PART 10 OF 10:INSIDE JOB THE LOOTING OF AMERICANS SAVINGS & LOANS:FRIENDS IN HIGH PLACES +

INSIDE JOB 
The Looting of Americans 
Savings and Loans 
By Stephen Pizzo, 
Mary Fricker 
and Paul Muolo


CHAPTER TWENTY-FOUR 

Friends in High Places 

By 1986 the biggest issue facing Ed Gray in Washington became the growing insolvency of the FSLIC insurance fund itself All the new regulations and beefed-up regulatory staff would be for naught if the FSLIC lacked the money necessary to close and liquidate insolvent thrifts once they were identified. When a thrift was liquidated all its deposits up to $100,000 had to be repaid to depositors. That money came out of the FSLIC fund. A single medium-sized thrift liquidation could cost the FSLIC half a billion dollars,1 and the fund was down to $2. 5 billion from $6 billion just two years earlier. Gray told Congress, as he had been doing for a year, that he needed the authority to raise at least another $15 billion, through bond sales, to cover the anticipated cost of closing all the rotten thrifts. 

In May, Gray sent to Congress a bill that he said would provide up to $25 billion to deal with the FSLIC's problems. But the bill, dubbed the "recap" (short for FSLIC recapitalization), soon became the hottest political potato in town. At times it seemed to Gray that everyone was lining up against the bill. Legitimate thrift owners bristled at the notion that they should pick up the tab 2 for poorly run thrifts. They wanted the recap to be as small as possible, $5 billion at the most. 

One day, after a particularly grueling session before Congress, Gray ran into one of the U.S. League's chief lobbyists in the hall outside the hearing room. 

"Why are you guys fighting me on the recap?" Gray asked him. 

"Listen, Ed," the lobbyist answered, pulling Gray off to one side. "In 1989 we'll have a new administration running things. By that time everyone will know this problem is so big that the industry can't pay for it. The taxpayer will have to pay for it then, not the industry." (The U.S. League did not speak for the entire industry. The smaller, and much less politically powerful. National Council of Savings Institutions supported immediate passage of Gray's recap bill.) 

The crooked thrift owners, on the other hand, wanted no recap at all. As far as they were concerned the best FSLIC was a broke FSLIC because it couldn't shut them down. That meant more time at the till and more time to gamble on hitting it big. 

The lobbying against the recap was furious, and the bill was going nowhere fast. Then once again, just when Gray's credibility was his most potent weapon, The Wall Street Journal ran a story that examined Grays cozy relationship with the U.S. League—which was curious since Gray had been fighting with them now for two years. The story examined the question of the League's "influence on Gray" and noted that the group had paid some of his travel expenses over the years. The Office of Government Ethics launched a probe to investigate whether the League regularly paid Gray's expenses when he traveled to speak at League functions.3 A Washington Post reporter wrote that some of these stories originated with law firms Charles Keating, Jr., hired to leak reports that would embarrass and undermine Gray. 

It had all gotten to be too much. Soon after the story broke Gray's two board counterparts, Mary Grigsby and Don Hovde, announced they would be leaving. Gray knew he would not be allowed much of a hand in picking their successors, and he also believed Don Regan would seize the opportunity to insert two of the biggest thorns he could find. Those being named as possible candidates did little to reduce Gray's concerns. Ihere was conservative Democrat George Benston, who had written a report just 15 months earlier for Charles Keating, Jr. Benston blamed high interest rates (that thrifts had to pay to attract deposits), not brokered deposits or direct investments, for the industry problems. Another possible choice was Durward Gurlee, Texas League lobbyist who had led the opposition to Gray in Texas. Then there was another Keating loyalist, Lee Henkel, a lawyer who resembled silent movie actor Fatty Arbuckle. Just a week earlier the National Thrift News had reported that Henkel-related businesses had received a number of large loans from Lincoln Savings, the thrift that Keating controlled. 

In November 1986 the White House announced its choices for the two vacant seats. The Democratic seat on the Board went to Larry White, 43, an economist from New York University. White was young and bright and didn't seem to have ties to anyone in particular. Gray was surprised. He had been certain Don Regan would put someone in that scat to keep an eye on him.4 

The second seat went to Lee H. Henkel. Gray learned that Lincoln Savings had given Henkel a $250,000 personal loan and had loaned him more than $55 million on real estate projects in Georgia. Henkel's law firm was also employed by Lincoln Savings. Keating and Henkel, it turned out, went way back together. They had reportedly met during John Connally's campaign for the presidency in 1980, when Henkel was Connally's East Coast finance chairman and Keating was the West Coast chairman. The evidence tying Henkel to Keating was so over- whelming even the U.S. League was embarrassed by the mounting disclosures and the League came out against his appointment to the Board.[That nugget on Georgia is interesting,because I am currently researching bank failures in America since 2001,and one of the interesting facts I have learned,is that the state with the most bank failures in that time...Georgia DC]

Gray suspected that since Keating Had failed to hire him away from the FHLBB, he was now trying to put his own man on the Board to neuter him. Henkel's first move did little to change Gray's theory. Henkel no sooner took his seat than he introduced a new regulation that would grant a sweeping clemency to thrifts that had violated Gray's tough direct investment regulation and would allow them to keep the investments they had made before the regulation went into effect. Among the thrifts that would have benefited from Henkel's regulation was Lincoln. 

A federal ethics investigator had reviewed Henkel's background, and Henkel told the investigator he had repaid the personal loan from Lincoln Savings and had put all his Lincoln-financed real estate projects into a blind trust. The reviewer had ruled that Henkel's relationship with Keating posed no ethics problems. However, Senator William Proxmire, the 66-year-old Democrat from Wisconsin and chairman of the Senate Banking Committee, made it known that he had major reservations about the Henkel appointment. It had been made by the president during the winter recess and until now the Senate had not had time to study or comment on it.'5 Proxmire reportedly felt Henkel might be unfit to serve as a FHLBB member because of the potential conflict of interest caused by the loans he'd received from Lincoln Savings. The senator had also supported Gray's direct investment regulation and strongly opposed Henkel's new proposal to amend it. Proxmire announced he'd hold hearings on the Henkel matter. With Proxmire on Henkel's trail, it didn't appear to Gray that Henkel would be a board member very long. 

Gray's priority at that juncture was to get the recap bill away from Jim Wright, who was holding it hostage as a favor to his Texas thrift constituents. The FSLIC insurance fund didn't have enough money to bail out a few small thrifts with the flu, much less the estimated 400 thrifts that were now functionally insolvent and just hadn't been so declared. (Regulators coined the phrase "brain dead" to describe thrifts that regulators were allowing to operate after they became insolvent simply because there wasn't enough money in the FSLIC fund to close them and pay off depositors.) The recap had to be passed and fast. Gray's best estimate was that brain-dead thrifts were experiencing operating losses totaling $10 million a day. 

For months Gray fenced with Jim Wright over the recap.6 Time after time Wright took Gray to the woodshed for his Texas thrift and developer constituents. 

In January 1987 Wright was elevated to speaker of the House. In February Gray had an aide call Wright to see if the bill would soon be sent to the floor for debate. Gray's aide also told the speaker's office that if they needed any information that would be helpful in moving the recap bill along, please call and Mr. Gray would go right over. Gray's aide made several such offers in the days that followed, but Wright's office didn't return any of the calls. At one point. Gray told us later, his office called Wright every 15 minutes for a solid week. At the end of that week (late February) a spokesman for Wright finally returned the call. Grav was out, so he left a message: "Don't call us. We'll call you." 

Later Gray would recall those hectic days with bitterness. "I have worked with all kinds of guys in government since 1966. I've seen people who were honest and straightforward and those who were something else, but I never saw anything like this. The speaker used his power and influence to bring about behavioral changes in a regulator. It was an abuse of power and improper. I felt he was putting us through hoops to do his bidding. I wish I had told him off, but when you have no money left in your fund you do things you would normally never do. I certainly would not have done what I did, unless I felt it was the only way to get the recap bill passed." 

Wright's chief of staff would later (1988) send the following mind-boggling rationalization to Banker's Monthly. 7

One of the first hints of serious troubles in America's S&Ls came to then- Majority Leader Wright in 1986. Into his office one day came a young woman whose husband had lost his job six months earlier. Even though the family had been making timely payments for eight years and was, in fact, only two months in arrears, their home was being repossessed. 

Looking into the matter, Wright found that this case, like many he would see later, was the result of a federal regulator's arbitrarily dictating policy to a savings institution under federal supervision. The regulator had ordered the lender to foreclose on all due mortgages—no delays, no forbearances, no ifs, no ands, no buts. In this case and several others Wright was able to help the young couple save their home. They were allowed to work out an arrangement to get their house payments current once more. 

That, after all. is the job of a Congressman. There is nothing unusual or sinister about a citizen coming to a member of Congress for help. In each mail Speaker Wright receives a stack of letters from people caught in the web of an impersonal bureaucracy and appealing for help. In every congressional office it is the same. 

This is what makes America the great country that it is. If government should ever become so remote and so aloof that the plain, everyday citizen has no influence, no access and no intercessor, then we will have lost our precious Constitutional right "to petition the government for a redress of grievances." 

The fact remained, however, that Wright intervened, not on behalf of some poor woman whose husband had lost his job, but on behalf of big campaign contributors who had lost (or were about to lose) their savings and loans, men like Tom Gaubert, Don Dixon, and Craig Hall. Hall had had half a billion dollars in troubled debt at thrifts when Wright exerted pressure on Gray to get Hall some forbearance.

By the end of February the burgeoning savings and loan crisis was making news. Washington reporters began asking Speaker Wright daily about the recap bill and why it wasn't moving. The break in the impasse came on April 27, 1987. when the FSLIC filed a civil lawsuit seeking $40 million in damages from Dixon and six other former Vernon officers, the largest such claim the agency had ever filed. The next day Wright announced he would support the $15 billion version (Gray's current version) of the FSLIC recap bill. But he continued to peddle influence for his Texas thrift constituents and was eventually successful in getting a forbearance provision added to the recap bill, a provision that instructed regulators to grant forbearance to thrifts whose problems were determined to have been caused by temporary economic conditions. Gray blasted the forbearance provision, saying it would hamstring regulators.8 

In May, after intense lobbying by the U.S. League for a smaller $5 billion recap bill, the House passed a $5 billion recapitalization plan 9 and the Senate passed a $7.5 billion version. A conference committee began the process of reconciling the two versions of the bill. 

Two months before the end of Gray's term, which was scheduled to expire in June 1987, things finally started to break his way. His old nemesis at the White House, Don Regan, ran into a buzz saw named Nancy Reagan and was sent packing. 10 Though no one could have imagined it earlier. Gray had actually outlasted Regan. To sweeten Gray's victory Regan had learned that he was "retiring" while watching a morning news program, after which he submitted his resignation in a huff. Those who lived by the news leak sometimes died by the news leak. It was a sweet moment for Ed Gray, whose friends broke out a bottle of champagne for a small impromptu office party. 

Just a week later pressure from Senator Proxmire and rumors that the Justice Department might probe his relationship with Charles Keating forced Lee Henkel to resign his seat on the FHLBB, saying he was "fed up with the whole process" of defending himself against conflict-of-interest charges concerning Lincoln Savings. Gray thought he just might be able to leave Washington with some scalps of his own under his belt. 

And there was more good news: No action would be taken against Gray for using expense money from the district banks for his travel expenses. The GAO and the Department of Justice had conducted an investigation of charges that he had traveled on FHLBB business and billed his expenses to district banks and that he had used expense money for golf and yacht outings. Gray had written a letter to Congress apologizing for his "flawed judgment" and had repaid the district banks $28,000. Investigators reported that using district bank money for FHLBB expenses would not be tolerated in the future and henceforth could result in criminal charges, but Gray would not be indicted. 

Early in April, a couple of days after Henkel resigned. Senator Dennis DeConcini (D-Ariz.) called. "Ed, can you drop by my office?" he asked. 

When Gray arrived at DeConcini's office the senator met him at the door. Gray had walked into another ambush. Waiting in DeConcini's office were three more senators; John McCain (R-Ariz.), John Glenn (D-Ohio), and Alan Cranston (D-Calif.). The four men had something in common besides being United States senators—campaign disclosure forms showed they each had received healthy political donations from Charlie Keating and his associates. Of the contributions Keating and his associates had made since 1984, these four men or their associates had received: DeConcini, $55,000; McCain, $112,000; Glenn, $200,000; Cranston, $889,000. Each man claimed Keating as his personal constituent because Lincoln Savings was based in Irvine, California, and American Continental Corporation, Lincoln's parent company, had been incorporated in Ohio and had its headquarters in Phoenix, Arizona. 

Suddenly Gray felt tired. With only weeks to go as chairman, he was in no mood for this. In the four years since he'd taken office his hair had thinned noticeably. His middle-age spread hung over the belt of his trousers. In the early days as chairman. Gray, with his silver hair and boyish smile, had looked distinguished, though often tired. Now he looked haggard, like a boxer who'd taken too many punches. 

The four senators wanted to know why the examiners from the Eleventh District FHLB in San Francisco were being so tough on Charlie Keating. The FHLB wanted Lincoln in line with Gray's new direct investment regulation, but Keating claimed that the new regulations were the equivalent of changing the rules in the middle of the game and should not be retroactively applied to thrifts that had operated under the old rules. (Keating had filed suit in federal court challenging Gray's regulation. The case was later dismissed.) 

DeConcini took the lead: "Look, this is what we'll do. We agree with the idea that Lincoln not making more home loans is bad. That's what they're supposed to do." (Prior to Keating's acquisition of Lincoln in 1984. the thrift had been a heavy single-family mortgage lender. But in 1985 Lincoln originated only 11 mortgages and four were for employees. For a $3.6 billion S&L with 24 branches that was unusual behavior.) 

"What do you want?" Gray asked. 

DeConcini offered a deal: "We'll assure you that they'll make more home loans and get into the basic business of home lending if you do something — you have to withdraw the equity risk regulations." (Equity-risk regulations required thrifts that were heavily involved in direct investments to set aside additional cash reserves to compensate for the risk inherent in those investments.) 

Gray was puzzled. He had four U.S. senators trying to negotiate business with him on behalf of a savings and loan. Gray reminded them that Lincoln was suing the FHLBB over the direct investment regulation. He also offered his opinion that it was highly irregular for him, as FULBB chairman, to be asked to discuss a savings and loan that was presently being examined by a FULB.11 Gray told them it would be impossible for him to withdraw the direct investment rule.

DeConcini made one last try. He suggested that the regulation be withdrawn until a court could determine if the rule were legal or not. 

"If I withdraw it," Gray told him, "then they'll just withdraw their suit." He reiterated. "The rule is very important." 

Gray told the senators if they had any more questions about Lincoln to direct them to Jim Girona, president of the Eleventh District FHLB in San Francisco. Supervision had been transferred to the district banks, and the Eleventh District was responsible for whatever examinations were in progress at Lincoln. 

A few days later DeConcini called Girona and asked if he and his staff could come to Washington to discuss "the Lincoln problem." A meeting was scheduled at DeGoncini's office for April 9 at 6 p.m. 

Girona flew to Washington along with his second-in-command at the San Francisco FHLB, Michael Patriarca, and Richard Sanchez, the supervisor in charge of Lincoln's examination. In Washington they picked up Bill Black over at the FSLIC. He was transferring out to San Francisco soon to be the general counsel at the San Francisco FHLB. 

When the four arrived at DeConcinis office they found senators DeConcini and McCain in attendance. Senator Glenn arrived a few minutes late and Senator Granston dropped by briefly. Also present was Senator Don Riegle (D-Mich.), next in line to replace Proxmire as chairman of the Senate Banking Committee. Riegle, like the other senators there that day, had received large donations from Charles Keating and his associates ($76,100 in Riegles case). Keating had raised the money for Riegle in March at a fundraiser attended by over 100 Keating employees. 

The meeting lasted just over two hours. All four regulators and four of the five senators stayed the entire time. Cranston, who had appointments to keep on the Senate floor, stopped by to tell Girona, "I just want to say that I share the concerns of the other senators on this subject. " The meeting was confidential. Bill Black was the only person taking detailed notes, which became an unofficial transcript of the meeting prepared at Ed Gray's request, and the basis for the following. (The entire, uncut transcript is reproduced in Appendix B. ) 

Jim Girona began the meeting by introducing his colleagues from the district bank. After the introductions DeConcini got right to the point. He told the regulators, "We wanted to meet with you because we have determined that potential actions of yours could injure a constituent." The constituent, of course, was Lincoln Savings. 

DeConcini said that Keating was afraid the FHLB was going to seize Lincoln because Keating disagreed with the Bank Board's rules on direct investments. He said Lincoln also strongly disagreed with the Bank Board over appraisals it had made on Lincoln properties. They were low, way too low, and "grossly unfair." 

Senator McCain, from Tempe, Arizona, spoke up to try to put the meeting into a more benign light. "ACC [American Continental Corporation, headquartered in Arizona, was Lincoln Savings' parent company] is a big employer and important to the local economy. I wouldn't want any special favors for them. ... I don't want any part of our conversation to be improper. We asked Chairman Gray about that and he said it wasn't improper to discuss Lincoln." 

Senator John Glenn jumped in to complain that the district bank had taken an "unusually adversary view toward Lincoln." He complained that normal examinations took up to six months, but the Lincoln exam had dragged on and on. "To be blunt, you should charge them or get off their backs," Glenn said. 

Riegle said the way it looked to him was that the standoff between Lincoln Savings and the FHLBB had become a "struggle between Keating and Gray. . . . The appearance is that it's a fight to the death." Riegle added that he just wanted to make sure the San Francisco regulators were acting in a fair and professional manner. 

Girona finally spoke up. Contrary to rumor, he told the senators, Ed Gray was not out to get Charles Keating. "We [at the San Francisco FHLB] determine how examinations are conducted," he told them. "Gray never gave me instructions on how to conduct this exam or any other exam. At this meeting you'll hear things that Gray doesn't know." 

Girona then put the senators on notice. "This meeting is very unusual, to discuss a particular company." 

"It's very unusual for us to have a company that could be put out of business by its regulators," DeConcini shot back. "Richard [Sanchez], you're on, you have 10 to 12 minutes." (The senators had a vote coming up on the floor.) 

Sanchez began presenting the Bank Board's case. "An appraisal is an important part of underwriting [a loan]. It is very important. If you don't do it right you expose yourself to loss. Our 1984 examination [of Lincoln] showed significant appraisal deficiencies. Mr. Keating promised to correct the problem. Our 1986 exam showed the problems had not been corrected, that there were huge appraisal problems. There was no meaningful underwriting on most loans." Sanchez cited as an example an appraisal redone for the FHLB by Merrill Lynch that corroborated a "significant loss." 

DeConcini countered Sanchez. "Why not get an independent appraiser?" 

"We did," Sanchez answered. (The FHLB had hired Merrill Lynch to do the appraisals.) 

"No, you hired them," DeConcini replied. "Why not get a truly independent one or use arbitration if you're trying to bend over backwards to be fair?" (DeConcini didn't specify how the FHLB might go about getting a "truly independent appraiser" without hiring one.) The senators broke for a vote on the floor.

When the meeting resumed Sanchez told the senators, "Lincoln had underwriting problems with all their investments, equity securities, debt securities, land loans, and direct real estate investments." He said that out of 52 real estate loans Lincoln made between 1984 and 1986 there were no credit reports in the file on the borrowers in all 52 cases. Examiners found $47 million in loans made to borrowers who didn't have adequate credit to assure repayment. 

"They're flying blind on all their different loans and investments," Patriarca told them. 

Glenn asked, "Some people don't do the kind of underwriting you want. But is their judgment good?" 

Patriarca replied, "That approach might be okay if they were doing it with their own money. They aren't. They're using federally insured deposits." 

Riegle piped up. "Where's the smoking gun? Where are the losses?"  

"What's wrong with this if they're willing to clean up their act?" added DeConcini. 

Girona couldn't believe the resistance. "This is a ticking time bomb," he told them.  

Patriarca's patience had worn thin. "I've never seen any bank or S&L that's  anything like this," he told the senators. ". . . They [Lincoln's practices] violate the law and regulations and common sense." 

Then he dropped his bombshell. "We're sending a criminal referral to the Department of Justice. Not maybe, we're sending one. 12 This is an extraordinarily serious matter. It involves a whole range of imprudent actions. I can't tell you strongly enough how serious this is. This is not a profitable institution. . . . Let me give you one example. Lincoln sold a loan with recourse [the buyer had the right to back out] and booked a $12 million profit. The purchaser rescinded the  sale, but Lincoln left the $12 million profit on its books. Now, I don't care how many accountants they get to say that's right, it's wrong." 

Still fighting, DeConcini countered, "Why would [the accountants] say these things [that the regulators' exam was inordinately long and bordered on harassment]? They have to guard their credibility too." 

"They have a client," answered Patriarca, referring to the fact that thrifts pay the accounting firms to perform the required annual audits. 

"You believe they [private accounting firms] would prostitute themselves for a client?" DeConcini asked. 

"Absolutely," said Patriarca. "It happens all the time." 

The senators left for another vote, then returned. 

After some discussion Sanchez said, ". . . [Lincoln has] $103 million in goodwill" on their books. If this were backed out, they would be $78 million insolvent." "They would be taken over by the regulators if they were a bank," added Patriarca.

Girona told DeConcini that the regulators had tried to compromise with Keating. "I've never seen such cantankerous behavior," Girona said. "At one point they said our examiners couldn't get any association documents unless they made the request through Lincoln's New York litigation counsel." 

Patriarca's comment that he was filing a criminal referral on Keating must have been still ringing in the senators' ears. They began to soften their opposition. DeConcini, although still unhappy with the way the FHLB was appraising Lincoln's properties, nevertheless commented, "Frankly the criminality surprises  me." 

"What can we say to Lincoln?" a stone-faced Glenn asked. 

"Nothing with regard to the criminal referral," Black said. ". . . Justice would skin us alive if they knew we had discussed it." 

Patriarca ended the meeting by telling the senators, "I think my colleague Mr. Black put it right when he said that it's like these guys put it all on 16 black in roulette. Maybe they'll win, but I can guarantee you that if an institution  continues such behavior it will eventually go bankrupt." Nine months after this  meeting the National Thrift News acquired a copy of Black's secret transcript and broke the story. Shortly thereafter Don Riegle returned the $76,100 in donations to Charles Keating and his friends, stating that he wanted to avoid any appearance of misconduct. 

Lincoln Savings' attorney commented on the allegations of impropriety' raised at the meeting: "From what you've told me these are malicious statements based on false information." 

In January 1989 Senator Riegle, now in Proxmire's old post as chairman of the Senate Banking Committee, appeared on Meet the Press and flatly denied he'd ever interceded on behalf of Lincoln. 

"I did not intervene on behalf of a company [Lincoln]. I did attend a meeting at the request of other senators who represented the state in which that institution was. I came as a member of the banking committee to help try to understand the maze of regulation that is obviously very complex. But I took no action on behalf of that savings and loan or any other at any time." 

A year after the meeting between the five senators and San Francisco FHLB representatives, Keating and the San Francisco district bank were still fighting. The president of the district bank, Jim Girona, later told a congressional committee that Lincoln Savings had given regulators in Washington a secret file about him. 

"He [Roger Martin, an FHLBB member] told me that he had in his possession, information that was furnished to him by Lincoln that would be very damaging to me." When asked by reporters about the file, Martin at first denied its existence. Then he recanted and said he had indeed had such a file given to him by Lincoln Savings but he had not looked inside it. He said, though, that it was his impression that the file contained nothing of a personal nature, only more complaints about the manner in which the San Francisco regulators were conducting their long examination of Lincoln. 

San Francisco regulators completed that examination in May 1987. They reported what they considered to be substantial irregularities at Lincoln and they recommended seizure of the institution. But Danny Wall became chairman of the FHLBB in June, and Keating complained to him that the regulators at the San Francisco FHLB were out to get him. He said they had leaked confidential material to the press to undermine him and his company. Wall prohibited the San Francisco regulators from moving against Lincoln, histead, he moved the responsibility' for Lincoln's examination and supervision from the San Francisco  FHLB to the FHLBB in Washington—something that had never occurred in  the 50 years of Bank Board history. San Francisco regulators complained that Wall's action had "crippled" the independence of his examination staff and it "undercut every regulator in the country."  

When Keating was asked if his financial support influenced politicians to support his cause, the Orange County Register reported that he told reporters, "I want to say in the most forceful way I can: I certainly hope so." 

In November 1987 the FHLBB in Washington initiated its own examination of Lincoln Savings, which would last for over a year. In 1988 a meeting was held at the White House with select members of the White House staff and a handful of Republican congressmen. One of those attending that meeting said he was astounded to hear a close advisor to the president conclude that the best cure for the thrift industry was to "keep moving in the direction of the Charles Keating's. They're the only hope." Keating, however, had different ideas. He decided he  didn't want to be in the thrift business anymore and put Lincoln up for sale. 

Finally even the folks in Washington could not ignore conditions at Lincoln. The FHLBB completed its examination at the end of 1988 and soon demanded that Keating relinquish control of Lincoln. He responded by throwing Lincoln's parent company, American Continental, into bankruptcy on April 13, 1989, and regulators moved in to seize Lincoln the following day. Keating promptly called a dramatic televised news conference in Phoenix and, visibly upset, hands shaking, he told the citizens of Arizona that their economy would be destroyed if regulators — whom he described as malicious, politically motivated bureaucrats—brought Lincoln down (American Continental claimed to employ 2,300 Arizonans). 

The same day Danny Wall was forced to admit that San Francisco regulators had been right about Lincoln, and he confirmed that the Bank Board had made several referrals to the Justice Department involving Lincoln Savings. He said the Bank Board audit had uncovered evidence of assets being shifted from Lincoln Savings to American Continental and documents being destroyed. 

Two weeks later the Orange County Register reported that it obtained a copy of an FHLBB memo that reportedly accused American Continental of "cooking the books" to make both it and Lincoln Savings appear healthy and of making deals with insiders and affiliated companies that cost Lincoln Savings more than $100 million. 

Company spokesman Mark Connally responded. "I don't put a whole lot of stock in anything the Bank Board says. All it is is a lot of hot air and unfortunate innuendo." As of this writing, Keating was threatening "to challenge in court those who would destroy us, and to call for a full federal investigation of the , abusive power by one or more regulator offices." 

Regulators said the collapse of Lincoln Savings would cost $2.5 billion. 

In June 1987 Ed Gray cleaned out his desk at 1700 G Street to make  room for the new chairman,  Danny Wall—the same Danny Wall who  in 1982 had helped shape much of what became known as the Garn-St Germain Act when he was staff director of the Senate Banking Committee, and the  same Danny Wall who had opposed Gray's brokered deposit regulation. Treasury Secretary James Baker called Jim Wright in Fort Worth to give him the good news.14 Wall had come to Washington with Senator Jake Garn (R-Utah), chairman of the Senate Banking Committee, from a savings and loan  in Salt Lake City and had served as Garn's chief administrative aide. Bald, bearded, energetic, and always impeccably dressed in three-piece suits. Wall was more in tune than Gray with the U.S. League: The New Republic reported that a journalist examining the disclosure statements of top congressional staffers a few years earlier had discovered that Wall led the pack in lobbyist-subsidized junkets,30 in one year. Wall was obsessed with making certain no unauthorized  documents leaked to the press. And he stressed the positive side of the S&L industry. Over and over he repeated how pleased he was to head an industry in which "80 to 90 percent of the thrifts were healthy and thriving." He said it was only a small minority of thrifts that were in trouble and he'd have a handle on them just as soon as the recap bill passed the Senate (which it finally did in August). 

Wall vehemently denied charges that he was systematically misinforming Congress and the American public about the depth of the FSLIC problem when he projected a $20 billion FSLIC deficit at the same time the General Accounting Office was estimating the debt to be more like $70 billion and private forecasts were coming in at over $100 billion. But after George Bush's nomination speech at the Republican National Convention, Americans might have wondered how Bush's "read my lips, no new taxes" and FSLIC's huge debt could coexist,15 so mum was the word. By 1989, however, Wall's sleight of hand with the S&L numbers had become so outrageous that House Banking Committee Chairman  Henry Gonzalez called loudly for Wall to be fired. It was hard to argue with Gonzalez's reasoning: Anybody who couldn't figure out how bad the problem was shouldn't be in charge of fixing it. 

As for Ed Gray, he was glad his term was over. He knew only too well that 80 to 90 percent of the industry was nowhere near "healthy and thriving." Gray knew he was still being vilified by almost everyone touched by the scandal. Federal Reserve Board Chairman Paul Volcker and Treasury Under Secretary George Gould were two of his few supporters. To the high fliers in Texas and California, Gray was still the Darth Vader of the Bank Board. To the U.S. League he was an unpredictable public relations nightmare and a loose cannon on their deck. To congressmen and senators he was the guy who had caused them to be reminded that money had strings and their mouths moved when someone pulled those strings. Almost everyone was glad to hear that Ed Gray was cleaning out his desk. 

Perhaps it was a tragedy that someone of greater national stature had not been chairman at this critical time, someone like Gray's friend Volcker, who could have gone to Congress and thrown down the gauntlet. It's difficult to imagine Jim Wright treating Volcker the way he routinely mistreated Ed Gray. But whatever Gray lacked in stature, he more than made up for in personal commitment. When he left Washington he left with bitter memories of a president and administration that had turned their backs on him when he most needed support. He also left in debt, while the crooks he had tried to chase out of the industry had stuffed offshore bank accounts with hundreds of millions of ill-gotten dollars. 

The movie The Untouchables opened in Washington the last week before Gray's departure, and Gray rushed to see it. It was about FBI Agent Elliot Ness's battles against mobster Al Capone and his bootleggers, and it struck a chord with Gray. Being under attack from every side for over four years left him feeling like Ness—one man, alone against the corruption of an entire system. The next day Gray had scheduled exit interviews with the major newspapers, and he invoked the name of Elliot Ness, comparing himself to the crime-fighting loner. Only one newspaper. The American Banker, mentioned Gray's embellishment. 

Gray never got to see Congress pass the recap. Two months after he left office reconciliation between the House and Senate versions was completed and the bill —which gave the FSLIC $10.8 billion in borrowing authority—was signed into law in August 1987. Two precious years had been wasted in political wrangling since Gray had first begun his campaign to get more money for the FSLIC so that insolvent thrifts could be closed and a permanent stop put to their hemorrhage of red ink—two years at $10 million dollars a day in additional losses. (By August 1987 some analysts felt this figure was too low. At the end of 1988 analysts said the insolvent thrifts were costing the FSLIC $35 million a day.) But Ed Gray's ordeal was over. Danny Wall had the wheel now, and his job would be to keep a lid on the problem until the Reagans got out of town in 1989. Once again political expediency would win out over statesmanship.

CHAPTER TWENTY-FIVE 

What Happened? 

We set out in 1986 with a simple question: How had thrift deregulation gone so terribly wrong? To find the answer we decided to take a look at a few dozen failed savings and loans that we selected virtually at random, attempting only to obtain a fair geographic sampling. Three years later we had our answer: A financial mafia of swindlers, mobsters, greedy S&L executives, and con men capitalized on regulatory weaknesses created by deregulation and thoroughly fleeced the thrift industry. While it was certainly true that economic factors (like plummeting oil prices in Texas and surrounding states) contributed to the crisis, savings and loans would not be in the mess they are today but for rampant fraud.  

Yet to this day diehard apologists for thrift deregulation flatly refuse to admit that purposeful fraud was, in fact, chiefly to blame for the FSLIC's $200 to $300 billion debt. A few stubbornly adhere to their denials because they still don't realize what was going on around the country, but most—especially members of lobbying groups like the U.S. League—are simply trying to cover up their own culpability. They pushed hard for deregulation and fliey share responsibility for the results. 

Even the part of the industry that did not participate in the orgy of avarice and fraud must share some degree of blame. They knew what was going on but they kept their silence, fearing that Congress would re-regulate the industry if legislators found out what rogue thrifts were up to. 

As Edmund Burke said, "The only thing necessary for the triumph of evil is for good men to do nothing." Fraud became the thrift industry's dirt)' little family secret. 

When Ed Gray tried to clamp down on renegade thrifts, the industry and  Congress fought his every move. Like rebellious teenagers bristling over parental  intrusion, thrift lobbyists and many thrift executives complained bitterly that Gray was cramping their style, that he didn't understand them, that he was old fashioned. Congress, always sensitive to the complaints of large contributors, listened well. In the end too many politicians became net beneficiaries of the fraud that swept the thrift industry. WFAA-TV in Dallas reported, for example, that in 1987-88 the three largest S&L political action committees gave more than $88,000 to candidates for Congress. As a result, just when the country needed the best regulators money could buy, those regulators were stopped cold in their tracks by some of the best politicians money had bought. 

These powerful forces easily outmaneuvered Ed Cray and systematically undercut his effectiveness. From the very beginning of our investigation we were told that Gray had bungled the job, that he was "an idiot, a buffoon." People like John Lapaglia, Charles Bazarian, Charlie Knapp, and Tom Caubert railed about Cray and his misguided policies, blaming him for virtually the entire thrift crisis. 

"If your book comes off sympathetic to Gray," Lapaglia warned us, "you'll be the laughingstock of the industry." 

But we spent many hours interviewing Ed Cray and people who worked with him during those critical years, and we came away with a different opinion. It was true that nothing Gray had done in his life had in any way prepared him for handling a crisis of this magnitude and complexity. He was a public relations man by trade. Still, even with some of the most powerful forces in government breathing fire down his back, he didn't fold and he didn't run away. Instead he took highly unpopular positions that he believed were right and necessary and he stuck with them. He was one of the first to correctly assess the magnitude of the problem and react accordingly.  

Ed Cray's biggest fault was that he didn't go public when it became clear that a cabal of political and industry forces were conspiring against his remedial efforts. He should have blown the whistle on them and blown it loud. He should have named names. He should have turned the spotlight on what seems to us to have been sleazy legislative extortion by Jim Wright and others. 1 He should  have held a press conference and exposed the OMB's refusal to give him more examiners. But Gray believed that common sense would eventually overcome partisan self-interest. He was wrong. 

If those who authored thrift deregulation didn't see the potential for fraud, others certainly did. The likes of Mario Renda and Mike Rapp and Charles Bazarian were swinging into action even before the Carn-St-Germain bill was signed. Renda actually followed the progress of the bill through Congress, making i notes in his daily desk diary. And when Carn-St Germain passed, Renda and the others moved in like German tank divisions in the early days of World War II, grabbing territory virtually unopposed. Instead of acting to stop the looting. Congress and regulators debated over whether they should do anything. They couldn't even seem to decide if the people looting thrifts were crooks or just misunderstood "entrepreneurs." 

Such a chaotic state of affairs was fertile ground for the mob. And for them thrift deregulation could not have come at a better time, because the justice and Labor departments had just cracked down on the mob's pipeline to the Teamsters' Central States Pension Fund, which had for so long been a ready reservoir of capital for wise guys who didn't mind paying kickbacks. The 1986 President's Commission on Organized Crime reported that Jimmy Hoffa, who became Teamster president in 1957, was indisputably a direct instrument of organized crime, and his control over the Central States Pension Fund was convenient for wise guys who couldn't get loans elsewhere. In the mid-1970s, for example, 89 percent of the fund's investments were in real estate loans, mostly to small, speculative businesses (such a portfolio was highly unusual for such a large fund, analysts said). "In short," wrote author Steven Brill (The Teamsters), "the mob had control of one of the nation's major financial institutions and one of the ' very largest private sources of real-estate investment capital in the world." 

The president's commission revealed that Hoffa shared his pension-fund kickbacks with Allen Dorfman, asset manager and consultant to the Central States Pension Fund, and one of their favorite investments for pension-fund money was Las Vegas real estate.2 After Hoffa was convicted of jury tampering in 1964 and went to prison in 1967, Dorfman and members of the mob continued to control the fund. But at the end of 1982 Dorfman was indicted along with Mafia and Teamster officials for trying to bribe Nevada Senator Howard Cannon with favors from the Central States Pension Fund, and a month later, January 20, 1983, Dorfman was gunned down in a parking lot. 

That same year the U.S. Department of Labor finally forced the fund to operate according to guidelines enforceable by the courts. That decree resulted in a dramatic shift in the way the Central States Pension Fund invested its money.  The message was clear. Wise guys had to find a new "friendly" lender, one that offered the same easy, no-questions-asked access to money 3 and the same liberal non-repayment terms. Like a gift out of nowhere, deregulated thrifts became the answer to their prayers. President Reagan had just signed the Carn-St Germain Act, in October 1982, and the covey of swindlers who had fluttered around the Teamsters flocked to savings and loans. Simply put, deregulation was the best thing to happen to the mob since Congress passed Prohibition. It also provided organized crime with the best money-laundering environment since the invention of bearer bonds. No one will ever know how many hundreds of millions, or billions, of dollars the mob and drug organizations pumped through thrifts during this "anything goes" period. 

But we were told repeatedly by regulators, and even Justice Department officials, that the Mafia, the mob, organized crime, the Syndicate, whatever label you choose, had not and could not infiltrate the thrift industry in any serious way. Well, we asked, then why had these people shown up in our investigations? 

Martin Schwimmer, Mario Renda's "associate," was, according to Organized Crime Strike Force investigators, an investment advisor for Frank "the Wop" Manzo, a reputed member of New York's Lucchese crime family. (The five New York crime families were Lucchese, Gambino, Genovese, Bonanno. and Colombo.) Mario Renda, who was credited with helping destroy dozens of thrifts and banks (possibly a hundred or more), was a friend of Sal Piga, whose rap sheet listed him as an associate of the Tramunti crime family (Carmine Tramunti was the boss of the Lucchese crime family) and enumerated a criminal record of grand larceny, assault and robbery, burglary, first-degree assault, carrying dangerous weapons, and criminal possession of stolen property. 

Michael Rapp, a.k.a. Hellerman, who looted Flushing Federal Savings and Loan, among others, said in his autobiography that he had worked his swindles on Wall Street in the 1970s on behalf of the Lucchese and Gambino families, and a law-enforcement official said the dividing of the loot from his S&L swindles in the 1980s was the subject of a sit- down between the Lucchese and Genovese families. 

John Napoli, Jr., a Rapp associate who was convicted with Heinrich Rupp in the Aurora Bank case, was identified in an FDIC lawsuit as having been associated with "a well-known. Eastern organized crime family" (identified by a law-enforcement official as the Lucchese family). 

Lawrence lorizzo told investigators he was a Colombo family lieutenant and that Renda invited him to join him in his scheme to bust out banks and thrifts. 

lorizzo said in federal depositions that Mario Renda told him that he (Renda) was handling business for Paul Castellano, a Gambino crime family boss who was assassinated in 1985. 

Murray Kessler, indicted with Richmond Harper (identified by the Dallas Morning News as a member of the Beebe banking network in the 1970s) for smuggling arms to Mexico in exchange for heroin (the case ended in a mistrial), was identified by federal officials as an associate of the Gambino family. 

Beebe's friend and associate, former Louisiana Governor Edwin Edwards, was implicated through federal wiretaps in dealings with New Orleans Mafia boss Carlos Marcello. Marcello in 1979 bragged to an FBI undercover agent that he and two or three other mob bosses "owned the Teamsters." 

A Beebe-controlled bank made loans to Marcello, his son, and several corporations connected to Marcello, according to the bank's president. 

The American Banker revealed that Anthony Russo, a former attorney and a director at Indian Springs State Bank, had represented Kansas City's Civilla mob family, and bank records showed the Civillas had several loans at Indian Springs. For years Nick Civella was the man to see about getting favors from the Teamsters, according to the President's Commission on Organized Crime. 

David Gorwitz, who was with Dick Binder in Santa Rosa (Binder listed $1.5 million in loans from Centennial on his bankruptcy papers), worked with Binder in Boston. The Boston Globe reported that the pair were suspected by law-enforcement officials in Boston of laundering money for fugitive mobster Salvatore Caruana, a capo in the New England Patriarca crime family. Gorwitz was also described in court testimony in the 1970s as a muscleman for the mob. 

Lionel Reifler, who indirectly received money from loans made by Judge Reggie's Acadia Savings, was a career white-collar criminal associated with Mike Rapp and organized crime figures. 

Morris Shenker, who surfaced time and again in our investigation, was identified in congressional hearings on organized crime as a close associate of the Civella crime family. He was Jimmy Hoffa's attorney and also a close associate of Allen Dorfman, the insurance executive and sophisticated money manager who had extensive connections to the Chicago mob (which is reportedly called "the Outfit") and to the Teamsters Central States Pension Fund. The President's Commission on Organized Crime reported that Shenker borrowed millions of dollars from the fund. Individuals or companies in this book whom we found had done business with Morris Shenker included Norman B. Jenson, Philip Schwab, Charlie Bazarian, Kenneth Kidwell, Southmark, John B. Anderson, Jack Bona, Mario Renda, the Indian Springs State Bank bunch, Al Yarbrow, FCA, Sun Savings and its president, Dan Dierdorff. 

Jimmy "the Weasel" Fratianno in The Last Mafioso told of Jilly Rizzo, Frank Sinatra's sidekick, associating with him and other mob figures. Rapp, in his biography, said Rizzo was his close friend. Rizzo was a borrower with Rapp at Flushing and regulators said he was involved with Delvecchio at Aurora Bank. Rizzo and Delvecchio sold property in the Poconos that became collateral for a loan at Kdniund Reggie's Acadia Savings and Loan. 

Guy Olano of Alliance Savings and Loan was said by the FBI to be connected to people with ties to major Colombian drug families. He had arranged casino financing through John Lapaglia for Las Vegas attorney Norm Jenson, who himself was later identified in evidence collected by Organized Crime Strike Force investigators as a key figure in a $300 million drug-money-laundering operation that the Justice Department said also involved Centennial Savings vice president Sid Shah. 

Philip Schwab failed to get a Nevada gaming license because officials had more questions for him than he apparently wanted to answer on the subject of his associations with certain Italian surnamed individuals, one of whom they described as a convicted heroin trafficker. Consultants he hired to help him get the license said in their report, "We can only presume at this point that the Gaming Control Board has information from law-enforcement authorities associating these individuals with organized crime activities." 

At nearly every thrift we researched for this book we found clear evidence of either mob. Teamster, or organized crime involvement. Only one conclusion was possible: The mob had played an important role in the nationwide fraternity that looted the savings and loan industry following deregulation. 

Of course the mob and swindlers didn't suck all the billions out of the thrift industry, although they certainly got their share. People who had never committed a crime in their lives fell prey to deregulations promise of easy money. Thrift officers watched as the professional swindlers worked their scams and never got caught and decided, why not? Buttoned-down appraisers, plugging along in boring jobs making $200 to $600 per appraisal, learned that by simply raising their opinion of a property's value to match a borrower's needs or desires, they could raise their own standard of living as well—and the higher their opinion, the bigger their paycheck. Contractors, attorneys, title company executives, and auditors each found their own ways to get a seat on the gravy train by perverting their particular business functions for the cause. As Erv Hansen so correctly observed in 1983, "The beauty of this is that there's going to be enough money in it for everyone." And there was. 

Something else was going on at thrifts too. We avoided dealing with it in detail because we never seemed to be able to get our arms around it, but it disturbed us and bears mention. Time and time again during our research we ran into people at failed thrifts who claimed to have connections with the CIA. We ran into individuals whom we discovered were dealing secretly with the Contras. moving large sums of money here, there, and off to nowhere for what they claimed were covert purposes. 

At San Marino Savings in Southern California we heard about a major borrower, G. Wayne Reeder (who also attempted a couple of failed ventures with Herman Beebe), meeting in late 1981 at an arms demonstration with Raul Arana and Eden Pastora, Contra leaders who were considering buying military equipment from Reeder's Indian bingo-parlor partner. Dr. John Nichols. Among the equipment were night-vision goggles manufactured by Litton Industries and a light machine gun.4 Nichols, according to former Reeder employees and published accounts, had a plan in the early 1980s to build a munitions plant on the Cabezon Indian reservation near Palm Springs in partnership with Wackenhut, a Florida security firm. The plan fell through. Nichols was a self-described CIA veteran of assassination attempts against Castro in Cuba and Allende in Chile. Authorities said he was a business associate of members of the Los Angeles Mafia. He was later convicted in an abortive murder-for-hire scheme and sentenced to prison. 

At Indian Springs State Bank we found Farhad Azima, who financed part of his Global International Airways operations with loans from Indian Springs bank. Mario Renda had relationships with Adnan Khashoggi and another deposit broker who federal investigators confirmed, was a former CIA operative who laundered millions of dollars through financial institutions for Baby Doc Duvalier. the former ruler of Haiti. Investigating Mike Rapp we met Heinrich Rupp, a self-described CIA contract pilot, and his associate, who claimed the CIA was using banks to launder drug money and get loans that went to finance the Contras. 

And there was more, much more. Experts had wondered how so many billions of dollars could just vanish from the thrift industry without a trace. If some of that money were channeled into the Contra pipeline or used to serve other legal or illegal covert purposes, that could certainly be one answer. One respected law-enforcement official told us that a man in prison for bank fraud had agreed to cooperate with him in an investigation of another bank fraud case, in exchange for a good word to the judge, until he was suddenly granted a White House pardon. The official said he was told the pardon was obtained through CIA chief Bill Casey. And as we were going to press we were working with a fellow reporter digging up information that Southmark may have had a relationship with some members of the covert Iran-Contra crowd. 

We don't know what all that means. We didn't have time to investigate both that story and this one, but we want to be on the record as saying that we finally came to believe something involving the CIA and Contras was going on at thrifts during the 1980s. After all, deregulation created enough chaos to accommodate just about anyone's purposes. And taking out loans from federally insured institutions, giving the money to the Contras, and letting federal insurance pick up the losses does have the flavor of what Ollie North might think was a "neat idea." 

The S&L industry-inspired "see no evil" approach to tlie looting at thrifts helped keep the mounting crisis out of the public consciousness until 1988. It surfaced then only because non-industry analysts began to insist loudly that the FSLIC's losses were approaching $100 billion. Suddenly the American public  started paying attention. For two years the three of us had worked in near  isolation. With the exception of a handful of other reporters around the country, we couldn't find anyone who understood what was happening or seemed to care. But suddenly everyone wanted to talk to us about the problem. We were just winding up our investigation when the General Accounting Office in Washington sent two investigators out to Guerneville. The two buttoned-down bureaucrats wanted to know if any "La Cosa Nostra types," as they so quaintly put it, had infiltrated the thrift industry after deregulation. A producer for CBS's 60  Minutes contacted the House Committee on Government Operations to get background for a 60 Minutes segment on the thrift crisis, and an attorney for the committee referred him to us. He, too, made the trek to Guerneville to  spend a few days going through our files. 

The FBI announced that fraud and embezzlement cases settled at financial institutions were up 42 percent in 1987 and more than doubled (to $2.1 billion) in 1988. In October 1988, Congress finally caught up and announced their findings that the country's financial institutions were targets for bust-outs by organized crime syndicates and generic swindlers. A House committee reported, "At least one-third (and probably more) of commercial bank failures and over  three-quarters of all S&L insolvencies appear to be linked in varying degrees to [serious misconduct by senior insiders or outsiders].5 

In 1988 the comptroller of the currency surveyed recent bank failures and found that less than 10 percent were caused solely by economic factors. The FSLIC began issuing profiles of the failed thrifts it was trying to dispose of (sell, merge, give away), and the profiles almost always included tales of looting and 'insider abuse.6 

Finally even FHLBB Chairman Danny Wall, who had made a profession out of denying that there was a problem, admitted to the House Banking Committee's Subcommittee on Financial Institutions in March 1989 that the FHLBB 'was finding more and more instances of fraud and mismanagement: "In virtually all cases, the boards of directors of resolved [handled by the FHLBB in 1988] institutions were found to not have acted prudently." 

But after all was said and done, what would come of it? Had anything been learned? Probably not. As far back as 1976 key members of Congress knew what might happen if they deregulated thrifts. That year Congressman Fernand St Germain (D-R.I.) had chaired the House banking subcommittee investigating the failure of Citizens State Bank in Carrizo Springs. Texas, and the network of businessmen (including Herman Beebe) whom authorities believed were abusing dozens of financial institutions in the area. As we read the hearing transcripts 11 years later, it was clear that Congress and federal regulators knew in 1976 what kind of people were out there just waiting for an opportunity to victimize financial institutions if given the slightest opening. 

During those 1976 hearings St Germain said about bank failures: 

We have been repeatedly told that most major bank failures have been caused by criminal conduct. . . . hisider loans have been the principal cause of bank failures over the past 15 years. . . . 

Yet, he noted: 

Of the 56 banks that failed in the United States between 1959 and 1971. 34 had passed their most recent examination in a "no-problem" category, and 17 of the 34 had been given an "excellent" rating. Undeniably, this fact alone points to an increasingly apparent deficiency in the existing examination process. ... 

All too frequently examiners do not "look behind the loan" as to the adequacy of collateral and do not inquire into relationships between institutions due to agency coordination difficulties. . . . 

There has been a growing feeling in recent years of the need for greater uniformity in statutes and regulations relating to self-dealing loans, conflict of interest, duties and responsibilities of boards of directors, and loan limitations for directors and stockholders. 

With those words St Germain had summed up not only the situation in the banking industry in 1976 but also predicted with stunning accuracy the fate of hundreds of S&Ls less than ten years later. 

Federal regulators who testified at the Citizens State Bank hearings (among those testifying, by the way, was Rosemary Stewart, the regulator whose picture would be a target in Tom Gaubert's mini-shooting gallery ten years later) warned that their ability to keep swindlers out of the banking industry was severely hampered by privacy laws that made it illegal to keep lists of undesirables who had a history of abusing financial institutions. Furthermore, anyone who wanted to buy a bank could. Only officers and directors, not owners, were required to meet certain minimum standards. 

Committee member Representative Henry B. Gonzalez (D-Tx.) also sat on the subcommittee investigating Citizens State Bank and he made the most ironic comment of the hearings:

Here, however, we have found the one bright spot: namely, that the Federal Home Loan Bank Board is aware of the situation and is plainly working hard to turn it around. Even here we probably must consider strengthening enforcement powers of the Federal Home Bank Board. . . . 

Remember, this was 1976. But then Representative Gonzalez gave this wise and eloquent summation: 

Charters issued to financial institutions are given for public reasons. Banks are supposed to serve the public. They have a public character. It is the public that suffers when bank owners and officers buy and sell banks like used cars, when they engage in self-dealing, when they plunder and steal. We have seen the pattern of flagrant and squalid misconduct in these institutions. There is no reason to doubt that other institutions are being stripped and raided this very day. 

We have found regulation that is forgetful, benign, and on some levels pitiful, Inadequate regulation is what has made possible the kind of outlandish sordid conduct we have discovered. We have lifted only a corner of the rock. What we have seen is enough to disgust anyone. 

Corrective action is needed both at the state and federal level. Administrative regulation can be—and must be—strengthened. State statutes need to be strengthened. Federal statutes probably need updating, and yet at the bottom this is the ultimate truth: no law is going to replace efficient, honest and aggressive regulation. 

Six years later Congress, led by St Germain, voted to deregulate the savings and loan industry with the Garn-St Germain Act in 1982. (Gonzalez voted against both the 1980 and 1982 deregulation legislation.) Had St Germain forgotten everything he saw and learned at Citizens State Bank?7 It would appear so. During the time his deregulation bill was pending in 1981 and 1982, St Germain was dining around Washington on the U.S. League of Savings Institutions' charge accounts.8 That little indiscretion earned him a special Justice Department probe into his cozy relationship with the U.S. League and the $10,000 to $20,000 a year in entertainment they reportedly spent on him but he never reported. Though the Justice Department decided not to prosecute St Germain, it found "substantial evidence of serious and sustained misconduct." A House ethics committee investigation in 1986 alleged that he understated his assets by more than $1 million for several years and took at least seven trips on Florida Federal Savings' jet (St Germain reportedly had a close relationship with the CEO of Florida Federal Savings in St. Petersburg), but they recommended no punishment. St Germain's home-district voters voted him out of office in the 1988 election, and he thus became the first major Washington politician to succumb to the thrift gate scandal. Because any legislation to clean up the savings and loan industry would have to go through the House Banking, Finance and Urban Affairs Committee, which St Germain had chaired, we hoped his ouster was a good omen. He was replaced by Representative Henry B. Gonzalez, who had spoken so eloquently during the Citizens State Bank hearings in Texas 12 years earlier and later voted against deregulation. 

St Germain wasn't the only person who demonstrated a flat learning curve when it came to the thrift industry. 

In 1988 Wall remembered his benefactor, Senator Jake Garn, by committing the bankrupt FSLIC to donating $6,000 to the Jake Garn Institute at the University of Utah. When a reporter asked Wall about the donation, she reported that he replied, "So?" 

In the fall of 1988 members of the U.S. League—who as late as the summer of 1987 argued, against all reason, that the FSLIC needed only $5 billion to get back on its feet—held their annual convention in sunny Honolulu. Network television ran colorful footage on the evening news of thrift executives partying on the sandy beaches, showing no apparent concern for the billions in losses their industry had incurred, losses they had every intention of asking the taxpayer to cover. 

Only a few weeks earlier three officials of the Federal Home Loan Bank of San Francisco flew at bank expense to Italy and Spain to choose granite samples for the bank's new 20-story headquarters building. (After a public outcry they decided to use American sandstone from a quarry in Pennsylvania.) 

In 1987 an annual survey of executive salaries and benefits showed that for the second time in three years thrift chief executive officers got much larger increases than CEOs in other industries. In 1987 total compensation for thrift CEOs increased 13 percent, 5 percent more than for CEOs in other industries and nearly triple the 4.4 percent rise in the consumer price index.9 

Taken altogether, it was enough to make a taxpayer scream, since by the end of 1988 it was being widely reported that taxpayers would probably have to fund most of a $200 to $300 billion FSLIC bill, an amount equal to the entire NASA budget for the next 20 to 30 years. The potential cost to the average American taxpayer was estimated to be at least $2,000 each (or $200 a year on every person's 1040 for ten years) assuming the hole wasn't deeper than estimated, and that was not a very safe assumption. By the end of 1988 insolvent thrifts yet to be closed were costing the FSLIC $35 to $40 million a day in additional red ink, or at least $12.7 billion a year.

In March 1989 President Bush's point man on the thrift crisis, Richard Breeden, warned thrift industry leaders meeting behind closed doors in Los Angeles that the new administration's broom was about to sweep the industry clean and not to get underfoot. 

"This is a very delicate and very dangerous situation," Breeden said. He warned that the administration was in no mood for trouble from either thrifts or their lobby groups. "I'm here today to tell you that it would not be in the long-term best interests of this industry to oppose our plan. We don't have ten months this time to sit around and debate this thing. This is a very dangerous situation."

CHAPTER TWENTY-SIX 

Taking the Cure 

The American savings and loan industry has been damaged beyond repair. Little  can be done now to mitigate the damage done by careless and thoughtless deregulation. Over the next five or ten years the savings and loan industry as we know it today will quietly disappear into history, one of the last relics of post Depression New Dealism. The FHLBB, FSLIC, etc., may gradually be merged , with the bank regulatory agencies, and the few remaining distinctions between , thrifts and banks will vanish, or the thrift regulatory apparatus will remain to supervise financial institutions still called S&Ls but very unlike today's thrifts. Perhaps we will be left with community banks—to handle mortgages, consumer loans, and small business loans—and commercial banks. In any case, the country will have institutions offering home mortgages and a safe haven for deposits, but they will bear little resemblance to traditional savings and loans. As deregulation progresses, more and more Americans may have to turn to unregulated mortgage bankers 1 for home loans because banks and thrifts lulled by the siren song of developers will have little interest in mortgages. 

While the thrift industry plays out its last hand, the American taxpayers must concern themselves with how the industry's little $200 to $300 billion problem can be solved. There has been and will continue to be a great deal of effort expended in Washington to disguise the politically dangerous fact that American taxpayers are the only people with deep enough pockets to pay the bill. The remaining members of the thrift industry can't pay it.2 Already, thrifts are paying premiums two times higher than banks are paying and that extra expense makes it very difficult for them to compete in the financial marketplace. Forcing them to pay even more would only create more casualties. We believe it would be inherently unfair to expect the prudently managed thrifts to pay the entire cost of this debacle (even though their silent acquiescence allowed the situation to get so far out of hand) because the primary responsibility for the huge losses belongs to those who plundered and to politicians who were seduced by the thrift lobby and campaign contributions. 

But as with any such sticky issue, officials in Washington were looking for a way to fix the problem without personally taking any heat. A wide-open debate over the thrift crisis was the last thing Congress, the Federal Home Loan Bank Board, or the thrift industry lobby wanted. Too much dirty laundry would get aired in the process. To avoid just that the same people who brought us this $200 to $300 billion problem began cooking up schemes for quietly dealing with it. 

To get a jump on any new Bush administration (non-industry) initiative, and because Congress wouldn't give them the money to close the institutions down, the FHLBB initiated a crash program to "sell" 220 of the sickest institutions before changes in the tax laws at the end of 1988 made such acquisitions less attractive. But to attract buyers the Bank Board had to offer huge financial and regulatory incentives.3 

Analysts 4 said that selling the institutions in this manner actually cost up to 40 percent more than simply closing them immediately, paying off insured depositors, and selling the institutions' assets. When the FHLBB sold American Savings and Loan (a subsidiary of Charlie Knapp's FCA) in 1988 to the Robert Bass Group, the buyer put $350 million cash into the deal, with a promise of $150 million more within three years. The FSLIC subsidized the balance of the transaction with nearly $2 billion of its own money. In another "take my wife, please" deal, the FSLIC sold failed Eureka Savings to former Bank of America executive Steve McLin's group, America First. As part of the deal the FSLIC agreed to pay for all future losses from bad loans on Eureka's books and contributed $291 million in cash to make Eureka solvent for the new owners. The FSLIC agreed to share the tax-loss benefits with America First on a 50-50 basis, just to sweeten the deal, and guaranteed America First a built-in profit on troubled assets that came along with the thrift. One source close to the FSLIC/McLin negotiations described dealing with the FSLIC negotiators as "taking candy from a baby," and in the first seven months of ownership America First reported a $10 million profit from its Eureka Federal operations. 5 

For the first time, The Wall Street Journal reported, thrifts are being run by corporate raiders, with assets guaranteed by the government. 

These arrangements were attractive to the FHLBB and some politicians because many of the costs were in the form of tax breaks 6 and interest payments' that can be spread out over many years and may go quietly unnoticed. But the losers will be the U.S. taxpayers, who several years from now may have to pay an even larger thrift bill than is due today if these same (but even sicker) S&Ls wind up back in the taxpayers' laps. It is especially troubling that some of the buyers of these insolvent thrifts are other thrifts who are themselves almost insolvent or developers with no banking experience but a lot of uses for money—those ubiquitous "entrepreneurs." These deals are simply a new batch of ticking time bombs. 

Representative Jim Leach (R-lowa) said the deals were too good for the buyers but not good enough for the government. What has developed, he said, is a giveaway system where the potential profit has been privatized while the potential loss has been socialized —exactly the problem that brought us the thrift crisis in the first place. 

In 1988 regulators put together what they called the "Southwest Plan," in which they created 15 large thrifts out of 87 smaller, insolvent ones and threw in some federal "assistance." The very first Southwest Plan deal in Texas merged four sick thrifts into one large thrift. Southwest Savings Association of Dallas, owned by Caroline Hunt, the daughter of one of the Texas Hunt brothers." The FSLIC forgave Hunt a debt estimated at $15 billion and contributed $2 billion to the new mega thrift. Within ten months Southwest Savings was reportedly seeking an additional $200 million in federal assistance. In March 1989 the comptroller general of the General Accounting Office was saying that the Southwest Plan had little chance of succeeding. He told the House Banking Committee that the FHLBB didn't even audit the 87 Texas thrifts involved in the Southwest Plan before arranging their mergers. 

Other mergers and purchases the FHLBB had arranged were already falling apart. Ramona Savings in Fillmore, California (its president, remember, was arrested at the San Francisco passport office as he tried to flee the country for the Grand Cayman Islands), was sold to Midwest Federal in February 1988. Within a year Midwest Federal had also failed and news reports alleged fraud and misconduct by the Midwest chairman, who was reportedly under FBI investigation. 

In March 1989 the GAO told the Senate Banking Committee that the FSLIC was so disorganized and its record-keeping so sloppy that it was impossible to tell how much the deals would eventually cost the federal government and whether or not some White Knights got preferential treatment. 

In February 1989 the new Bush administration moved swiftly to take the initiative away from the FHLBB and presented a complex plan that was still being revised as this book went to press. The most immediate aspects of the Bush plan called for the FHLBB to be placed under the direct supervision of the Treasury Department and the watchful eye of the comptroller of the currency. The FSLIC's job of seizing and liquidating the nation's junkyard of insolvent thrifts would be handed over to the FDIC. The complex plan also called for $50 million for the Department of Justice's white-collar crime and fraud divisions. 

The Bush plan was a clear improvement over the status quo, but the idea of the FDIC shouldering the additional burdens of the thrift industry gave little comfort. The same people who decided it was a good idea to lend billions of dollars to Argentina, Mexico, and Brazil would be deciding what was best for thrifts. 

The FDIC said its assets at the end of 1988 stood at around $18 billion — not a lot of money for an agency with plenty of problems of its own. In 1987 a record 184 banks failed, costing the FDIC more than $3 billion, and 221 were closed in 1988 at a cost of $3 billion to $9 billion. FDIC examiners said there were an unprecedented (since the Depression) 1,500 problem banks around the country at the end of 1988—three times the number of problem thrifts that remained to be dealt with. In late 1988 a banking industry watch group, the Shadow Financial Regulatory Committee, reported that the FDIC was itself nearly insolvent but wouldn't admit it. The shadow group said the FDIC had only $400 million left. 

The FDIC record in dealing with those troubled banks was not much better than the FSLIC's in many cases and, like thrift regulators, the FDIC was politicized. Jake Butcher, who with his brother was close to the Carter administration and looted 23 banks in Tennessee and Kentucky until they collapsed in 1983 (even though the insider dealing was identified as early as 1977), bragged to a journalist that he had helped name a member of the FDIC board. (The Butcher brothers are serving 20-year prison sentences for bank fraud.) 

But the Bush administration proceeded with its plan to put the FDIC in charge of closing more than 200 insolvent thrifts, and even before Congress began to debate the Bush plan the FDIC moved in. Closing those brain-dead institutions resolved two immediate problems: first, it stopped the losses that such a thrift racked up each day it remained open—an open, insolvent thrift is like an open artery; and second, each closure removed another piece of the excess capacity created in the thrift industry when everyone rushed to open his own money machine after deregulation. But it mired the FDIC in a problem the FSLIC had been wrestling with for some time—how to operate and then dispose of the assets of the seized thrifts. Regulators did not make good real estate managers or brokers, and the stories of their inefficiency and wasted millions of dollars came to us by the dozens. 

Acknowledging the magnitude of the problem, FDIC Chairman Bill Seidman said, "The amount of real estate that will be up for sale is likely to exceed $100 billion, so it is a huge task, the biggest liquidation in the history of the world." 

Immediately reports began to surface that with the FDIC turning its attention to thrifts, banks were going dangerously unsupervised. The House Committee on Government Operations had reported in October 1988 that the FDIC examination staff was understaffed then and "failed badly" at meeting its examination schedule. In 1986 and 1987, 79 out of 189 state banks that failed had not been examined within a year of their failure, 39 had not been examined within 18 months, and 29 had not been examined within three years prior to their failure. The American Banker reported in March 1989 that hundreds of state-chartered banks in Texas were operating essentially unsupervised, just as bank failures in the state had soared from 22 in 1987 to 44 in 1988 to a projected 50 in 1989. 

Clearly, the only way to successfully tackle the thrift crisis was with a coordinated, overall attack approved by the Bush administration and Congress. Piecemeal efforts had proved inadequate time and time again, and siccing the FDIC on thrifts without adequately increasing its staff was just one more example. President Bush entreated Congress to act on his proposal in 45 days, but there was no chance whatsoever that they would. And the $35 to $40 million-a-day losses continued. 

While Congress tried to deal with the Bush plan, the savings and loan industry continued to operate under regulations (especially on the state level) that hadn't changed much since the heady days of deregulation. It was true that some important improvements had been made. For example, when California Savings and Loan Commissioner William Crawford succeeded Larry Taggart in early 1985, he stopped the expansion of the state thrift industry dead in its tracks until he could get the out-of-control situation in hand. From 1981 through 1984, California regulators had approved 172 thrift charters. From 1985 through 1988, Crawford approved one. 

Federal and state regulatory agencies were in general beefing up their staffs with more regulators and examiners. And some important re-regulation had occurred on the federal level, including: standards were raised for thrifts seeking FSLIC insurance; in 1985 Gray placed limits on growth, raised minimum net- worth requirements, and limited direct investments; in 1986 he increased reserve requirements; and the FHLBB began demanding more accurate appraisals. In addition, savings and loans had to start carrying assets on their books at values that more closely reflected actual market values. While the new standards came with qualifications that blunted some of their effectiveness, and the  philosophy of forbearance continued, these were important steps in the right direction. But regulators and Congress still needed to develop a comprehensive program to ensure that savings and loans (and banks) would stop acting like drunken sailors. 

Banks and thrifts should be held to the same standards when they are serving  the same market, and the following points must be addressed in any future  legislation:

Politics: 
The issue of politics as played in the halls of Congress hardly needs further mention here except to report the ironic results of the ethics probe of Speaker Jim Wright. The outside counsel to the House Ethics Committee, Richard Phelan, submitted his report February 21, 1989, and concluded that in savings and loan matters Wright broke House rules four times: 

When he removed the recap bill from House consideration in order to pressure the Bank Board to change its resolution of the Craig Hall matter. 

When he sought a change in the Bank Board's decision to oust Tom Gaubert from Independent American Savings. 

When he attempted to "destroy Joe Selby's career" based upon the accusation that he was a homosexual. 

When he tried in early 1988 to get Danny Wall to fire William Black (by then Black was working for the FHLB in San Francisco and was not within Wall's jurisdiction). 

But the House Ethics Committee ignored Phelan on the S&L matters. Members concluded that Wright violated House rules 69 times, but not when he tried to get a little service for his thrift constituents. 

Still, the savings and loan issue wouldn't die. In May 1989 during the Dallas trial of some Commodore Savings Association officials (for allegedly illegally funneling corporate money into a political action committee headed, coincidentally, by Wright's friend Tom Gaubert), defendant John Harwell, a former Commodore vice president, said Wright solicited campaign contributions for Democrat Jim Chapman during a meeting of S&L executives in Dallas and also said Wright understood the problems that pending direct-investment legislation could create for thrifts. Subsequently, the PAG received large donations, some of which went to Chapman, according to press reports, and the legislation never made it to the House floor. Wright denied any connection, saying, "You can look until you're blind, ask until you're hoarse, listen until you're deaf and you will never find anybody of whom I've asked anything in return." 

If the FHLBB remains in operation, several changes need to be made to help keep political pressure from playing such a strong role in the regulation process. The Bush plan called for the elimination of the three-member Bank Board, but if it is retained, the three members should be appointed for six-year terms rather than the current four-year terms. The requirement that no more than two members can belong to the same party should be eliminated—the White House should select the best-qualified people regardless of their political affiliation. The FHLBB should not oversee the FSLIC—the FSLIC should be a separate entity free from any political pressure the FHLBB might exert. 

Though transferring examiners to the district banks served an important purpose when Gray couldn't get Stockman's approval for more examiners, it created a possible conflict of interest when a president of a troubled S&L was sitting on the board of the supervising district bank (FHLB directors are elected by the member S&Ls). Charles Keating raised the further objection that his company's thrift, Lincoln Savings, was being regulated by officials (the San Francisco FHLB board, which was made up of savings and loan executives in his district) who were in competition with him. But even under the old system the potential for conflict of interest existed. For example, when examiners from the FHLBB were examining Empire Savings' books in 1982, Empire Chairman Spencer Blain was an official of the FHLB of Little Rock, which was responsible for any disciplinary measures that might grow out of the examination. 

The Topkea Federal Home Loan Bank, under its president, Kermit Mowrbray, became embroiled in several political controversies, and an official said Mowbray was sharply criticized by Ed Gray for not being tough enough in his supervision. For example, regulators said, the Topeka bank had been receiving warnings since 1985 that Silverado Savings of Denver was on a collision course with disaster, and Silverado borrowed heavily from the Topeka FHLB, but no significant supervisory action was taken against the $1 billion thrift until it was finally declared insolvent in December 1988. (The thrift fell within the jurisdiction of the Topeka FHLB.) A former analyst for the Topeka FHLB, James Moroney, went public with his conviction that politics was the reason. Moroney declined to elaborate, but published reports said Larn- Mizel, a Republican activist who had raised over $1 million for the Republican party, was a borrower at Silverado; Neil Bush, son of then-Vice President Bush, sat on Silverado's  board of directors 9 and Silverado's chairman, Michael Wise, was reported by the Denver Post to be a favorite of the thrift lobbying organization, the U.S. League. 

"The problem in my assessment," said Moroney, "was the lack of separation between the examination and supervision function at the Topeka bank.10 

Deposit insurance: 
There is a place for the entrepreneurial bank or thrift in today's marketplace, but the risks such a nontraditional institution takes should not be underwritten by federally backed deposit insurance. Until the politically powerful in the thrift, industry are willing to let go of the FSLIC security blanket in return for the right to wheel and deal, all their talk about free enterprise is simply hypocrisy. Deposit insurance was established so the common person could be assured that his relatively meager life savings could be invested safely. It's time to get back to that concept. 

Deposit brokers: 
Deposit brokers' access to thrifts was limited in the 1960s precisely for the reasons Gray wished to limit them again in 1984: Their ability to scour the countryside for the highest rate in the nation creates an atmosphere that pushes rates up, as institutions compete for the easy-to-get institutional deposits, and encourages thrifts to use the expensive deposits in high-risk ventures. Insured brokered deposits also are too easy a source of fuel for fraudulent deals. 

We believe, however, that the problem is not necessarily the brokers themselves but, again, the insurance coverage. Deposit brokers can perform a legitimate and important function by efficiently moving money around the country, but we should limit FSLIC insurance coverage to $100,000 per deposit broker, per institution. Even Mario Renda would have had difficulty getting normally honest thrift officials to sell their integrity for a $100,000 deposit. 

Capital requirements: 
Before deregulation, thrifts were supposed to have 5 percent of their total assets in tangible reserves to cover unexpected losses. But regulators dropped the requirement to 3 percent in 1981 as fewer and fewer institutions were able to meet the 5 percent standard. The 3 percent rule, coupled with a regulation adopted in 1972 that allowed thrifts to meet the reserve requirement by averaging reserves over a five-year period, allowed thrifts to grow much too fast, if they were so inclined, and the crooked ones were. This high leveraging capability was one of the chief elements that attracted "entrepreneurial" owners into the industry. The brake on lending that the reserve requirement achieved disappeared. 

A high capital requirement is a key element to a healthy banking or thrift industry, and we applaud a movement within the industry to support an 8 percent reserve requirement that would increase as a thrift's investment risks increase. The FHLBB attempted a decade ago to develop a risk-based reserve requirement but abandoned the plan in 1980 when the thrift industry objected. If the FHLBB had stuck to its guns, much of the artificial growth that followed would not have been possible. 

Regulatory agencies: 
Deregulation of the financial services sector has blurred the distinctions between financial institutions. Mortgage brokers and commercial banks, as well as thrifts, now provide traditional home-loan mortgage services. As a result many people feel a separate thrift industry is no longer needed.11 But if thrifts do continue to exist as a separate entity, they must be prepared to fund an adequate regulatory staff and be able to offer auditors and examiners salaries equal to what they could earn at private auditing firms—only then can they expect to attract quality staff. If thrifts are at all reluctant to pay the bill for such a regulatory structure. Congress could take this opportunity, this crisis atmosphere, to swiftly put the industry out of its misery. They could liquidate the twelve district banks and apply to the FSLlC's deficit the estimated $13 billion in equity that the district banks hold, fill the rest of the FSLIC hole with a federal bailout, and liquidate the FSLIC. Close all the sick thrifts immediately and send the healthy ones out for applications to become banks. 

Accounting principles: 
Accounting practices used by thrifts (Generally Accepted Accounting Principles and Regulatory Accounting Principles) were practically impenetrable except by specially trained accountants. They looked like something authored by Lewis Carroll. In dozens of ways thrifts could legally doctor their balance sheets, and they used those smoke-and-mirror accounting methods—usually with the regulators' blessing—to hide the sorry truth of their deteriorating condition from the public and, to some extent, from themselves. Thrifts should be required to adhere to accounting methods that reflect reality, no matter how distasteful that reality may be. They should be required to regularly revalue their assets to current market conditions ("mark to market"). 

Screen the thrifts' officers, 
directors, and owners: 
Set up a process modeled after the New Jersey and Nevada Gaming Control Boards, which screen and thoroughly investigate applicants for gambling licenses. Look into applicants' pasts, their records in other jurisdictions, and their associates. Determine the source of the funds that applicants are using to capitalize their new institution. (Herman Beebe grubstaked more than one unethical banker.) And after they are approved for a charter, recall thrift owners for a thorough reevaluation at the slightest breath of scandal. If it's determined that they hang around with crooks, show them the door. Don't let con men be bankers. Don't let borrowers be lenders. Remember the words of California's tough Savings and Loan Commissioner Bill Crawford: "The best way to rob a bank is to own one." And the words of Willie Sutton when he was asked why he robbed banks: "Because that's where the money is."

Rewrite bank secrecy laws: 
It's high time to bury the Depression-era fear of runs on hanks. That phobia is one of the underlying justifications for the secrecy that surrounds Bank Board actions, but, in fact, the best thing that could have happened to the thrifts in this book would have been an early run on deposits to force more timely action by regulators. Secrecy was the single most important factor in allowing losses at thrifts to get so large. It played directly into the hands of anyone who had something to hide. It even prevented ethical S&L managers from monitoring their own industry, because when they reported their concern about a high flier to regulators, they never heard another word about the case. 

The secrecy was inevitably carried to ridiculous extremes, as when regulators sent us several short biographies ("bios") of themselves, prepared for the media . . . and each one was stamped "confidential." 

We recommend opening thrifts and banks to the light of day, and if depositors don't like what they see and decide to take their money elsewhere, so be it. Examination reports, for example, should immediately be made public. If Vernon Savings' depositors had discovered the kinds of screwball deals that thrift was involved in when its assets were only, say, $300 million, and there'd been an ugly little run on deposits, forcing regulators to pay attention, think how much the FSLIC would have saved. Instead, secrecy let Vernon swell to over $1 billion in assets before it finally collapsed—all in the name of "privacy." 

Law enforcement: 
The nation's legal systems weren't prepared for the upheaval that followed deregulation. Prosecuting financial fraud cases became a nightmare, partly because it was a fairly simple matter to bust out a thrift or bank without clearly breaking a single law; Borrow (or have your associate borrow) lots of money, never pay  it back, blame a bad local real estate market or (if the scam was in the Southwest) the falling price of a barrel of oil, and enjoy the proceeds tax-free since debt is not taxed. Prosecutors had a tough time proving intent to defraud. 

"Let me wave a pair of bloody underwear in front of a jury in a murder trial and I can have their undivided attention," complained one U.S. attorney. "But  let me wave a handful of phony deeds and loan applications in front of that  same jury and their eyes just glaze over." 

Congress should pass legislation that expands and redefines bank fraud and establishes new and more severe penalties, particularly for those who have a history of abuses at institutions. There are too many cracks in the law through which highly sophisticated criminals can slip. 

White-collar crime is a growth industry and the Justice Department's small fraud task forces are not an adequate weapon against it. Nor are individual FBI
agents chasing swindlers around their own blocks. Just as the Justice Department created permanent regional organized crime strike forces around the country, they now need to establish similar white-collar crime strike forces. Such strike forces could keep track of these highly mobile swindlers as they move from jurisdiction to jurisdiction, state to state. And, as the strike forces did with the mob, they could penetrate the network of associations that white-collar criminals use to facilitate their schemes. They could establish long-term sting operations and place in the field undercover agents who would act as an early warning system when a scam was about to go down. Only then would prosecutors have an effective weapon against the growing number of economic terrorists bleeding today's financial services industry. 

Not only is no such white-collar crime strike force being considered but, remarkably, one of the first suggestions made by Attorney General Richard Thornburgh upon taking office in 1989 was that the 24 regional organized crime strike forces be eliminated. We found incontrovertible evidence of organized crime involvement in the thrift crisis, but Thornburgh wanted the strike forces disbanded and merged with the U.S. attorneys, who have so often proven themselves ineffective in battling bank and thrift fraud. The battle was a bureaucratic one, with Thornburgh supporting the U.S. attorneys, who didn't like having independent strike forces operating in their jurisdiction. But we remembered the trouble Mike Manning had finding a U.S. attorney who would take the Mario Renda case, and we strongly agreed with assistant U.S. Attorney Bruce Maffeo, who prosecuted Renda in Brooklyn, when he said, "The First United Fund case provides a vivid example of why the organized crime program is necessary to effectively investigate and prosecute complicated financial crimes. Without the institutional dedication of resources and time that the organized crime section uniquely affords, this case and others like if would never have been solved." The strike forces should not only be retained, but they should be expanded to include non-mob white-collar crime. Another change in the works, moving white-collar crime out of the jurisdiction of civil racketeering laws (RICO), is another bad idea. Securities, accounting, commodities, and other industries are lobbying against the Racketeer Influenced and Corrupt Organization Law, but it is a powerful tool against economic, white-collar crime. As Thornburgh said, it is one of the few federal laws designed "to attack the business of crime." 

The Bush plan did call for a token increase of $50 million in the Justice Department's white-collar crime budget, but it would be a mere drop in the bucket. When we considered that just one of our alleged thrift abusers, Tom Nevis, got over $80 million in loans from a single failed thrift, according to the FBI, $50 million seemed insignificant—and so would be its effect. 

Federal judges need to be schooled on the damage that white-collar criminals do. Too many major white-collar swindlers, like Herman Beebe, get meaningless short sentences. Judges need to get away from the notion that a person who robs a bank with a gun and one who defrauds it with a pen are somehow different. They are not. Only their techniques differ. Either way, the money has been stolen. In fact, bank robbers usually run out the door with only several thousand dollars, while the average swindle nets hundreds of thousands, or millions, of dollars. White-collar criminals should be sentenced to hard time at regular mainline federal prisons, not minimum-security "country clubs." Anything less fails to establish a creditable deterrent to bank fraud. A new sentencing law should include a clause for bank fraud that reads: "Use a Pen, Go to Jail." 

Fortunately, new federal sentencing guidelines that went into effect November 1987 prescribe minimum prison terms based partly on the amount of money stolen, regardless of whether the theft was robbery or fraud. Unfortunately, the law went into effect too late to apply to many of the S&L looters. Meanwhile, the five-year statute of limitations is running out on many of their crimes, and they are laughing up their silk sleeves. 

FSLIC legal action: 
The FSLIC typically files civil lawsuits against officers and directors of institutions they believe have been "mismanaged." If the officers and directors of a failed thrift have assets, the FSLIC should take them. If they don't, the FSLIC should go after the officers and directors' insurance coverage. Too often we saw the FSLIC spend millions of dollars to get a civil judgment against a crooked former thrift officer, only to agree later to a settlement that was a farce. 

In 1988 regulators settled secretly with Frank Domingues and Jack Bona, whom they had sued in connection with $200 million in loans that contributed to the failure of San Marino Savings and Loan, San Marino, California.12 When we contacted regulators in Washington to find out the terms of the settlement, we were told the terms were secret, put under court seal at the request of both the plaintiffs and defendants. If the FSLIC is going to spend a small fortune in legal fees to sue these people, then they must be prepared to demand settlements that are not just one more travesty, and those settlements should be made public. 

The FSLIC hired a law firm to sue David Butler, former CEO of Bell Savings and Loan, San Mateo, California,13 and in the settlement that followed Butler agreed he was responsible for $165 million in losses incurred by Bell while he was in charge. Butler had been an extravagant spender, even having a $6,000 leather toilet seat installed on his corporate jet and reportedly buying his secretary a new Maserati. The final judgment the FSLIC agreed to, however, limited Butler's actual liability to $290,000 in cash and to what the judge described as some nearly worthless stock. Butler was allowed to keep his $190,000 home and his $40,000 vintage biplane, and the FSLIC agreed to pay him $110 a day for his time and trouble while he cooperated with its investigation. A federal judge vacated the settlement in 1988, calling it a disgrace and saying "The court feels FSLIC owes more of a responsibility to the American taxpayers." The legal fees collected by the firm representing the FSLIC in the Bell case would have dwarfed the quarter million in cash they "recovered" from Butler. Anyone who admits to causing $165 million in losses should be stripped naked of assets. But apparently the FSLIC felt that a man and his biplane should not be parted. 

Ethics in government: 
The relationships that developed between politicians and thrift abusers constituted a breach of ethics at best and in some cases smacked of corruption. It's outrageous that politicians who helped protect and perpetuate much of the thrift scandal were allowed to wrap their actions in the disguise of "constituent service." Their real constituents should give them the boot (as Rhode Island voters did St Germain in 1988), because those congressmen and senators weren't helping constituents, they were protecting their financial supporters. When they should have been guarding the public's interest, they were instead repaying old debts. And to prove that nothing had changed, the Federal Elections Commission revealed that in 1988 333 congressmen and 61 senators received donations from thrift lobbyists. Voters should vote out of office legislators who do not demand from themselves and others the highest possible ethical standards. When powerful leaders like Jim Wright can hold up a piece of emergency legislation like the recap bill, in order to extort concessions for constituents from federal regulators, they have violated the public's trust (to the tune of more than $100 billion, said some analysts who believed losses could have been held at $15 billion if regulators could have closed institutions as soon as they became insolvent). If Congress and the Justice Department haven't the stomach to do what is necessary, then the voters should. 

Appraisers: 
Appraisers played a critical role in much of the looting that occurred at thrifts. Behind nearly every fraudulent loan was a phony appraisal. Time and time again properties were grossly over appraised to justify large loans that were never paid  back. At one Southern California thrift, regulators found a half dozen appraisals on a single piece of property that began at $2 million and went up to $175 million. "The last appraisal even had a big red seal on it," recalled California Commissioner Bill Crawford. "I'd never seen one with a seal on it. It looked real official." The FSLIC later sold the property for $2.5 million. States should license appraisers. Most states now license real estate salespersons and brokers, and the slightest accusation of illegality, misrepresentation, or fraud can result in suspension or revocation of that license. All states license barbers. Why should appraisers be any different? Currently, appraisers can belong to private professional organizations that allow them to put official-sounding letters after their names, but nowhere are they licensed. 

Auditors: 
Many thrifts failed not long after receiving perfectly clean bills of health from their auditing firms. By March 1989 the FSLIC had sued ten accounting firms that had audited the books of failed S&Ls and more suits were on the way.14 The auditors deflected criticism by saying that their audits could only be as good as the information provided to them by the thrift's management, and if that information was fraudulent, they weren't responsible. 

When auditors examined a thrift's books, they were not required to look for fraud, but if they should happen to see any, they were required to report it to thrift management, which might not be the best move if the thrift management itself was involved in the scam. Auditors should be required to look for fraud and to report to federal regulators, who can then confirm the suspicions and contact the FBI. Auditors also do not now have to include in their annual audit any suspicion they may have that the company might be about to collapse. Clearly, they should be required by law or by industry standards 15 to include such information. If thrift officials pressured auditors (or promised them rewards) to overlook fraudulent deals or other discrepancies,  auditors should be required to report the pressure to federal regulators. Auditing firms that were found to routinely certify thrifts that fail should be barred from auditing thrifts. 

Adjustable rate mortgages: 
Ironically, the deregulation thrifts most needed in the 1970s was one of the simplest: allowing thrifts to offer adjustable rate mortgages. The industry lobbied heavily for the ARMs in the 1970s, but Congress—trying to please consumers —refused. 16 Deregulating interest rates on both the deposit and loan sides would have allowed thrifts to make all the adjustments they really needed during both inflationary and deflationary periods. Rates on deposits were finally freed up by the Depository Institutions Deregulation and Monetary Control Act of 1980, and rates on loans were freed up in April 1981 when then-chairman of the FHLBB Richard Pratt authorized thrifts to use ARMs. But by then it was too late. Forces for thorough deregulation had already been set in motion by the interest rate crisis of the late 1970s. The savings and loans that did survive the 1980s steered a conservative course, ignored deregulation as much as possible, and simply took advantage of unregulated deposit and loan rates.17

What we hope will come from the thrift industry carnage is a careful reassessment of what can and cannot be deregulated in this country and a recognition that deregulation is one thing while un-regulation is something else entirely. Deregulating segments of the financial services industry is, conditionally, a good idea. Federal meddling in private financial services, like placing tariffs and import quotas, can smother the most efficient business and turn it into a lumbering U.S. Postal Service-type beast. But Congress must learn to treat financial service deregulation like brain surgery, realizing that if too much is cut away, the patient will begin acting in bizarre, unpredictable, and, often, self-destructive ways. 

Congress now is besieged with banking industry pleas to deregulate commercial banks.18 Banking lobbyists are clamoring for bank deregulation today the same way thrift lobbyists clamored for thrift deregulation a decade ago. Even their arguments are the same, as bankers complain that they need more "freedom to compete." They, too, want freedom from what they see as a "regulatory straitjacket." 

In the late 1970s, when thrifts found themselves caught in the interest rate squeeze caused by inflation, thrifts begged for the right to diversify their investments. Today banks, being squeezed by ill-advised loan decisions they have made over the past two decades (loans to Third World countries, in particular), also want to diversify into fields where they hope they can make up the losses, particularly into underwriting securities and insurance. They want the restrictive features of the Glass-Steagall Act removed, and they certainly never mention that one of the reasons Congress passed the Glass-Steagall Act after the Depression was that risky transactions conducted between banks and their securities affiliates 19 led to many bank failures when the market crashed in 1929.20 Robert Glauber, Treasury undersecretary for finance, said in May 1989, "Once we get the thrift industry legislation passed, we are going to go back to our agenda of structural reform" (a euphemism for bank deregulation). 

Banks are crying for deregulation, but they are not offering to give up federal deposit insurance or accept a risk-based insurance system. That would be more "deregulation" than they have in mind.21 And bankers are not offering to pay for more examiners, examiners trained in the ways of the complicated and risk- ridden securities industry. What they say they will do is erect so-called fire walls that would theoretically keep their federally insured banks separate from their Wall Street stock-trading operations. But when the stock market crashed in October 1987, Continental Illinois National Bank and Trust in Chicago 22 promptly lent its option-trading subsidiary over $90 million to cover margin calls, in direct violation of an existing fire wall.23 For another example of fire walls that didn't work, we have to look no further than the thrift industry: Thrifts were limited in the amount of money they could loan to themselves or to their own projects, so they found other thrifts who wanted to play and they made quid pro quo loans back and forth to each other. Banks, too, will work out back scratching arrangements with their friends. So much for fire walls. 

It's hard to believe Congress would contemplate significant deregulation of banks before they have come to grips with the monumental mess they created by deregulating thrifts. And look who's giving Congress advice on the subject —Alan Greenspan, chairman of the Federal Reserve Board. He assured Congress in 1988 that deregulating banks and abolishing the 55-year-old Glass-Steagall  Act was a great idea and held nothing but benefits for the nation and for banking. Just four years earlier the very same Alan Greenspan had advised Ed Gray to stop worrying so much about deregulated thrifts because things were just fine and would only get better. 

Swindlers have always targeted banks, but with mixed success prior to deregulation. An FBI agent in Texas told us, "The only difference [between banks and thrifts in Texas] is that the FDIC still has its head in the sand. When I looked at the banks that closed between 1984 and 1987, in many of them I found people I knew, the same S&L crowd I'm investigating from the failed I thrifts here." Attorneys at private law firms who worked for both the FDIC and the FSLIC told us the same story. 

About bank deregulation, U.S. Attorney Joe Cage said, "Some of the same people who took down savings and loans, they're out in the securities business and banking, already in place, just waiting for Congress to abolish the Glass Steagall Act. When it happens I'm afraid they'll take the banks just like they did the savings and loans."  

Our conclusion that S&Ls were in large part looted by a hit-and-run network that would pose the same threat to deregulated banks was reinforced by the Housing and Urban Development (HUD) scandal breaking as this book went to press. While the national press focused on powerful Republicans who got huge consulting fees for pedaling their influence with insiders at HUD (for HUD approval of their clients' projects and the low-interest loans and tax credits such  approval carried), we saw other patterns emerging:  

The ethics report on Speaker Wright said that in 1983 he personally appealed to HUD Secretary Samuel Pierce for approval of a HUD grant to help a company owned by Wayne Newton, Billy Bob Barnett, William Beuck, Steve Murrin,  Don Jury, and others restore the Fort Worth stockyards. When the application  was denied, Wright got Senator Paul Laxalt to write to Pierce in support of the grant and the project was eventually approved. (It later went into bankruptcy in spite of efforts by Wright's friend George Mallick to bail it out.) 

An FBI affidavit filed in a Washington, D.C., court (in support of a request for a warrant to search the offices of DeFranceaux Realty Group [DRG] and its affiliates) revealed that the Justice Department believed DRG (approved by HUD to act on its behalf) in 1988 sold repossessed property' to Southmark at below market value (for example, Southmark paid $2.3 million for Dallas property DRG had loaned $6.4 million on just two years earlier). At the time DRG was trying to get a $15 million loan and a $25 million line of credit from San Jacinto Savings and Loan, a Southmark subsidiary. HUD was liable for 85 percent of the "loss" on such sales. 

The affidavit also claimed that in September 1984 DRG loaned Colonial House Apartments in Houston $47 million based on DRG's appraisal that the property was worth $60 million. In 1988 DRG had to foreclose. A few months later HUD appraisers said the apartments had been only 6 percent rented when the loan was made and were worth at that time only $13 million, not $60 million. In 1989 HUD estimated it would lose over $35 million on the deal. The Houston Post reported that Colonial House Apartments apparently was owned at least part of this time by a limited partnership (in a tax-shelter investment) headed by a group of syndicators that included Howard Pulver. Pulver's group in 1984 and 1985 sold $333 million in mortgages (appraised at the time by the county for only $192 million, according to the Post) to Mainland Savings in Houston, where Martin Schwimmer and Mario Renda placed some of their pension deposits and where Adnan Khashoggi also did business (in 1985, for example. Mainland reportedly paid Khashoggi $80 million for 21 acres the county was appraising at only $41.5 million). Reporter Pete Brewton discovered that Pulver lived practically across the street from Schwimmer in an exclusive Long Island neighborhood, yet the two men did not admit to knowing each other. Mainland collapsed in 1986. 

In 1988 Charles Bazarian was actively involved in locating property that qualified for HUD tax credits. It was then packaged and sold as tax shelters. The FBI was said to be investigating Bazarian's relationship with HUD. 

So the S&L and HUD scandals were not two separate stories. They were the same story. The fund that insured HUD's Federal Housing Administration (FHA) mortgages was reported to be at record lows and whispers of another taxpayer bailout had begun. 

Would banks be next? 

Those considering bank deregulation should go slow. Very slow. Keeping in mind that two simple, well-thought-out adjustments—flexible deposit rates and adjustable rate mortgages—were all that was needed in the 1970s to save the thrift industry, while sweeping deregulation and expanded powers destroyed it. Deregulation is powerful medicine. A little goes a long way. 

And the money lost in the savings and loan crisis, as horrendous as it is, would pale beside a similar fleecing of the banking industry: here were only 3,200 savings and loans in the United States, but there are over 14,000 banks.

We leave this project knowing this will probably be the most important story the three of us, as journalists, will ever work on. 

We have tried to give the reader a sense of the vast scope and depth of this scandal, but there was no way we could cover everything in the space allowed. We investigated many more failed thrifts than we could mention in this book. For every scam we chronicled, we left a hundred out. For every connection we made between key players, organized crime figures and thrifts, we had to leave (dozens out. it would have literally taken several volumes to chronicle this story in its totality. There was so much more that we would have liked to have told you.

We began this project as seasoned reporters, but we were not prepared for the depth of corruption and the pervasiveness of white-collar crime that we found. "Sometimes I think the only thing keeping this economy going anymore,are bust-out scams," a business reporter quipped to us one day. The words of one exhausted FBI agent seemed to sum it up: "Trouble today is that too many people in business are just no damn good." 

But besides the criminality we discovered a pervasive feeling that anything not actually illegal or specifically prohibited by thrift regulation was fair game. Traditional standards of right and wrong were ignored. Too many people in the thrift industry simply sold their fiduciary responsibilities to the highest briber. Whatever had infected Wall Street in the 1980s found its way into S&Ls as well —a burning greed that consumed long-standing American ethical standards.  

"An ethical person is someone who does more than is required and less than IS allowed," said Michael Josephson, former law professor turned ethics teacher. The thrift rogues turned that maxim on its head. If this book has a message, it is that the fabric of American society is being systematically weakened by the growing number of people willing to sell their values and principles for a fast buck.  

But perhaps most dangerous of all was the willingness of honest people to tolerate, rationalize, and even do business with the crooks. Erv Hansen could never have flown as high as he did for three years without the cooperation of many people in Sonoma County, California. As a respected Nevada judge said: 

"It won't be the bad people who destroy this country. It'll be the good people who rationalize the bad people's conduct."


Epilogue 
Appendix A
Appendix B
and notes
source here
https://ia802609.us.archive.org/5/items/insidejoblooting00pizzrich/insidejoblooting00pizzrich.pdf

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