The S & L Bailout:
$32 billion every year for 30 years
excerpted from the book
Take the Rich Off Welfare
by Mark Zepezauer and Arthur Naiman
Odonian Press, 1996
The S&L Bailout: $32 billion every year for
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
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
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 unemployment down.
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 their debts.
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
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
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 Harold White.
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
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 billion dollars).
(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
the Rich Off Welfare