S&L bailout gives crooks a free ride

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'A thousand points of light?' The Interagency Council on the Homeless has written an incredible report that praises the government, corporations, and private organizations for helping the estimated 3 million homeless.

"Not since the war on poverty and the civil rights movement," the report says, "has one particular group of people brought about such national attention and mobilized thousands of organizations and individuals to such immediate and successful action as has this parWhat the death rate is in other cities nobody knows. The San Francisco city government, under pressure from activists in the homeless movement, is the only U.S. city that keeps these tragic statistics. Of course, the government report avoided this "point of light"

SOCIALIST ACTION FEBRUARY 1989 Members of the House Banking Committee held hearings in San Francisco last month. They came to investigate "one of the most colossal blunders in regulatory history," as The Wall Street Journal described the savingsand-loan (S&L) crisis.

The committee members wanted to know, among other things, why 284 S&Ls had failed at a time of "unparalleled prosperity" and why over 200 applications for new S&Ls or thrift associations had been filed in California at a time when the industry was in a tailspin.

They also wanted to know how many crooks had seized control of S&Ls and why the California agency supervising the thrift industry was cut from 190 to 30 employees when the industry was booming.

Citizens across the country are also asking questions-with alarm-as they read of the cost of bailing out bankrupt thrifts. Succeeding news stories raise the estimated bill ever higher. The last report was $100 billion, and they are still counting.

Roots of the crisis S&Ls used to be relatively small, hometown institutions taking in their neighbors' savings and lending the money to other neighbors who want to buy a house. They remained in the backwaters of the American financial scene, not considered true banks.

The Wall Street Journal describes the leisurely pace of executive life in the traditional thrift: They followed the "3-6-3 formula." "Pay depositors 3 percent, charge borrowers 6 percent," and get on the golf course by 3:00 p.m. How could such conservatively run institutions lose $100 billion?

The downhill slide started with a rise in interest rates in the 1970s. When a saver could get 5 percent from a bank savings account, "3-6-3" was no longer realistic. And interest rates soared far higher than that by the '80s.

To keep savers from withdrawing their money, S&ls had to pay higher interest. But they were stuck with 20-year and 30-year mortgages with interest rates of 7 percent or 8 percent—a losing proposition.

In Texas, the collapse of oil prices hit the S&Ls hard, as borrowers were unable to repay. These problems could have been overcome if the Federal Savings and Loan Insurance Corporation (FSLIC) had intervened in time. But this would have involved some belt tightening that thrift executives were loath to suffer.

Instead, they looked with envy at the commercial bankers across the way who were knee deep in exciting and profitable deals all over the world. Why should S&Ls be confined to boring home mortgages?

Lawmakers in Washington, D.C., where the prevailing philosophy is "get government off the backs of businessmen," listened. In 1986, they said, "You are now largely deregulated. You are now on your own to invest where you wish."

The thrifts did not want to be entirely on their own. They still wanted FSLIC around to insure deposits up to $100,000 against loss. With this safety net, S&l officers could try their hands at big-time finance.

First they pulled in deposits by ever higher rates of interest. Then they raised the interest on their loans higher yet. Sound businesses would not borrow at these rates, but fly-by-night speculators would.

The result was bad loans-loans that could not be repaid, loans that were "secured" by nearly completed buildings that turned out to be only a hole in the ground.

Defaulting borrowers produce "nonperforming loans." Very bad in the banking business! But bad non-performing loans can be turned into good-performing loans by lending the borrower the money to keep up the interest payments.

This means luring more savers with higher interest rates, which means making more risky loans to depositors. It's a fascinating process to watch so long as your deposit is safely insured. FSLIC insurance made the money merry-go-round workable-for a time.

Speculators and thieves

As paper profits, commissions, and executive perks multiplied, shady characters were attracted to the S&Ls like flies to honey. Speculators saw great advantages in owning an S&L. They could vote themselves loans with few questions asked, and use the money for risky speculation and high living.

If there was no thrift to buy, they could always start their own. California and other states charter S&Ls on very easy terms. Nearly 200 have been given charters in the last two years. This was far more than needed to supply home mortgages.

But no problem! The new S&Ls were not into home mortgages, but into speculative oil leases, junk bonds, and executive jets for high-flying officers. All this speculative activity and outright thievery was underpinned by FSLIC, which insured state as well as federal thrifts.

With crooks in the executive suites, the closest scrutiny by regulators was called for. But it did not happen. The San Francisco hearing revealed one reason why:

Larry Taggart, a former California Savings and Loan Commissioner, wrote the White House in 1988 to call off regulators who were checking California and Texas thrifts. Their regulatory action, he warned, would have an adverse effect on Republican fundraising.

So the FSLIC ignored the proliferation of non-performing loans and dwindling assets. Depositors were lulled into complacency by the insurance on their deposits, while the money machines rolled downhill to inevitable bankruptcy.

The government payoff Insolvent thrifts have to spend $38 million a year in interest and expenses, while they take in only about $32 billion. So they are losing $6 billion a year. Day by day, the bailout bill grows by more than a million.

In desperation, the FSLIC put into motion "Operation Thrift Rescue." Failing thrifts would be taken over by large concerns that could absorb some losses, inject new capital into the business, and put the insolvent S&Ls back on their feet.

This tactic has worked with some other failing businesses, but there had to be incentives. FSLIC had to make offers that profit-hungry entrepreneurs could not refuse. Actually, the FSLIC is scarcely selling the S&Ls. More accurately, it is paying wheelers and dealers to take them away.

In a typical deal, Michigan National Corp. paid $52 million to buy Beverly Hills S&L (with assets of over a $1 billion). FSLIC put up $983 million in assistance. They also promised to cover any losses from rising interest rates, while Michigan National could keep any profits gained from falling rates.

If loans go bad, the government will absorb the loss. If they are paid off, the new owner keeps the profit.

On top of this bonanza, buyers of thrifts get huge tax writeoffs. Since the tax writeoff was reduced in 1989, FSLIC rushed through a bunch of deals in the last months of 1988. They disposed of 49 Thrifts at a cost of $121 million to the buyers, and $21.8 billion to the FSLIC.

With terms like these, there is no lack of buyers. The list of bidders looks like a "Who's Who" of corporate raiders. These pirates are not concerned with saving the S&Ls to make home loans. They have picked up these bargains to continue the speculative operations that got the thrifts in trouble in A soon to be released government report make crystal clear what George Bush means of light" expression.

ticular group of Americans."

Tell that to this woman and child on Market In that city alone, the number of street deaths increased from 69 in 1987 to 103 in 1988.

like the plague. the first place. How long before the taxpayers have to bail out the rescuers?

"Soak the poor"

The $100 billion bailout cost is added to the woes of the budget deficit. Everything will be done to conceal it, to postpone it, and to pass it on to future generations. Meanwhile, they talk of measures to reduce the cost of the bailout.

A trial balloon launched by Bush proposes that savers buy insurance to protect their S&L and bank accounts. They suggest a premium of 30 cents for every $100 on deposit. They might also institute deductibles, as in auto insurance. The depositor would absorb the first $500 or $1000 loss. This would be in harmony with capitalist "soak the poor" philosophy.

Regulation and reform will be widely discussed. There is a lot of talk about "blunders" being made, as though minor adjustments in regulations will solve the problem. But making more rules will not solve the inherent problem of business-for-profit being business-for-greed.

After the crash of 1929, the most far-reaching reforms of the banking system were instituted. This was supposed to prevent another financial collapse from happening. Now we are facing the threat of an even more devastating crash.

Band-aid solutions dictated by the financial interests concerned will solve nothing. The whole system of capitalist greed and corruption must be replaced.

on homelessness should by his "thousand points St. in San Francisco. among the homeless

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HOMEL Joseph Ryan/Socialist Action A HOTEL Joseph