Savings & Loan scandal: How to rob a bank without a gun

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CHARLOTTE "Inside Job: The Looting of America's Savings and Loans," by Stephen Pizzo, Mary Fricker, and Paul Muolo. McGraw Hill, New York, 1989. 440 pages, $19.95.

As damage-control estimates for the nation's savings and loan institutions soar up and up, people ask, "How could these little, essentially mom-and-pop financial institutions, lose as much as $500 billion?"

The authors of "Inside Job" have the answer. They name the con men who looted, the politicians who profited, and the officials who permitted the most massive swindle in American history.

A prologue, set in Washington, D.C., prepares the stage. For years, S&L executives had complained that government regulations limited them to low-profit home mortgages when there were millions to be made in wider financial circles.

In response to these pleas and President Ronald Reagan's exhortations to "get government off the backs of business," Congress passed the Garn-St. Germain Act in 1982. This lifted most federal controls on the thrift and savings and loan industry. While signing the bill in the Rose Garden, Reagan said, in effect, "Now you will see what unregulated free enterprise can do in the thrift industry."

The whole nation has seen, with dismay, exactly that. One example was enacted in the little resort town of Guerneville, 60 miles north of San Francisco. Stephen Pizzo, editor of the Russian River News, saw the wondrous effects of deregulation on the local Centennial Savings bank. This was a typical small town thrift institution with $2 million in capital, and barely enough home loans to cover expenses.

As deregulation dawned, Pizzo tells us, Centennial's directors "wanted someone at the helm who could sail their little thrift out of becalmed seas and into the uncharted potential promised by this newly deregulated industry."

On Dec. 16, 1980, the directors found their man and appointed him president. Although he had spent years in the thrift business, the new Chief Executive, Erv Hansen, did not look or act like a banker. He wore cowboy shirts and boots, and spent much of his time in bars with the local "redneck" cowboy element. His enthusiasm for Centennial's prospects under his leadership was infectious. "The beauty of it is there is money in it for everybody," he boasted.

Where was the money coming from? That question bothered Pizzo and led him and his 4 SOCIALIST ACTION collaborators on a three-year paper chase through the thickets of multi-million-dollar scams and swindles.

Brokered deposits

Guerneville was a good place to start. Hansen and his pals demonstrated how to rob a bank of millions without using a gun. First Hansen had to put millions into the bank. He could not do this just by offering toasters to new depositers in Guerneville.

He had to draw in money from all over the country. One way to do this is by using brokered deposits. These are large accumulations of cash, such as union pension funds. Money managers are hired to invest these funds profitably and safely.

S&Ls were paying ever-higher rates of interest and were "super-safe." Despite deregulation, every account was insured up to $100,000 by government agencies. Ultimately, however, it was the American taxpayer who guaranteed these accounts.

Big depositors could open any number of $100,000 accounts. This was great for the depositors, but not so great for the thrifts. These big depositors might pull out their money suddenly-which could have the effect of a run on the bank. To avert this, more brokered deposits had to be drawn in, at ever-higher interest rates.

This did not concern Hansen, as he raised the level of Centennial's deposits from $2 million to $49 million in 1983 and ballooned them up to $404 million by 1985.

With millions in deposits, millions had to be loaned out. This was a more complicated process because Hansen intended that most of these loans go to him and his friends. His friends included Siddarth Shah (an engineer with Piombo Construction Company) and Nicholaas Sandman (a Dutch land developer). Another friend was Beverley Haines, a Centennial teller, who was promoted by Hansen to chief loan officer and vice-president.

Now the stage was set for loans and more loans. Centennial loaned Sandman $4.5 million on a development scheme that eventually collapsed. Centennial paid Shah a $150,000 finder's fee for introducing Sandman as a good credit risk. They did not ask for their money back when the loan went sour.

Then Hansen persuaded the directors to buy Shah's Piombo Construction Co. for $14 million. Hansen wanted an enterprise through which large sums could flow without arousing suspicion. Construction firms are ideal for that purpose.

Shah was made a Centennial vice-president JUNE 1990 DO YOU EVER IMPENDING DISASTER AND ALL THAT? to facilitate the cashflow.

Centennial's directors were willing to make large loans, partly because they generated immediate profits. "Points" of added interest were tacked onto the loan, to be collected as soon as the papers were signed. Five points added to a million-dollar loan would create an immediate $50,000 profit. "Loan origination fees" and other charges added more profit and laid the basis for executive bonuses.

These were only paper profits, however. Centennial would lend the money to pay all the charges, plus two years of interest payments. A $1 million loan would be boosted to $1,200,000 with the extra money reserved for interest payments. Thus, a loan would look good on the books for a while, even if the borrower had disappeared.

Thieves get together

Under federal rules, Hansen could not borrow more than $100,000 from his own bank. This was not enough for his lavish life style. To get around this, Hansen looked up an old friend, who had established Columbus-Marin S&L. Columbus made loans totalling $174,000 to Hansen. In return, Centennial loaned Columbus $550,000, while Columbus returned the favor by making 14 loans to Centennial directors. Few of these loans were ever repaid.

These loans were made on the security of real estate that was appraised far above its real value. To make these inflated prices seem creditable, Hansen and his friends would resort to "land flipping," selling a piece of real estate back and forth among themselves at ever-higher prices. No money changed hands till the loan was made.

Not surprisingly, these shenanigans lead to defaulting loans, but Hansen had a scheme to delay the day of reckoning. He lent another friend $1 million to set up Atlas S&L, and invited him to "participate" in some of Centennial's projects. Soon Atlas became the "fall guy," holding a mess of Centennial's non-performing, defaulting loans.

With these S&Ls in place, Hansen could tap his money machine at will. He moved Cantennial into a $7 million headquarters building, ordered a twin-engine Cessna, and bought a stretch limousine at a cost of $72,000. This extravagance was crowned in 1983 by the most lavish Christmas party the citizens of Guerneville ever enjoyed. The bill for the bash came to $148,000.

Claiming a profit of $2.6 million for 1983, the directors gave Shah and Hansen two thirds of it through bonuses of $818,000 each. The "profits" were created through smoke and mirrors, but the bonuses had to be in real cash.

For two years, Hansen and his pals were on a roll, becoming respected movers and shakers in that part of California. When Pizzo expressed doubts in the Russian River News about Centennial's sudden prosperity, Hansen gave money to a rival publisher. When state and federal regulators began asking questions, Hansen put a former regulator on his payroll. When regulators got too persistent, Hansen got his "man in Washington," Rep. Doug Bosco to protest the harassment of an honest businessman.

Operation "bust out"

But that only bought time. In 1985, Hansen decided it was time for operation "bust out"-to get as much cash as possible out of Centennial and pull out. Shah, as vice-president, wangled a golden parachute worth $750,000 before quitting. Hansen cashed in through a more devious route.

The regulators declared that Centennial must immediately raise $7 million in new capital to back its inflated loans and deposits. Hansen had another scheme.

He found a buyer for Piombo Construction Co., which Centennial had bought for $14 million three years before. It had been stripped of its best assets, but the new buyers were willing to pay $25 million for it. The buyer was identified only as Sierra Diversified Investments of Shingle Springs, Calif. They did not appear to have $25 million. They did not even have a listing in the phone book.

Sierra came up with $100,000, which Hansen said was enough of a down payment to give them control of Piombo and $800,000 in its bank accounts. Hansen also gave them a $1 million operating loan.

Feds move in too late For three years, federal regulators had watched developments in Guerneville from afar. They wrote a letter to Centennial deploring the executives' excessive bonuses, but took no further action. Finally, the phony sale of Piombo Construction could not be ignored. Regulators moved in on Aug. 20, 1985, ousted Hansen, and took over.

They found $165 million was missing. This single heist netted three times as much as the 6000 bank robberies committed in the United States in 1985. Bank robbers with guns get long sentences. But crime in the executive suite is treated more gently.

Hansen died before he could be indicted. Beverly Haines was convicted of stealing $1.5 million. She was sentenced to two years, but released to do community work after two months.

If Centennial were the only case of looting an S&L, the financial system could absorb the loss. But thrifts are failing all over the country. "By the end of 1988," Pizzo writes, "Centennial and 581 other thrift institutions were dead and another 800 were in intensive care and might not survive." Many suffered much larger losses than Centennial. The much publicized Keating-Lincoln collapse may cost the taxpayer $2.5 billion.

Pizzo does not say that every failed thrift was a victim of criminal embezzlement. Falling land values and oil prices, and the lure of junk bonds brought even honest executives down. Regulators, however, report they have found evidence of fraud in 80 percent of the failed thrifts.

Pizzo documents the fraud in numerous bankruptcies and points to the involvement of Mafia families in many of them. The nature of this involvement is indicated by another quote from Pizzo. He says, "Some of the people who had run these institutions were also dead-garroted, shot, or victims of suspicious accidents."

The ultimate victim of the looters is the American taxpayer. The costs, which have not been totaled yet, are beyond all reason; and threaten the solvency of the nation.

A subsequent article will examine the role of the government in the collapse of the S&Ls and its failure to solve the problem. • FIGHT A Walnut THE FOR Publishing Co.

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