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 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 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 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.

Scoundrel time

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 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.

Check, please

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 S&L."

Take the Rich Off Welfare