S&Ls, Big Banks and Other Triumphs of Capitalism
THE GIVEAWAYS BEGIN
Making misleading public statements to hide the real condition of the industry absorbed only a fraction of Wall's time in 1987-88. Mostly he was busy making the kind of deals with S&L buyers that prompted financial analyst Jonathan Gray to quip, "If you can't get the better of the Bank Board in negotiations, who can you beat?" House Banking Committee chair Henry Gonzalez (who did not hold that position at the time and was therefore restricted in his ability to serve as watchdog) now damns the deals as "giveaways," and he is certainly not being excessive. Not that all the blame can be heaped on Wall. The giveaways were part of such a wide conspiracy that no one person, certainly no one person of Wall's limited brainpower, could conceive and carry it out himself. But Wall was at the center of it.
The long delay in obtaining bailout money from Congress was about to pay off for friends of the Reagan and Bush administrations with enough resources to buy into the game. Particularly welcome, no doubt, were those several gents (including six owners of S&Ls) who had contributed $100,000 each in federally illegal soft money to Bush's 1988 presidential campaign. Two such gents, Robert Bass and Ronald Perelman, did join the game, with winning results, as you shall see. The lack of an effective F.S.L.I.C. bailout fund, which was partly Wall's fault, gave Wall the excuse to unload insolvent thrifts in breathtakingly subsidized bargain basement sales. The bank board had originally estimated that the subsidies to buyers would cost the government $39 billion. But the terms were so incredibly generous that, in fact, it will cost more than $70 billion.
And the sales--called the "Southwest Plan" because most of the zombies on the block were in that part of the country--were done in total secrecy. Details of the sales were kept not only from the public but from members of Congress as well.
When Senator Don Riegle, who was about to become chair of the banking committee, asked Wall's office to fill him in on how the Southwest Plan was unfolding, they told him to bug off--the information was proprietary. The desire for secrecy must have been intense because Riegle, one of Keating's boys, was known as a great friend of the S&L and banking industries.
The "plan" of the Southwest Plan was to entice, with fabulous favors, some of America's rich folks to buy the ailing thrifts. They were guaranteed a prearranged profit (if their assets didn't yield a minimum return the government promised to make up the difference) and marvelous tax advantages. By rushing to complete the deals before December 31, 1988, the bank board had no problem recruiting scores of buyers for its "expensive lunacy," to use Mayer's apt phrase. "Under the 1981 tax law," he explains, "which still governed until the end of 1988, payments from FSLIC guarantees were not taxable income to the S&Ls--but the losses the FSLIC payments made up could still (you may not believe this, but it's true) be used as deductions from the purchaser's other income. The government made up the loss and then paid a second time in the form of reduced tax receipts." In that situation, obviously, the purchasers of seized S&Ls would be eager to sell their assets--all those empty condos and shopping centers and vacant land and junk bonds--at a loss, because the greater the loss (which the F.S.L.I.C. repaid), the greater the tax write-offs they could claim for their other enterprises.
On September 5, 1988, the bank board announced the most expensive rescue of a single savings and loan association up to that time. The board unloaded the $16.3 billion American Savings and Loan of Stockton, California, the nation's largest insolvent thrift institution, to a group of "vultures" (to use Newsweek's generic term) headed by Robert Bass of Fort Worth, one of the nation's richest men.
In return for Bass's injection of $350 million in cash to rejuvenate American Savings, the bank board offered $2 billion in subsidies. These included a $500 million I.O.U. from the F.S.L.I.C. (Since it was busted, it couldn't deal in money, but its note was good at the Treasury.) In his first year of ownership, Bass recovered 30 percent of his down payment, and that doesn't include the tax write-offs. A very sweet deal, as Neil Bush might say, but not unusual in that giveaway season.
In fact, the government got more from Bass than it did from some buyers, namely, the ones who didn't put a penny down. In one eight-day period in August 1988, the bank board promised $8 billion in assistance to the buyers of nine thrifts--but only one of the buyers made a down payment, and that one put up only $20 million after being promised $585 million in assistance by the bank board. The $20 million bought control of nearly $1 billion in assets. These no-down-payment deals mocked the rationale Wall had given for the Southwest Plan in the first place, which was supposed to attract private capital to revive the zombies.
One of the neatest tricks of the Southwest Plan was turning two busted thrifts, Neil Bush's alma mater Silverado and another Colorado thrift, Columbia Savings, into one of the most profitable thrifts in the country by merging and selling them to First Nationwide Bank of San Francisco for $96 million. The profits came from federal subsidies of more than half-a-billion dollars and tax breaks. In its first year of ownership, First Nationwide earned a profit of $48 million, or about half its investment.
Among the giveaways that raised the greatest public stink--Fortune magazine called it "The Screwiest S&L Bailout Ever"--was the merger of First Gibraltar Bank with four other bankrupt thrifts and the subsequent sale of the package to Ronald Perelman, king of Revlon cosmetics and reputedly the fifth-richest man in the United States. Perelman and associates paid $315 million. In return they got $7.1 billion in good assets, $5.1 billion cash to cover bad assets and $900 million in tax breaks for MacAndres & Forbes Holdings Inc., his investment company, which counted Revlon Group Inc. and First Gibraltar among its subsidiaries. In his first year of ownership Perelman reaped $121 million in tax breaks and $129 million in profits--a 79 percent return on his investment.
What goes through the minds of ordinary Americans when they learn of deals like that? Rarely do we find out. But when Wall and the other two members of the bank board went before the House Banking Committee to reveal the luscious feast they had secretly laid out for the financial elite, we at least learn what went through the mind of one black man. Mayer uses this exchange to give his book its most human moment:
"Did I understand you to say," said Representative Walter Fauntroy, "that Mr. Perelman, in return for $315 million in cash, received benefits of $897 million?"
"It might not work out that way," said Danny Wall.
"But it might?"
Very reluctantly: "Yes, it might."
Fauntroy leaned forward. "I have just one question for you, Mr. Wall," he said.
"Why is it only white folks who get that kind of deal?"
How could the bank board excuse selling First Gibraltar on such insanely generous terms? By faking the insolvent thrift's real worth, that's how. Believe it or not, the bank board rated as "worthless" thousands of acres of land that First Gibraltar, before collapsing, had paid $1.2 billion for. Last year Perelman sold 400 of these "worthless" acres for $7.5 million. That grotesque undervaluation allowed Wall's gang to give Perelman millions more than would otherwise be justified. Is an observer overly suspicious to think of kickbacks?
Internal bank board documents show that the government could have saved more than $4 billion by closing First Gibraltar and paying off its depositors at a cost of $6 billion. But of course the F.S.L.I.C. didn't have $6 billion at that time; it was broke.
Speaking of rascals, it is worth remembering the kind of politically tinged deals that brought First Gibraltar to insolvency in the first place. One of the biggest was the development of Stonebridge Ranch north of Dallas, a 6,250-acre millionaire's tract that was supposed to have 27,000 homes and apartments built on it but never got more than 270. Among First Gibraltar's important shareholders who boosted the development were Robert Strauss, former chair of the Democratic Party and big-time insider of both political parties; his son, Richard Strauss; and J. Lingston Kosberg, a nursing-home owner and an active fundraiser for the Democratic Party in Texas. Young Strauss was in charge of the development, for which he got a $2.9 million annual salary. His father's law firm was billing First Gibraltar $1 million a month. Before First Gibraltar went broke, it had sunk $330 million into Stonebridge. Recently the government sold it to a Japanese industrialist for $61 million. The $269 million loss will be paid by you and me. (Surely you must feel much more secure knowing that this same Robert Strauss is advising President Bush on how to lick the deficit.)
The pinnacle of insanity in the Southwest Plan was achieved by Wall, with the help of William Seidman. Fifteen zombie thrifts were sold to James Fail, which he merged into one named Bluebonnet Savings, based in Dallas. To get the fifteen, Fail put up $1,000 of his own money and $70 million in borrowed cash, and in return Wall's agency promised him $1.85 billion in federal subsidies, or, as Senator Howard Metzenbaum puts it, "The U.S. taxpayer, compliments of the deal makers at the FSLIC, send Mr. Fail a check for what amounts to $23 million every month." Fail must be feeling pretty good about the deal, seeing as how in his very first year of operation, with the first of the federal payments ($250 million) in his pocket, Bluebonnet became the most profitable large S&L in the country.
Two years after the transaction, it was discovered that (1) the deal had been greased by lobbyist Robert Thompson, who was George Bush's legislative aide when Bush was Vice President and who was lent half a million bucks by Fail's companies in 1989; and (2) the deal was totally in violation of bank board policy, if not downright illegal.
Fail had a tainted record. In 1976 he had beaten a securities fraud indictment in Alabama by promising to get out of the state and stay out. At the same time, the United Security Holding Company, which was controlled by Fail, pleaded guilty to securities fraud. That's a felony.
Folks who own companies that commit felonies aren't supposed to be sold thrifts and subsidized with $1.85 billion. So why did the bank board do it--and do it with very fishy swiftness, just one day after Fail made an application that neglected to mention his indictment? That question leads us to William Seidman, chair of the Federal Deposit Insurance Corporation. Wall's F.S.L.I.C. said it approved Fail's application in 1988 because