The S & L Bailout:
$32 billion every year for
excerpted from the book
Take the Rich Off Welfare
by Mark Zepezauer and Arthur
Odonian Press, 1996
The S&L Bailout: $32
billion every year for 30 years
The savings and loan industry began over
a century ago for the sole purpose of providing home mortgages.
Until the 1 930s, S&Ls (sometimes called thrifts-which is
pretty ironic, considering their recent history) got along quite
nicely more or less on their own. But when nearly two thousand
of them failed during the Great Depression, the government began
regulating them in earnest, and providing deposit insurance to
quell fears of further S&L failures.
Compared to the greener pastures of the
commercial banks, the S&Ls' opportunities for financial chicanery
were slight, so there wasn't a great deal of corruption there.
The trouble began when Jimmy Carter appointed Paul Volcker chairman
of the Federal Reserve Board (commonly called "the Fed")
in late 1979.
The Fed is supposed to minimize unemployment
as well as inflation, and before 1979, it tried to achieve some
sort of balance between the two goals. But under Volcker and his
successor, Alan Greenspan, it's simply aimed for low inflation,
regardless of the effect that has on jobs. In fact, Greenspan
has asked Congress to relieve the Fed of responsibility for keeping
Inflation was high when Volcker took over-13%
or so. To get it under control, he tightened the money supply.
This brought on a monster recession, the biggest since World War
II. Within a year, the prime rate shot up to the unheard-of level
of 21.5% (compared to an average of 7.6% for the fourteen previous
years). Unemployment peaked at just under 11%.
According to author Robert Sherrill, Volcker
stated, upon taking office, that "the standard of living
for the average American has to decline." Sherrill says Volcker
was recommended by David Rockefeller because "Wall Street
and the international banking fraternity loved [Volcker]. They
hated inflation-bankers don't like to be repaid in money that
is softer than the money they lend, even if the softer money makes
the economy hum-and they knew that Volcker was mean enough to
destroy the economy to save the hardness of their dollars."
Volcker's policies caused a combination
of inflation and recession called "stagflation." This
put the squeeze on S&Ls. Most S&L mortgages were fixed-rate,
so the S&Ls couldn't raise the interest they charged on those.
But because their depositors were withdrawing
money by the billions and placing it in higher-yielding money
market funds or government bonds, the S&Ls did have to raise
the rates they paid on savings accounts and CDs. Finally, because
of the recession, homeowners started defaulting on their mortgages
in droves, and S&L bankruptcies skyrocketed.
If it's broke, fix it
By the time Ronald Reagan took office
in 1981, two-thirds of the nation's S&Ls were losing money
and many were broke. If all the problem thrifts had been shut
down right then, the government's insurance fund would have covered
Instead, the government delayed an average
of two years-and, in some cases, as many as seven years-thus allowing
bankrupt S&Ls to go on losing billions of dollars. This delay
also gave S&Ls a chance to gamble on questionable investments,
in an attempt to regain solvency. But first they had to convince
Congress to deregulate them.
One night in 1980, Representative Fernand
St Germain (D-Rhode Island), whose $10,000-to-$20,000-a-year restaurant
and bar tab was paid for by the S&L industry's chief lobbyist,
proposed raising federal insurance on S&L savings accounts
from $40,000 to $100,000- even though the average size of an S&L
account was $6,000. He waited until after midnight, when only
eleven representatives were still on the floor of the House; they
approved his proposal unanimously.
But St Germain was just getting warmed
up. In 1982, he cosponsored a bill that removed all controls on
what S&Ls could charge for interest and released them from
their century-old reliance on home mortgages.
Around the same time, the Reagan administration
ended the requirement that S&Ls lend money only in their own
communities, allowed them to offer 100% financing (i.e. no down
payments), let real estate developers own their own S&Ls,
and permitted S&L owners to lend money to themselves.
These changes were like taping a sign
to the S&Ls' backs that read, "Defraud me." In fact,
it's widely rumored that Mafia lawyers and accountants carefully
monitored the progress of this bill as it worked its way through
Congress, ready to pounce the moment it became law.
Whatever truth there is to that rumor
the "defraud me" sign worked. J. William Oidenburg bought
State Savings of Salt Lake City for $10.5 million, then had it
pay him $55 million for a piece of land he'd bought for $874,000.
With the help of a shadowy figure named
Herman K. Beebe, who served a year for bank fraud, Don Dixon bought
Vernon Savings and Loan-one of the nation's healthiest-then set
up a series of corporations for it to loan money to. Four years
later, he left Vernon $1.3 billion in debt.
Beebe also had money in Silverado Savings,
an S&L partly owned by President Bush's son Neil. Silverado
told a prospective borrower he couldn't have $10 million; instead,
he should borrow $15 million and buy $5 million in Silverado stock.
Although federal examiners knew Silverado
was leaking cash as early as 1985, it wasn't closed down until
December 1988, a month after Bush was elected president. Because
Silverado kept leaking cash for those three years, it ended up
costing taxpayers more than a billion dollars.
Robert Corson, who helped the CIA smuggle
and launder money, bought Kleburg County Savings and Loan and
bankrupted it in nine months. Houston Post reporter Pete Brewton
found 24 failed S&Ls with ties to the ClA. One of these was
Peoples Savings and Loan in Llano, Texas, which loaned $3 million
to Ray Corona, a drug smuggler, and $2.3 million to his associate
One of Corona's drug-smuggling associates
was Frank Castro, a Cuban exile involved in Oliver North's contra
resupply network. Herman Beebe's Palmer National Bank was also
involved with North; it loaned money to customers who then channeled
it to the Swiss bank accounts used to supply the contras.
The Reagan administration not only failed
to police the industry while all this was going on, it dreamt
up ways to keep insolvent S&Ls propped up even longer. By
1988, the government was spending a billion dollars a month keeping
"zombie thrifts" afloat.
Everyone in the S&L industry and Congress
knew that a bailout would be necessary, but a conspiracy of silence
kept the issue out of public debate. Democratic presidential candidate
Michael Dukakis tried to raise the issue in 1988, but dropped
it under pressure from his running mate, Lloyd Bentsen (who had
been part-owner of a couple of Texas S&Ls).
They rob-we pay
As we said, if the insolvent S&Ls
had been shut down in 1980, the government's insurance fund would
have covered the losses and only administrative costs would have
been incurred. If they'd been liquidated in May 1985, it would
have cost less than $16 billion. By the end of 1985, the costs
were estimated at $30 billion.
In 1989, Congress finally came up with
$157 billion to bail out the S&Ls. But by that time, the costs
were over $200 billion (and they continue to rise to this day).
To make up the difference, the Resolution Trust Corporation was
formed; it sold off the assets of failed S&Ls, mostly at bargain-basement
prices in sweetheart deals.
For example, Robert Bass, one of the richest
men in America, bought American Savings and Loan for $350 million,
then received $2 billion in government subsidies to help him resurrect
it. (With that much money, you could probably raise the dead.)
During one week in 1988, the government promised $8 billion in
assistance to nine S&L purchasers; one of them put $20 million
down, and the other eight paid nothing.
That same year, the First Gibraltar Bank
was merged with four failing S&Ls and sold to Ronald Perelman
(at the time, the fifth richest man in America). Perelman and
his partners paid just $315 million for $7.1 billion in good assets;
the government then gave them $5.1 billion to cover bad assets,
plus $900 million in tax breaks. In the first year Perelman et
al. owned it, Gibraltar made a profit of $129 million and got
an additional $ 121 million in tax breaks.
The $157-billion bailout was financed
by floating 30-year bonds, the interest on which will make the
ultimate cost much higher. The actual total will depend on what
interest rates end up being between 1990 and 2020, but estimates
range from $500 billion to $1.4 trillion (in other words, 1,400
(If we could predict interest rates, we'd
be vacationing on Jupiter right now, s) let's just split the difference
between these two estimates and predict that the ultimate cost
for the S&L bailout will be $950 billion. That comes to about
$32 billion a year-and we're locked into it for thirty years,
no matter what we do or who we elect.
All this money will come from taxpayers
and will go to the people who bought the bonds. So, ultimately,
the S&L bailout amounts to a massive transfer of wealth from
ordinary people to investors (most of whom are wealthy)-as well
as to the crooks who looted the S&Ls. (Few of them were convicted,
by the way, and the average sentence of those who were was less
than two years.)
Probably the worst part of the S&L
bailout is the message it sends to high-flying con men. It says,
"Plunder all you want. As long as your political connections
are solid, you'll get to keep the money and probably won't suffer
more than a slap on the wrist." (Charles Keating only went
to jail because his abuses were so extreme; he was the exception,
not the rule.)
The authors of the best book on the S&L
scandal, Inside Job, conclude that, rather than a lot of mindless
blundering, there was "some kind of network...a purposeful
and coordinated system of fraud. At each step of our investigation
our suspicions grew because, of the dozens of savings and loans
we investigated, we never once examined a thrift-no matter how
random the choice- without finding someone there we already knew
from another failed S&L."
the Rich Off Welfare