyond Ed Gray's dreams. He had a reputation as an anti- pornographer and a philanthropist, and one of his favorite charities was politicians. He also encouraged his friends, employees, and business associates to contribute. Keating knew no political party. His largesse flowed equally to Democrats and Republicans alike.
Though now head of a multibillion-dollar thrift empire (Lincoln Savings made up about 85 percent of American Continental Corporation's assets), SEC documents revealed that in 1979 Keating had been accused by the Securities and Exchange Commission of misusing bank funds in Ohio by lending $14 million to friends and associates between 1972 and 1976. The SEC alleged that Keating, Carl Lindner, and Donald Klekamp, all officers of American Financial Corporation of Cincinnati, used Provident Bank, which American Financial controlled, for their own benefit. They accused the three men of a long list of SEC violations, including permitting Provident Bank to make loans to them without collateral, extend them new loans to cover the interest they owed on the old loans, roll over loans as they matured without demanding payment, and guarantee loans that other banks had made to Keating and others.
Keating and two associates consented to the SEC judgment without admitting or denying the allegations in the SEC complaint. After reading the charges, and even knowing that the SEC never had to prove them in court, we still wondered how Keating later got control of a thrift. In late 1988 published reports revealed that Keating, through American Continental, had gotten caught up in another SEC investigation, this one centering around MDC Holdings Inc. (a major borrower at Silverado Savings in Denver and an associate of a Southmark subsidiary), and that the SEC was investigating American Continental's accounting methods.
Gray said he turned down Keating's job offer without ever talking to him. When a reporter from the National Thrift News called Keating and asked if he had tried to hire Gray away from the Bank Board, Keating simply said. "No. That's all I have to say at this time. Good-bye." Click.
Though Gray turned Keating down, he was thinking that it was time for him to keep his promise to his wife and bow out of the Washington scene. After all, he'd already stayed on several months longer than he had meant to. But he had no intention of being forced out. He was determined to orchestrate his own departure from public life. But his enemies were impatient, particularly Don Regan, who now decided it was time to put the pressure on Gray again. He knew Gray was on the outs with a lot of people in the industry, most recently because Gray had told them the insurance fund was down to $3 billion in reserves to cover $1 trillion in deposits and member thrifts were going to have to set aside 1 percent of their assets to make up the shortfall.
That news was a sour pill that thrift officers did not want to take, and Regan seized the moment to leak to The Wall Street Journal the "news" that Gray was resigning. It was Regan's way of saying to Gray, "Here's your hat. What's your hurry?" It was also no secret that Regan wanted his old friend, former stock exchange president James Needhain, in Gray's place.
When reporter Monica Langley of The Wall Street Journal called Gray for comment on the rumor that he was resigning, Gray was stunned.
"I am?" he said. "I think I'd know if I was resigning."
Langley told Gray she had gotten the news "from the highest possible authority."
"You mean the president?" Gray asked, half fearing the answer.
"No," Langley responded, but a very high source.
Ah, Gray thought . . . Don Regan. Gray was tired and mad.
"No, I'm not resigning," he told Langley, and he hung up the phone. At that moment Gray knew he was going to have to break that promise he kept renewing to his wife that he would retire soon. He was staying on.
The decision brought with it more than personal hardship. It meant financial hardship as well. Gray's $79,000-a-year salary was quickly eaten up by the cost of living in Washington and maintaining a home base in San Diego. He also had two daughters in college. Gray said he took out small personal loans from ; Washington banks to support himself. He even borrowed from his mother. (By the time he left the Bank Board his personal loans exceeded $80,000, Gray said.) He chaffed at the thought of having to scrape and beg while people like Don Dixon and Ed McBirney and Charles Bazarian lived the life of Reilly.
But once again Ed Gray had outfoxed the Washington pros. One could almost hear the sighs of frustration when they read Gray's remarks in The Wall Street Journal: "Resigning? Why no. I'm staying on."
A week later White House spokesman Larry Speakes reaffirmed the administration's support for Gray. "Ed Gray can stay as long as he wants," Speakes said.
By the time 1985 rolled to a close it looked to Gray as though he might finally have turned the corner. They'd passed the regulations to curb direct investments and growth, and they'd gotten more examiners in the field—major accomplishments that should at least hold the high fliers in check while regulators and law-enforcement officials mopped up the damage that had already been done. As Gray flew out of Washington to spend the holidays with his family in San Diego, he felt the first optimism he had enjoyed in months. He sat back in his seat and watched from the window as his plane left Washington—and the thrift crisis—behind. He thought maybe the worst was over.
TWENTY-THREE
The Touchables
While officials at the Federal Home Loan Bank Board in Washington caught
their breath, enjoying what they did not yet realize was simply a lull before another storm, pressure was building down the street at the Department of Justice
to pay more attention to the thrift industry. But they were no more prepared to handle the thrift crisis than the FHLBB had been—and for many of the same
reasons. The Department of Justice was understaffed. FBI special agents and U.S. attorneys in field offices around the country were battling a war on drugs that had already stretched them far beyond their resources. It took awhile for them to realize how many swindlers had infiltrated the thrift industry, and once they did they found they were woefully short of FBI agents and U.S. attorneys with accounting backgrounds who could unravel the paper trails of sophisticated bank fraud. Regulators who contacted the FBI for assistance were often put on hold —literally.[So this is how they did it,first they had a member declare a war on drugs,at the same time,another member decided He was going to become the biggest drug dealer/bank robber of all time with the help of his friends in intelligence.Controlling all the major ports and entries into the country,this member could flood America with as much drugs as it takes to keep Justice and Law busy enough looking at the drugs,to not look at what he was doing with the money.It worked,and I do not believe a halt has been put to it yet here in 2018.I believe the member is now with no memory,and they run him out there for pic for whatever nefarious reason,and I would guess that the member's junior is now the biggest Racketeer in the united states history.That would explain some of the off the wall events over the last 10 years.Man I hope some Good guy knows what has to happen for this one.DC]
"I had to phone the Los Angeles FBI office 17 times trying to get them to open a case when North American Savings and Loan failed," California Savings and Loan Commissioner Bill Crawford complained later. "After 17 calls an agent finally returned my call and told me. "Look, if you're telling me that North American is more important to you than Consolidated Savings and Loan, I'll drop my Consolidated investigation and come right over.' " If not, he said, he could get around to North American in about two years.
Particularly in hot spots like Texas and California, the FBI simply did not have enough agents to investigate all the thrift fraud cases. In 1983 the FBI had only 258 agents assigned to bank fraud investigations, and within a year they would have over 7.000 cases to investigate. Three years later there would be only 337 special agents to investigate what by 1987 would increase to over 11,000 cases. To make matters worse, bank fraud was an incredibly complex white collar crime. Each major case took from two to four years to investigate and prosecute. The FBI just didn't have the manpower. In San Francisco, for example, the FBI's white-collar crime unit had only 34 FBI agents to handle not only bank fraud but also drug-money laundering, corruption of public figures, and espionage. Part of their district ( 15 California counties from south of Monterey to the Oregon border) included Silicon Valley, which was waist-deep in spies trying to get information on nearly $7 billion a year in Defense Department projects, the head of the San Francisco FBI office told us he needed nearly twice as many FBI agents (60) for his white-collar crime unit.
Even if the FBI had the manpower, the United States attorneys' offices did not have enough assistant U.S. attorneys to take the cases to court. When an assistant U.S. attorney took on a major thrift fraud case that attorney was lost to the department for up to two years. The cases were backbreakers and budget busters. To make matters worse, there was a lot of turnover in U.S. attorneys' offices. Assistant U.S. attorneys could earn about $70,000 a year prosecuting federal cases for a few years and then retire to the private sector, where they could earn twice (or three times) as much representing the crooks.
But something far more damaging than lack of manpower was undermining the Department of Justice's response to criminality within the thrift industry. The biggest threat to the proper prosecution of these cases—and the hope of deterring further such abuses—was the thrift and bank regulators' penchant for secrecy. Ironically, the best accomplice that thrift crooks had after they were discovered was the federal regulators, who secreted away the evidence of the crime and sat on it.
On an increasingly regular basis, starting in 1985, FBI agents around the country saw thrifts in their jurisdiction being seized by federal regulators. Insiders or informants would tell them of massive fraud at the failed thrift, but regulators were referring only a handful of the cases to the FBI. The agents wondered why their phones weren't ringing off the hook. The Bureau contacted Federal Home Loan Bank officials and asked why they had not reported these alleged crimes to the FBI. The answer they got could have come right out of a Kafka novel.
"We can't discuss these cases with you," they were told. "That would be against the law."
The law the regulators were referring to was the Right to Financial Privacy Act, which Congress passed in 1978. It mandated that a person's business with a financial institution was privileged, like his business with his doctor, attorney, or priest. Regulators told FBI agents that, yes, many of the thrift failures had been caused by insider and customer fraud, but the law forbade regulators to discuss any thrift's relationship with any customer (which regulators interpreted as meaning even fraudulent relationships). And, no, they wouldn't be in a position to supply the agents with any evidence to help them in their investigations. That meant there could be no investigation because when the FSLIC seized an institution it sucked up every atom of information on the spot, and immediately it all became as secret as plans for the stealth bomber. Without the evidence that was in the regulators' possession, no United States attorney could hope for a conviction of a bank swindler. He needed those phony appraisals, postdated documents, fraudulent financial statements, endorsed checks.
The problem wasn't a new one. The Bureau had had earlier problems with banking regulators over the same issue. After the collapse of the Butcher brothers' banks in Tennessee in 1983, the FBI actually had to complain to a Senate subcommittee to get FDIC regulators to release the phony loan documents they needed to convict the brothers. The regulators fought the justice Department every inch of the way, leading The Wall Street Journal to wonder in an editorial if regulators might be worried less about bank secrecy than they were about what the documents said about their own ineptitude.
"Since the FDIC was the main agency keeping watch over the Butchers' banks, its documents afford the best picture of what went on. But every time its files have been subpoenaed it has asked the court for a sweeping protective order. . . . Similar cover-ups blanket a multitude of other cases, including one in which the defendants contend the plaintiff FDIC sought the protective order to 'hide its own culpability.' "
Concerned that serious white-collar criminal investigations involving the theft of hundreds of millions of dollars were going nowhere while FBI agents fought with federal regulators in public over scraps of information, the Justice Department in December 1984 had called for a sit-down with regulators. Together they formed a joint working group to which they gave a $50 name: "The Attorney General's Interagency Bank Fraud Enforcement Working Group. " The group's mission was to mesh the needs of prosecutors, FBI agents, and bank supervisory personnel and to "identify, address, and resolve issues of major significance relating to the detection, reporting and prosecution of bank-related crimes, focusing especially on crimes by insiders of financial institutions."'
The Justice Department began to teach bank examiners how to spot bank fraud, and the FBI began work on a computerized tracking system that would contain the names of known bank swindlers. When crooks moved from one FBI jurisdiction to another, agents could just type in their names and get a complete history on them. Unfortunately that system was not scheduled to go online for several years.
Regulators were told in no uncertain terms that the Right to Financial Privacy Act in no way prohibited them from releasing information to the FBI on suspected criminal activity at a financial institution. They were provided with criminal referral forms and told to file one anytime they had suspicion of a crime. But old habits died hard. To a regulator financial information was as sacred as the Holy Sacrament was to a priest. One just didn't hand something that precious to the uninitiated, the great unwashed—and particularly not to ham-handed FBI agents with lumps under their coats. Agents were still required to get a federal court subpoena for anything they wanted from regulators.
An example of passive-aggressive behavior by Bank Board examiners was their "redacted" criminal referral, which satisfied the letter of the law while totally avoiding the spirit. One veteran FBl agent recalled his first run-in with a redacted criminal referral.
"You would not believe it. It read kind of like this:
Loan officer A made a loan to borrower B. Borrower B supplied fraudulent financial information on the loan application. Loan officer A knew the information to be false. Appraiser C supplied an inflated appraisal on the property. He and Borrower B and Loan Officer A knew the appraisal was false. When the loan was funded Borrower B paid Loan Officer A and Appraiser C $25,000 kickbacks out of the loan proceeds.
"I called that character [the examiner] back and asked him just what he expected me to do with this piece of shit. I told him I couldn't investigate people with code names, that he had to put their real names in the referral. What the hell did those clowns call us for? They wanted us to investigate someone but they wouldn't tell us who?" (The FHLBB is the only agency in government that employs redacted criminal referrals.)
Secrecy at the 12 district banks became an obsession and got even worse after Danny Wall succeeded Ed Gray at the FHLBB. If we called to speak with Bill Black or Mike Patriarca at the San Francisco Bank, at least one "listener" would stay on the line to make sure Bill or Mike didn't spill any unauthorized beans. Black, before Danny Wall took over as FHLBB chairman, was well known to Washington reporters for his good rapport with the press. However, once Wall became chairman that changed. Black reportedly wrote a memo to Wall criticizing the FHLBB's new Southwest Plan (Wall's much-ballyhooed answer to the S&L crisis in Texas that called for selling bankrupt thrifts), which was costing the FHLBB billions of dollars. Wall, according to former regulators, put Black on an informal muzzle, threatening to fire him if he criticized FHLBB policy again. Wall brought in the FBI as a consultant to help the agency keep a lid on information. He hired a security officer to track leaks. This Nixonian paranoia reached its peak when Wall's chief of staff recommended that the FHLBB offer a $20,000 reward for anyone who could turn in a leaker. (Wall decided against the plan.) Washington columnist Jack Anderson reported that the year after Wall took office he convened the FHLBB for only three public meetings but held at least 70 meetings behind closed doors.
Such secrecy inevitably raised suspicions that the regulators had something to hide. We began to wonder why we never found a single instance where federal regulators had filed a criminal referral against one of their own examiners. Were we to believe that, while crooked thrift officials were busily bribing appraisers, accountants, and contractors, and receiving kickbacks and bribes themselves, not a single $14,000-a-year FHLB examiner ever took a bribe to cover up? Regulators said no, but we began to hear differently. One California examiner was quietly fired by the San Francisco FHLB after it was discovered he had received a $6,000 check from a crooked thrift officer. In Texas an officer of a failed thrift actually let a grand jury charge him with perjury rather than repeat to the jury what he had already told two different FBI agents three times in different interviews: Two days before he was subpoenaed to appear before the grand jury, an employee of the FSLIC whom he had known for years had called and told him to "get dumb" if it came to testifying before a federal grand jury. Still, not until 1989 did we find a single FHLB examiner or supervisor charged with wrongdoing.
Then the facade began to crack. We learned that the FSLIC had hired Stuart Jones in Washington to help dispose of Texas S&L assets while he was reportedly being investigated by the FBI in Dallas for alleged criminal wrongdoing at Richardson Savings in Dallas, which had collapsed. Jones was a commercial loan officer at Richardson until he was fired in March 1986. The National Thrift News reported that the FHLB in Dallas had filed not one but two criminal referrals on Jones, both of which the FSLIC was blissfully unaware.
A couple of weeks later the FBI arrested twin brothers Philip and Thomas Noons and charged them with defrauding the FSLIC while employed by the agency to help liquidate insolvent Mainland Savings in Houston. The men were charged with setting up a complex web of offshore banks to acquire assets of Mainland at below-market value. They pleaded not guilty and their trial was pending at press time.
Then the FHLBB announced it had asked the Justice Department to investigate charges that the former head of the FSLIC, Stuart Root, had given Silverado Savings in Denver (where Neil Bush had been a director) advance warning that regulators were going to seize the thrift in December 1988. Root denied the charges.
These were all just allegations. No one had pleaded guilty or been convicted by a jury at this writing. But this cascade of allegations in early 1989 reinforced our own suspicions that all the confusion and sense of urgency surrounding the faltering thrift industry might become fertile ground for a second wave of thrift fraud, this time perpetrated by the very people sent to save the industry.
Apparently we weren't alone in our concerns. In mid- 1989 we learned the FBI had spent over $11,000 flying two suspected Texas thrift swindlers around the country. According to court testimony, the pair met with important elected and appointed officials in Washington under the guise that the two men wanted to acquire troubled Texas thrifts. The FBI wired them and recorded the conversations. In all, 38 hours worth of body tapes were collected by the pair. While in Washington meeting with congressional aides, the pair met in June 1988 with none other than FHLBB Chairman M. Danny Wall, a meeting they said had been arranged for them by Texas Senator Phil Gramm. Wall later confirmed the meeting. When the San Antonio Light ran a story that Wall was a subject of an FBI probe, the FHLB and the Justice Department vehemently denied Wall was a target. The tapes were put under court seal when the U.S. attorney argued that their release could jeopardize the probe. At press time precisely what that probe involved remained under wraps.
Secrecy at the FHLBB succeeded for a long time in keeping the public from finding out that fraud was rampant at S&L's. Occasionally someone on the inside would speak out, but that was rare. In January 1987 William Weld, assistant attorney general and head of the Justice Department's criminal division,' said in a speech to the American Bar Association: "... both FBI and FDIC figures confirm that a large percentage of bank failures involve allegations of criminal misconduct on the part of the bank's senior management. . . . We have even got organized crime types taking a look at thinly capitalized financial institutions which are candidates for takeover, and then using various specified fraudulent schemes to create a paper financial asset which they can then pull the plug on after a year and a half or two, and leave the FDIC or FSLIC, i.e., the taxpayers, holding the bag. . . . Insider fraud thus obviously plays a major role in bank failures, and we now have evidence to suggest a nationwide scheme linking numerous failures of banks and savings and loan institutions throughout the country."
Unfortunately Weld's words didn't get much attention (we didn't hear about them until 18 months later), and regulators continued to play the secrecy game. In late 1988 we called the San Francisco FHLB to ask about complaints we were still getting from FBI agents that they weren't receiving criminal referrals. A public relations person took our message and said she'd have an official call us back. Half an hour later she told us the official was "not comfortable talking to you about this."
We did talk later, but only after we told the PR person that we already had the FBI side of the story and if the FHLB didn't want their side presented, we were "comfortable" with that. Then we were invited to a meeting with the Bank's criminal referral staff. At that meeting we were told that, indeed, the regulators had "fouled things up in the past" when it came to timely criminal referrals and providing information to the FBI. But since April 1988, they said, a new system was in place and the machinery was functioning much better. They, in turn, now criticized the Justice Department, saying that many cases referred to the FBI were not being prosecuted. Congress released the results of a confidential internal FBI audit that painted a bleak picture of the FBI's ability to investigate sophisticated financial crimes. Some federal prosecutors, the report said, were giving their bank fraud cases to IRS agents or Secret Service agents to investigate, and some were going so far as to hire outside accountants to do the sleuthing.
Criminal referrals remained the chafing point between the Justice Department and thrift regulators. But civil suits that the FSLIC filed against thrift abusers, to try to recover some of the FSLIC's dwindling fund, were another important stumbling block in the complicated task of bringing criminal charges against thrift looters, though regulators would never admit it. When a thrift failed the FSLIC hired a high-powered private law firm to represent its interests against the thrift's former management and customers. Those attorneys were called "fee counsel" because the FSLIC paid them a fee for their services— a fat fee. In a short 18-month period between January 1986 and September 1987. the FSLIC reported it paid out a staggering $108 million in legal fees to independent fee counsel working on thrift failures nationwide (prompting one attorney to suggest they rename the Garn-St Germain Act the Lawyer's Relief Act of 1982).
Fee counsels' job was to figure out how the thrift's assets had disappeared and to go after them. They sued thrift officials who were guilty of self-dealing and borrowers who had defaulted on their loans. And they had no interest in seeing those people arrested because the accused might start squirreling their money away to pay for criminal attorneys and say they didn't have enough money to pay the civil judgment. Fee counsel complained further that when they filed a criminal referral, FBI agents flashed badges in the faces of their civil defendants, scaring them, and everyone immediately clammed up. Defendants being deposed in a civil case would suddenly start taking the fifth amendment on the grounds that a criminal investigation was under way and anything they said in the civil action might be used against them in the criminal case. For these reasons many fee counsels just counted to ten whenever they were tempted to file a criminal referral and kept counting until the temptation went away. The issue became one of priorities: Was it more important to collect the missing money or punish the offenders?
At the FHLB in Topeka we ran across a prime example of regulators' reluctance to make criminal referrals to the FBI. After discovering what appeared to be fraud at SISCorp, an Oklahoma thrift servicing company heavily influenced by Charles Bazarian, attorneys met with Kermit Mowbray, president of the Topeka Federal Home Loan Bank, to advise him of their findings. A transcript of the meeting included the following exchange:
"I can't minimize what I feel to be suspicions of criminality."an attorney told Mowbray. But, apparently concerned about the conduct of possible civil proceedings, he quickly added, "I think if there was a stampede now by certain investigating agencies, I wonder if it wouldn't set off somewhat of a situation where people would become immobilized.
"For example, if we called up the FBI . . . they're hot on white-collar crimes anyway. And that if the FBI was to hit the streets and investigating who knows ... I wonder if it would help or harm in the short term . . . everybody retreating into a very defensive posture and not saying anything to anybody without four lawyers and a monsignor present."
Mowbray replied, "I'm not sure that we need that. We usually do not call the FBI in until we have done our own investigation."
"Well, that's fine," the lawyer replied, apparently satisfied that no ham handed FBI agents would be muddying his civil waters.
The end result of the strained relations between regulators and the Department of Justice was clearly visible in the numbers. Even as late as 1987 (three years after the working group's formation) the San Diego division of the FBI would be working on only nine bank fraud investigations in the $100,000 to $250,000 category (a category large enough to exclude garden-variety embezzlements). None of those investigations was referred by the FSLIC or the FDIC. Two were referred by the district attorney, two by an FBI informant, and two were started after agents learned of alleged bank fraud while reading the morning paper over coffee. The other three referrals also did not come from regulators.
In Los Angeles in 1987 the federal prosecutor would receive 78 criminal referrals in cases involving losses between $100,000 and $250,000. None of those cases was referred by the FSLIC. Informants referred seven of the cases and seven more were initiated by the FBI on its own after it stumbled over information while investigating unrelated crimes.
In cases where the loss exceeded $250,000 nine investigations were initiated in the San Diego division, and none of those was referred by the FSLIC. In Los Angeles 14? criminal referrals were filed in the $250,000-plus category, of which the FSLIC was responsible for only five.
When regulators did make criminal referrals and forked over supporting documentation, the Justice Department often refused to keep them informed of the progress of the case (or to give them the information the FBI gathered that might help the FSLIC locate some of its missing money) and prosecutions were uneven, depending entirely upon the individuals called upon to handle the case: the FBI agent, the U.S. attorney, the judge, and the jury. If an FBI agent pursued his suspects with vigor and collected all the necessary information to support an indictment, he then had to "sell" the case to an assistant U.S. attorney who would decide whether or not to prosecute the case. The system worked best when there was a team of an FBI agent and a U.S. attorney who were both dedicated to the prosecution of the case, like U.S. Attorney Joe Cage and FBI Agent Ellis Blount in Louisiana (Herman Beebe) or U.S. Attorney Lance Caldwell and FBI Agent Joe Boyer (State Savings/Corvallis) in Oregon. But those were the rarest of exceptions. (In late 1988 a congressional report stated that 60 cases in which the FBI in the Northern District of California had completed its investigation had gone unprosecuted.)
If the U.S. attorney gave the go-ahead to prepare evidence for a grand jury, and (the grand jury handed down indictments, the U.S. attorney had another chance to decide how much he believed in his case. Could he spare the long months it took to prepare for trial? And then the weeks in court? If the answer was no, the U.S. attorney would dispose of the defendants one by one by offering them relatively light sentences or even probation in exchange for a plea to one count of bank fraud. For the U.S. attorney's career scorecard a plea bargain counted as a conviction, just as if he had sent the crook up the river for 20 years.
But suppose the U.S. attorney decided to bite the bullet and take the case to court. Then he and the FBI agent faced the tedious work of building a case, and they nearly always did so by reinventing the wheel. The fraternity of high fliers and professional white-collar criminals who looted thrifts seldom confined their efforts to one financial institution. Yet FBI investigators rarely looked beyond the thrift in their jurisdiction. Time and again when we asked an FBI agent about a suspect we were investigating we discovered the agent had had no knowledge that the same person was under FBI investigation for bank fraud 1,000 miles away. Crooks networked—FBI agents did not. In fact, we found that reporters like Byron Harris at WFAA-TV in Dallas and Pete Brewton at the Houston Post were far better informed about the network of major players in the thrift bust-out game than many FSLIC attorneys, U.S. attorneys, and FBI agents actually working the cases.
Once FBI agents and the U.S. attorney had gathered their information and made a case, they had to endure the uncertainty of the outcome. Would a jury understand the complicated financial deals? Would they understand what a cash for-trash deal was, what a land flip was, and how they were used to bilk a thrift? And if they got a jury to convict, would the judge hand down a sentence tougher than the prosecutor could have gotten if he'd just plea-bargained at the start? Every inch of the path, from discovery of the crime through prosecution, was littered with uncertainty.
Judges and juries had a hard time dealing with white-collar criminals. White collar criminals didn't look like crooks—they looked like businessmen. In more than one instance we saw them con FBI agents, U.S. attorneys, judges, and juries. Swindlers are by definition likable folks. They'd be damned poor con men if they weren't. A few hours with a Charles Bazarian or a Mario Renda had most folks wondering why everyone was picking on them. All too often we saw people like Beverly Haines and Herman Beebe come before judges who could not bring themselves to view the defendants as serious criminals. Instead, they were treated like characters out of some Greek tragedy . . . victims of fate ... in the wrong place at the wrong time . . . choosing the wrong fork in the road but otherwise fine fellows . . . when in fact they were criminals, plain and simple. They were swindlers who, when given the chance to make a decision between right and wrong, freely chose wrong.
"These guys are con men," complained California Savings and Loan Commissioner William Crawford during congressional testimony in 1987. "First they con the banker, then they con investigators, then they con prosecutors, and lastly they con the judge and the jury."
The odds against the successful prosecution of a bank fraud case were enormous. The vast majority of looters would never see a day in jail or ever have to pay any restitution. Admitting the obvious. Attorney General Richard Thornburgh told Congress in early 1989, "We'd be fooling ourselves to think that any substantial portion of these assets is going to be recovered."
Sometimes the obstacles came from within the Justice Department itself, as when then-Attorney General Ed Meese decided to transfer a million dollars to the department's obscenity unit from the travel budget of the Fraud Section just when it was beginning to make headway in its investigation of failed thrifts in Texas. (Meese was on his way out of office, having resigned after questions were raised about his ethical standards.) Suddenly prosecutors around the country were told there was no money to have witnesses flown in to testify before the grand jury and FBI agents were told they could not go to other states to conduct interviews because there wasn't enough money to pay the air fare. Then in October 1988 it was announced that, because of budget restraints, the Criminal Division at the Department of Justice had a hiring freeze in effect and U.S. attorneys would be cut back by 10 percent in 1989. By the end of 1988 there were still 128 vacant U.S. attorney positions that would apparently go unfilled. As regulators began referring more cases the understaffed Justice Department fell further behind in its investigations and prosecutions. In Chicago the U.S. attorney between 1985 and 1988 charged 300 people with embezzlement (250 were convicted or pleaded guilty) and 120 cases involving losses of perhaps $100 million were under investigation in December 1988. "Despite that," the U.S. attorney said, "the bank frauds continue to grow. " In 1989 Thornburg announced that one-third of the major bank fraud cases were not being pursued because the Justice Department lacked the resources.
The only solution to this crunch was to filter the flood of fraud cases. U.S. attorneys' offices in areas like Los Angeles, San Diego, San Francisco, and Dallas simply established an arbitrary $100,000 cutoff point. If a case under $100,000 was reported to them, it generally went unprosecuted. In some jurisdictions a fraud had to exceed $250,000 before the U.S. attorney would even look at it. One U.S. attorney on the Organized Crime Strike Force told us, "I think sometimes that I could quit this job and go out and do bank scams. As long as I kept my take under $100,000 per scam I know I'd never get prosecuted." In Southern California and Texas, the cutoff became $1 million.
The simple fact remained that whether the mob or just your generic swindler busted out a savings and loan (or bank), the risk he incurred was very low but the potential for gain was staggeringly high. If a person was stupid enough to walk into a thrift and stick a gun in a teller's face, he would get out the door with a couple of thousand dollars at the most, have his picture taken in the process, get caught, and spend years in prison, where, for a handful of cigarettes, he'd become the personal property of the cellblock guerilla. But if he (or she) pulled a well-oiled loan scam, he would walk out the door arm in arm with the thrift president, with a check for a couple of million dollars in hand, if caught, and chances were excellent he would not be, and if convicted, and the odds were against it, he faced a very small chance of ever spending a day behind bars. The problem challenges us as a nation. For some reason our system has seen nothing unjust in slapping an 18-year-old inner-city kid with a 20-year prison sentence for robbing a bank of a couple of thousand dollars while putting a white-collar criminal away for just two years in a "prison camp" for stealing $200 million through fraud.
The average sentence for an executive who defrauds an S&L and gets sentenced to prison is three years, compared to 13 years for someone who sticks up the same institution. Of the 960 people convicted in federal courts of fraud against lending institutions in one year, only 494 were sentenced to prison terms; of 795 people convicted of embezzling, only 227 were sentenced to prison terms. But of 996 people convicted of robbing banks and S&Ls, 932 went to prison.
Even the Justice Department's much-ballyhooed task force of 50 federal law- enforcement officers who moved into Dallas in 1987 to investigate S&L fraud had failed to produce much results almost two years later. They had 25 convictions, but most were for minor violations or were the result of plea agreements. About 25 percent of those sentenced got probation. Hampered by a lack of funds, most of the attorneys on the task force commuted from Washington to Dallas a couple of times a month while many defendants seemed to have huge financial resources and hired teams of high-powered attorneys to represent them.
If Ed Gray hoped that furious prosecution of thrift crooks was going to help him chase the bandits out of the industry, he was destined for disappointment.
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