S&L bailout: workers pay while thieves play

Scan page 6

U.S. history is replete with financial scandals. But nothing in the past comes close to matching the thievery and corruption inherent in a "free enterprise system" as the S&L scandal.

The Republicans and Democrats are both right. Blame for the savings-and-loan debacle rests with the "other party." But it was both Democrats and Republicans in the White House and Congress who opened the doors to the speculators and looters, shouted down those who sounded the alarm, and blocked every move to stop the financial rot before billions were lost.

Edwin Gray, a bureaucrat appointed by Reagan to keep an eye on the S&Ls after deregulation, took his job seriously. He saw little Main Street S&Ls with $2 million in deposits balloon overnight to mega-buck institutions with as much as $2 billion in customers' accounts.

Gray knew these billions represented brokered deposits: accumulations of money from pension funds and other sources seeking safe and profitable investments. S&Ls could not be safer. Every penny was insured by the government.

Money managers could move millions into an S&L overnight. They could also pull millions out overnight, leaving executives frantically searching for new deposits and investmenes hit managers are Takinsky investments thrift managers were making to pay these high rates of interest made Gray shudder.

As brokered deposits rose from $3 billion to $29 billion in 1984, Gray decided to call a halt. He would limit insurance to only one $100,000 deposit per person or institution. By presenting this proposal, Gray brought a storm of abuse on his head.

Secretary of the Treasury Donald Regan angrily declared that Gray "had strayed off the reservation. He was not a team player." Regan was scarcely unbiased. He had built his Wall Street firm, Merrill Lynch, into the biggest deposit broker in the country.

S&L executives went to court. A judge ruled in 1987 that only Congress could change the terms of insurance. Congressmen were not about to offend the thrift industry that lavished so many campaign dollars upon them. So the taxpayer continued to be responsible for all the billions on deposit, but had no say about the crapshoots the S&Ls were investing in.

Eminent economists told Gray not to worry so much. Alan Greenspan, Chairman of the Federal Reserve Board, pointed to 17 S&Ls he said had sound conservative managers. Within four years, 15 of these "sound" S&Ls were bankrupt, at a cost to the taxpayer of $3 billion.

Neil Bush's "normal practices"

Probably Greenspan would have considered Silverado Savings and Loan of Colorado a well-managed thrift. Neil Bush, the president's son, sat on the board of directors. But this did not ensure that only sound, honest business practices would be followed.

Neil Bush may be correct in saying he and other directors were only following normal business practices in running Silverado Savings. It was normal to put a man with no experience-but high political connections—on the board of directors.

It was also normal for Kenneth Good, a speculator, to give Bush a cost-free loan, and to invest in Bush's oil-exploration company. Naturally, Bush would reciprocate by persuading Silverado to lend many millions to Good. When Good's enterprises failed, he owed Silverado over $31 million.

Denver developer William Walters also invested in Bush's company and got $200 million in Silverado loans. He failed to repay $40 million. These and other defaulting loans pushed Silverado's losses to $1 billion-losses to be made good by the taxpayer.

What Bush calls "normal business practices" were characterized by regulators as "insider abuses." They charged that directors served as "rubber stamps" for management's abusive or questionable practices to make short term gains."

"Come and get it!"

Democrats are making much of the Silverado failure because of the president's son. But malfeasance at Silverado was only typical of policies pursued at the other 223 had previously been indicted for fraud, put up only $1000 of his own money to get 15 Texas S&Ls. Fe borrowed $60 million, but was still $10 million short of the down payment.

Someone close to the White House said, "Approve him anyway. Forget the indictmillion in federal payments over 10 years to create Bluebonnet Savings, the most profitable S&L in Texas.

This was not so profitable for the government. A series of such deals, with huge subsidies to attract buyers, cost the taxpayer $52 billion more than it would have if the failed thrifts had been closed down. But this would have disappointed a lot of big campaign contributors who still wanted to play the S&L game.

Giant garage sales

As of June 1990, a new government agency, the Resolution Trust Corporation (RTC), was holding 35,908 properties formerly owned by 148 failed S&Ls. It is estimated that a total of 1700 insolvent thrifts with 300,000 properties will eventually be in government hands. These range from athletic clubs to unfinished office buildings, to two uranium mines.

To liquidate these properties, RTC is planning a series of giant "garage sales" with prices slashed below the market. This is alarmıng property owners everywnere who are already suffering from falling land values.

Until the Silverado fiasco, President Bush said very little about the S&L crisis, which has been described as a "financial Vietnam." His concern has been to avoid responsibility for the debacle and to push the cost of the clean-up onto future generations. He intends to do this by selling bonds to raise money, putting the charges "off budget," and stretching the rescue operation over 40 years. This enormously increases the cost of the bailout.

The New York Times estimates the actual losses of the S&Ls to be $155 billion, while interest on the bonds and the cost of working capital will total another $133 billion. The Times predicts another $37 billion will be needed over 40 years for administrative and other costs. This adds up to $325 billion. They say this is an optimistic estimate. It could rise to $500 billion--three times the cost of the Vietnam War!

Since the actual loss of the S&Ls is "only" $155 billion, nearly all the additional cost must be ascribed to criminal pandering White House.

An unworkable "solution"

Financial experts say there is little need for S&Ls today. Banks and other institutions are making home loans. But politicians look on the thrift industry as the goose that lays golden eggs for them. With the skyrocketing costs of elections, every member of Congress must constantly seek huge campaign donations. S&Ls have been a major source, providing payoffs in the hundreds of thousands of dollars.

So the S&Ls are as American as apple pie, the politicians say. We have only to go after a few crooks, put them in jail, and take back the millions they stole. This simplistic solution is not going to work. Congress has been protecting these con men for years, allowing them to stash much of their loot overseas. Putting all the crooked S&L directors, like Neil Bush, in jail would hopelessly clog the country club section of the federal prison system. It won't happen.

The administration hopes the S&L debacle, like the HUD scandal, will disappear after a few trials and many assurances that "the system works." But the "system" is not going to work this time. Too many billions are involved, too many social programs will have to be cut to pay for the bailout, billions of dollars worth of unsold property will destabilize the market for years to come, and the commercial banking system could go the way of the S&Ls.

While our ruling class gloats over the failure of Stalinism, their own system of capitalism has failed the test. It cannot provide housing, health care, or education——it can only produce scandals in abundance.

Each succeeding scandal costs the taxpayer ever more billions. The S&L debacle tops them all. It threatens the stability of the financial system, and the political system that fostered it. Long before the 40-year bailout program ends, the American people will challenge the system that produces such monstrosities as the S&L scandal.

nernational EWPOINT International Viewpoint s a biweekly magazine published under the auspices of the Fourth International. A one-year subscription costs only $47. Write to:

International Viewpoint, 2 rue Richard Lenoir, 93108 Montreuil, France.

----- pull-quotes -----

THe SEL DEBACLe HAS ENRAGED THE AMeRICAN PeOPLE AND

ment." Furthermore, Fail was to get $250 NeIL, Go TO YOUR ROOM.