S&Ls, Big Banks and Other Triumphs of Capitalism
GRAY AND OVERCAST DAYS
Let us return now, while the looting goes on apace, to see what is happening at that citadel of incompetence, the bank board. In our last episode, you will recall, the incomparable deregulator Richard Pratt had done his dirty work and then quit in 1983.
Edwin Gray was his successor. The thrift industry lobby picked Gray to chair the board, and of course the White House went along with the idea. I started to say "went along with the gag," because the lobby considered Gray to be something of a joke. "They thought I was going to be their patsy," Gray admits. After all, he was reputed to have the talents only of a goodwill peddler, a go-along-get-along sort of mushhead. As one of his friendlier critics said, Gray had the attention span of a doorknob. At least that was the way he appeared when he was press secretary to Reagan during Reagan's California governorship and later when Gray handled public relations at Taggart's thrift in San Diego. Gray was a firm believer in dereguation and had lobbied on behalf of Garn-St. Germain. So the crooks saw only blue skies ahead as Gray was sworn in for a four-year term by his old pal Ed Meese.
And for quite a while it appeared that their judgment of him was accurate. No sooner did he have his name on the bank board's door than Treasury Secretary Donald Regan, an alumnus of the Merrill Lynch gang that was doing so well with brokered deposits and junk bonds, called him on the phone and demanded to know if he was going to be a "team player" (apparently meaning one who would overlook the rot of the financial world); Gray assured him he would be. Early on, sounding like an indulgent uncle, he promised S&L operators, "We are going to allow you to do a lot of new things."
For a time, he was blind to the corruption, deaf to warnings. A little over two months after becoming chair, Gray made a trip to Texas specifically to encourage a convention of S&L owners to exploit--as if they weren't already--their emancipation from traditional restraints on how they could attract deposits and lend money (the title of his speech: "A Sure Cure for What Ails You").
On that trip he was taken aside by Texas Savings and Loan Commissioner L. Linton Bowman 3rd. Bowman tried to warn Gray about the grotesque, frightening explosion of new growth in East Dallas, where miles and miles of unoccupied apartments and condos were already crumbling and vandalized, all of them empty but with junkyard cars parked in front to make it appear they were occupied. This wasteland had been the recent handiwork of Empire Savings, which, with brokered deposits and some razzle-dazzle bookkeeping, had grown in the blink of an examiner's eye from a petty $20 million thrift to a bloated one of $330 million in "assets."
Gray wasn't interested in Bowman's warning. Empire's chair, Spencer Blain, had brought Gray into Dallas from the airport and Gray had noted with some surprise that Blain was driving a Rolls-Royce and wearing a $5,000 Rolex. Gray mentioned that he had never known a thrift operator with such luxuries, but Blain shruggingly explained, "We're just very profitable down here in Texas," and Gray was willing to believe it. After all, would Blain be living a lie--good ol' Spence, who had been a bank board director for four years before running Empire?
Team player Regan remains unrepentant about his responsibility for the Looting Decade. The problem, he insisted in testimony before the House Banking Committee on September 30, 1990, was too much regulation, not too little. Incredibly, he claimed that restrictions that "limited the ability of U.S. banks to diversify their loans outside their localities...made them extremely vulnerable to regional economic troubles." All such restrictions were actually removed in 1980.
Out of Control
A year later, Empire would be bankrupt and in receivership, the biggest insolvency caused by fraud in the F.S.L.I.C.'s fifty-year history. Losses in deposit insurance would total at least $165 million. Blain and a half a dozen S&L associates would be indicted for racketeering and fraud. Prosecutors said the bankers had been particularly expert at "land flips"--selling land back and forth to inflate its value artificially (one 117-acre plot increased in value from $5 million to $47 million in a few weeks of flipping).
By the time the Empire fell, Gray had begun to doubt the wisdom of thrift deregulation. Cautiously he had begun to speak out about its dangers. The Empire debacle turned him around completely. Because of his turnaround, the authors of Inside Job portray Gray as a hero. That judgement is excessively kind unless it is made simply to compare him to the depravity and willful incompetence of most Reagan-Bush appointees. But give him his due: Unlike virtually all other Reaganesque true believers, Gray was willing to change his religion when confronted with overwhelming evidence.
But still he took no drastic actions. Partly this was because he was understandably scared shitless. There was almost a trillion dollars riding on the nation's thrifts, and the F.S.L.I.C. now had only a ridiculous $2 billion to cover losses. What if, by getting tough, he tipped over the precarious thrift structure and created such a panic among depositors that they started a run he couldn't stop? Two billion dollars certainly wouldn't begin to handle a string of major failures. He decided to go easy until he had more money at F.S.L.I.C. Though his caution was, in that context, understandable, the harsh fact remains that for the first two years of his term, the bank board issued not a single rule to cure the industry's sickness.
Gray spoke up--which was enough to earn him the enmity of Don Regan and others in the White House who began to circulate ugly rumors about Gray in an effort to chase him from Washington--but he did not act. Finally, in February 1986, he could wait no longer. His enforcement chief had informed him that Texas was going down the tubes. Federal regulators there were overwhelmed. Reagan's budget cuts had resulted in the firing of two-thirds of the examiners in District 9, which covered five states, including Texas. Twelve agents and supervisors were supposed to keep tabs on 300 institutions. Some of them hadn't been examined in three years. The situation, particularly in Texas, was out of control. Fraud and insolvency had reached plague proportions. In March, 250 federal examiners hastily recruited from all over the country arrived in Dallas to inspect the books of every suspicious S&L in the region. Heading this emergency army was Joe Selby, a white-haired birdwatcher of deceptively benign appearance whom the crooked thrift bosses soon began calling the Angel of Death. He would not put up with their tomfoolery, their crazy excuses and their whining requests for more time to "straighten out" their hopelessly fraud-laden books.
Tomfoolery is not quite the appropriate term to apply to the business operations of such gents as Don Dixon. In the financial red-light district, Dixon was considered a hometown boy who made very, very good. He grew up in Vernon, Texas, near the Oklahoma border, and after some downs and ups in the construction business he was wealthy enough to think about buying a savings and loan. But he wasn't wealthy enough to actually do it on his own. So he turned to a close friend who did have all the money he needed: Herman Beebe (whom you will meet again in the section on the Mafia).
With the kind of sloppy sentimentality that sometimes afflicts outlaws, Dixon decided the thrift for him was his hometown Vernon Savings and Loan. It was a good choice: With $82 million in assets and only $90,000 in delinquent loans, Vernon Savings was rated one of the soundest in Texas. Assuring the old owners (who had babied the thrift like a house plant for the past quarter-century) that he intended to keep it in the service of Vernon, Dixon bought controlling interest for $1.2 million down and a note (which would never be paid).
Thereupon, Dixon promptly broke his word by moving the thrift to North Dallas, which was becoming the capital of financial con men, and went into high gear funneling brokered deposits into doctored loans on high-risk commercial real estate ventures. No more of those corny family home loans for him. Dixon pumped so much helium into Vernon Savings that by 1986 it reported $1.3 billion in assets--a mere 1,600 percent growth rate in four years. And for most of those four years Reaganesque bank regulators, far from suspecting something phony in such growth, pointed to Vernon as a prime example of miracles that could be accomplished via deregulation. But behind the Vernon "miracle" was the usual Ponzi operation, plus some fraudulent bookkeping. In 1985 the thrift reported $36 million in bad loans. Accordng to Inside Job, regulators would later learn the correct figure was $212 million.
To get his hands on the millions flooding into Vernon, Dixon set up Dondi Financial Corporation, which became the nominal owner of Vernon but which he controlled, and thirty subsidiary companies which had nothing to do with Vernon and were thereby free to receive loans from it, which they did with a vengeance. As for Dondi, it creamed off $22 million of the $22.9 million in dividends declared by Vernon in three and a half years.
These millions did not lie fallow; Dixon shoveled them into a glorious whoop-de-do that made him so celebrated that surely even the densest of S&L examiners must have got wind of it and wondered. Didn't they think it odd that this parvenu thrift operator suddenly had available for his use a $1.9 million chalet in Colorado, a $1 million beach house north of San Diego, a $2.6 million yacht (the High Spirits, sister ship to the President's Yacht, Sequoia), a fleet of six airplanes that in three years cost Vernon Savings $5.5 million to lease and operate, and a $2.4 million hunting lodge, equipped with, among other things, $40,000 worth of handmade Italian shotguns? (Dixon and friends shot quail shipped in from Illinois, their wings clipped so they couldn't fly from the hunters.)
Today the government is making a big to-do about charging Dixon with enough fraud counts to hang him by his thumbs for 190 years and fine him $9.5 million, if convicted. But where were the federal regulators when Dixon was openly having such Dionysian fun (like paying women $10,500 for their company at a California beach party), which left us with a $1.3 billion bill when his S&L failed? The total damages the government is trying to recover from Dixon and his associates--who are accused of pocketing at least $40 million--represent, according to the F.B.I., more than what all the conventional bank robbers in the entire country reap in a typical year. Didn't such an elaborately visible looting pique offical curiosity?
For four years the bank board and its regulators didn't try to lay a hand on him. Bureaucratic inefficiency was one reason, of course, but we may also fairly assume that Dixon had a phenomenally long run with our money because many important people enjoyed his hospitality--folks like Gerald and Betty Ford, who freeloaded several trips on Dixon's planes; Representative Jack Kemp of New York; California's Senator Pete Wilson and Representative Tony Coelho; Senator Paul Laxalt of Nevada, one of Reagan's closest pals; and some very potent lobbyists. And of course that unforgettably greedy Texas populist, Jim Wright.
When Dixon's yacht docked at Washington, D.C., which it did every year, you could hardly keep the Texas politicos away. As for Coelho--who eventually quit the House to avoid an investigation of favors he received from California S&Ls--he often used the yacht for partying with fat cats he hoped would give to the Democratic Congressional Campaign Committee, which he chaired.
The Wright Stuff
But nobody used the yacht more than Tom Gaubert, a Dallas multimillionaire who was such a generous contributor to Democratic causes and was so good at raising money that Coelho made him treasurer of the D.C.C.C. Gaubert used the High Spirits so often he took to calling it "my boat." He raised a great deal of money--largely from Dixon and other scurvy S&L operators--to help win a Texas Congressional race for the Democrats that was particularly important to Wright. Gaubert understandably felt Wright owed him a big favor in return. The favor he asked had to do with his ambitions as an S&L operator.
Gaubert had paid $1 million for a tiny S&L in Grand Prairie, which is between Fort Worth and Dallas. Like Dixon and others, Gaubert used brokered $100,000 CDs to increase his S&L's assets quickly from $40 million to $223 million. He then asked bank board regulators to let him buy another S&L and twenty-two branches of a third, which would give him $1.3 billion in federally insured deposits.
Brooks Jackson writes, "It was a brassy request, considering the fact that he was under grand-jury investigation of suspicion of having swindled another S&L out of millions." Indeed, some federal investigators flatly considered Gaubert a crook. Nevertheless, with the help of his Congressional friends he successfully delayed the bank board's effort to end his control of the combined billion-dollar operation, renamed Independent American.
But his ownership was never secure because regulators kept discovering that Independent American had some very unsavory lending practices and kept books that weren't even remotely accurate. In May 1987 federal authorities, finding that 40 percent of Independent American's loans weren't even drawing interest and that the thrift was probably half a billion in the red, placed it in receivership.
Before that happened, Gaubert kept hounding Wright to make Gray call off his investigators. Dixon, and dozens of other Texas thrift owners, were demanding the same thing. They told Wright that Gray had assigned a bunch of homosexual lawyers to harass them. Wright, treating Gray as though he believed the charge, forced him into several humiliating compromises.
Even after Dixon and Gaubert's thrifts had gone bankrupt and Wright could help them no more, he got his revenge on Gray--and pleased members of the U.S. League of Savings Institutions--by torpedoing the bailout legislation of 1987.
The bill would have allowed the issuance of $15 billion in bonds floated on Wall Street, with the bonds to be paid off from extra fees assessed the S&Ls. The bond money would be used by the F.S.L.I.C. to close insolvent thrifts. But the industry was against the bill. Shaky S&Ls correctly feared the money would be used to shut them down; healthy S&Ls rebelled at the idea of higher fees--they wanted taxpayers to pick up the tab instead.
When Speaker Wright finally allowed the bailout bill to pass the House in May 1987, but with only a measly $5 billion, it was worse than useless because it included a "forbearance" provision that in effect was a promise that insolvent Texas thrifts would get a long stay of execution.
It was symptomatic of the perspective of Congress that Wright was not hounded from the speakership and from Congress by a House Ethics Committee interested in his enormously costly pimping for the thrift owners; the committee instead focused mainly on his petty cheating. And it was symptomatic of the press's narrow perspective that few editorial writers noted that Wright was, as politicians go, a potentially great one, destroyed by his weakness for easy payoffs. After it was all over, he told his daughter, "We were just greedy. Dammit." He had always been greedy, and there had always been a special interest ready to feed his greed. Not counting the millions in "soft" money spent on him indirectly, the thrift and real estate industries admitted giving gifts to Wright of $274,000 in the three years before he left Congress. With that money, they bought an extra year of looting. But they also ruined the reputation of a Speaker whose brief two years in the sun, the 100th Congress, were arguably more productive than any other period since the heyday of the Great Society in the 1960s.