S&Ls, Big Banks and Other Triumphs of Capitalism (Page 10)

10. A SELLOUT BAILOUT

To everyone's amazement, Congress did finally get around to passing a bailout bill, weighed down by the pretentious title of Financial Institutions Reform, Recovery and Enforcement Act of 1989. It promised $157 billion eventually to save the thrift industry, but it offered only $50 billion at the moment; this was supposed to dispose of 500 to 700 ailing thrifts over the next six years. It was a stupidly unrealistic estimate because it understated the level of inflation in the economy, understated interest rates, projected no recession or economic downturn whatsoever and projected a 7 percent growth in thrift deposits when they were actually dropping by 9 percent.

Worst of all, with only $50 billion available, the program would start out $20 billion in the hole because Danny Wall, it turned out, had secretly promised $70 billion in "assistance" to those lucky guys who had taken thrifts off his hands under the Southwest Plan.

Not to bore you with all the bureaucratic reshuffling that took place with the new legislation, let it be noted that the bank board was killed, the F.S.L.I.C. was absorbed into the F.D.I.C., Danny Wall eventually resigned and William Seidman, who as head of the F.D.I.C. had proved himself a master manipulator of press and Congress, was put in charge of a new piece of bureaucratic bric-a-brac called the Resolution Trust Corporation. The R.T.C. would control the cleanup and sell-off of the S&Ls and their assets.

Every expert within shouting distance of Washington knew that $50 billion wasn't even half enough to make a real start on the bailout, but Seidman--like Wall and Gray before him--downplayed the true scope of the S&L disaster and stalled the day of reckoning. Why would he do such a thing? Why lie, when his lies were costing the taxpayers many billions of dollars more? Brumbaugh, who accuses the bank board chairmen of systematically lying, puts the nicest interpretation on it: "Everyone tries to be a team player in dealing with a very difficult situation." The Reagan-Bush team was composed solely of liars.

Wall was a clod; Seidman is a smoothie; otherwise their cozy attitude toward the owners of financial institutions is pretty much the same. Mayer reports that when Seidman took over as chair of the F.D.I.C. in 1985 he called together the staff and counseled: "Bankers are our friends.... The FDIC should be a friend of the industry.... It should be like a 'trade association' for the industry." The message to the staff was clear: Go easy on the banking industry.

In handling the savings and loan industry, Seidman has displayed the same attitude. He is adamantly against making the corporations that benefited from the 1980s deregulation binge pay for it; he wants taxpayers to foot the bill. On Nightline, Ralph Nader said "corporate taxpayers should pay for corporate scandals" and recommended legislation that would put a surcharge on the corporate tax system. Among other targets, said Nader, would be "banks like Chase Manhattan, which made $650 million in 1987 and only paid 1.3 percent federal income tax" [see afterword by Micah L. Sifry on page 623]. Seidman, smiling at such nonsense, responded, "Well, the U.S. government guaranteed these deposits, it wasn't the corporations. It was the government elected by the people that guaranteed depositors that they would get their money. It's always an easy answer to say, 'Well, let's just tax corporations,' because they don't vote. But the people vote, the people voted in the Congress and the President, and that government guaranteed these deposits."

To that, host Forrest Sawyer responded: "But you know, you know what the average taxpayer is going to say. 'Hold on a second. This is the same government that was supposed to be overseeing these S&Ls, and now, all of a sudden, you're coming to me and telling me that I've got to pay for all those problems that you weren't looking out for?' "

Seidman: "Well, unfortunately, the government is elected by the people. The government simply did not do its job, but the people are responsible for what their government does."

In other words, when the "people's" government--that's one of Seidman's little jokes--lets banks and S&Ls go crazy, or when it gives away our money to crooks in the financial world, the voters are at fault; after all, they voted for the pols who appointed guys like Wall and Seidman, right? That's the political philosophy of the chap now handling the Resolution Trust Corporation.

So it will come as no surprise to you to learn that Seidman's R.T.C. has created an even bigger giveaway than the Southwest Plan of Wall's era. Nor should you be surprised at the identity of some of the sharks circling the R.T.C. meat. ABC News economics reporter Stephen Aug found that "some of the best-known names in finance are waiting for the government to start selling." Among them: former Secretary of Commerce Pete Peterson and his Blackstone Group; Lewis Ranieri of Prudential Insurance Company; Richard Pratt, the former chair of the bank board who helped ruin the S&Ls (one of the more offensive ironies); Ronald Perelman of First Gibraltar fame; former Treasury Secretary William Simon and his partner, former Federal Reserve vice chair and onetime S&L regulator Preston Martin.

Edward Furash, a well-known bank adviser, said last summer, "There's a small army of investors and lawyers and consultants and people who've been in government...who see this as the next best thing to the Oklahoma landrush."

Martin, whose Wespar Financial Services has snapped up several S&Ls, said the method of exploitation is easy as pie. What you do, he explained, is manage the rescued S&Ls conservatively for five years or so, raking in up to 20 percent profit a year, and "at the end of that time" you sell out to a "commercial bank holding company" or to a "group of investors from Japan."

Picking the Taxpayers' Pockets

Tom Schlesinger of the Financial Democracy Campaign, an outfit backed with labor and liberal money, is right on target when he accuses the R.T.C. of becoming "a patsy for acquirers of insolvent S&Ls. Commercial banks like NCNB [North Carolina National Bank] and Banc One [of Columbus, Ohio] have been the biggest bidders for S&Ls in RTC conservatorship, and RTC has acquiesced completely to their brand of hardball--our terms or no deals. On March 15, RTC actually gave NCNB $700,000 to take Bankers S&L of Galveston and its $104 million in deposits off the agency's hands."

According to a study by the Financial Democracy Campaign, just "fourteen mega-acquirers have received $54.4 billion in deposits--59 percent of all deposits transferred by the RTC through the end of September 1990." In what R.T.C. chair Seidman calls "a great fall inventory clearance sale," five big banks--Bank of America of San Francisco, Security Pacific Corporation of Los Angeles, North Carolina National Bank, Great Western Bank of Beverly Hills and Banc One--have received 40 percent of the total.

"Week after week:' says Schlesinger, "RTC announces a new set of pot-sweeteners for prospective bidders on S&L franchises. As a result, even more money is being picked from taxpayers' pockets in order to consolidate the financial industry and RTC's deals are more and more resembling the transactions that Danny Wall put together in 1988.

"In fact, some of the same fatcats who reaped windfalls from Wall have used the proceeds to buy front row seats at RTC's trough. For example, Revlon raider Ronald Perelman, whom Wall gave Houston's First Gibraltar, was recently awarded the $2 billion San Antonio Savings Association."

He's right about the pot-sweeteners. Whereas under the Southwest Plan, at least buyers had to take all the assets of the insolvent institution, the good and the bad, now the R.T.C. allows the buyers of zombie thrifts to pick over their assets, keep the good ones and return the bad ones to the government. A year ago, the rule was that buyers had six months to pick over the carcass; now they have two years--and during those two years the R.T.C. pays the buyers for any losses they incur from dud assets. So far, more than half the assets have been dumped back into the taxpayers' trash bin.

In fact, another sweet policy gives buyers the right to avoid handling the dud assets even for a trial period: They can bid solely on the thrifts' most stable deposits and their most easily marketable securities. A sparkling example is the CenTrust Savings Bank of Miami, the largest failed S&L ($8.2 billion in assets) under the R.T.C.'s control. It was sold--or part of it was--to the Great Western Financial Corporation, the nation's second-largest S&L, operating mostly in California and Florida. Now get this: Last year Great Western offered CenTrust $100 million for sixty-three of its branches. The deal didn't go through because the R.T.C. seized CenTrust. This year, with the R.T.C. making the deal, Great Western got seventy-one branches for $60 million. A fantastic bargain. What's more, Great Western walked off with only the healthy portions of CenTrust, leaving behind in the R.T.C.'s hands $3.1 billion of dying loans, junk-bond mutants and discarded real estate.

One of the most repulsive features of the R.T.C. program is that it permits billionaires to welsh on a deal. If these rich buyers agree to a sweetheart deal and then discover it isn't as cushy as they expected it would be, they can back out. That's what the R.T.C. did for Caroline Hunt, daughter of the right-wing kook H.L. Hunt and perhaps the richest woman in America. She bought Southwest Savings Association of Dallas from the government, decided she didn't like it, and Seidman allowed her to back out on a $60 million commitment. Now the R.T.C. has Southwest Savings on its hands again.

These procedures have allowed the R.T.C. to pretend it is clearing things up when in fact it is simply becoming the world's biggest trash collector. As economist Robert Litan put it: "People are led to believe that the Resolution Trust Corporation has done a lot of deals. It has; it's shut down a lot of institutions, it's sold a lot of institutions. But instead of actually resolving the institutions, it's taken assets, troubled assets, off the books of these institutions and put them onto its own books, thereby becoming itself...the largest troubled savings and loan in the history of the world."

And then there is the sweetener concocted particularly for Seidman's pals at the commercial banks. The R.T.C. now permits banks that buy S&Ls to keep a thrift's branch network even when such branch banking is prohibited by state law.

Worth noting, too, was a shift in policy last July that gives banks and other rich investors an opportunity to get their hands on thrifts even before they fail, and to do it in secret deals. Under this new plan, the R.T.C. will, instead of publicly advertising for bids, solicit proposals secretly from a favored list of 3,500 potential investors. Some analysts thought the R.T.C. was showing strange haste to start selling still-breathing thrifts when it already had on its hands hundreds of unsold zombie thrifts.

The Gold Rush

Why did Wall make such a frenzied effort to sell or give away or merge--anything but liquidate--the zombie thrifts? Why is Seidman continuing to do the same, in the same frenzied manner? One of the least noticed reasons: to save the big depositors, who were naked.

Researchers at the Southern Finance Project, analyzing fifty-four of the largest thrifts that failed between 1987 and 1989, found that they were swollen with accounts not covered by the F.S.L.I.C.'s federal insurance limit of $100,000. One out of every $5 in these failed thrifts was in an account that exceeded $100,000. In some instances, the percentage was awesome. At CenTrust of Miami, for example, which the F.D.I.C. took over this February, 53 percent of its $8.2 billion was in uninsured deposits.

Repeat: Those deposits were not covered by insurance. If the zombie thrifts had been liquidated, which would probably have been the cheapest technique to use, and if the F.S.L.I.C. had followed its own rules, the jumbo accounts (many of which contained more than $1 million) would have lost everything over $100,000. Cumulatively, rich speculators would have lost billions. To prevent that, Wall and Seidman sold and gave away and merged the zombies, keeping them "alive," whatever the cost to taxpayers.

"These numbers refute the myth that taxpayers are bailing out small savers," said Marty Leary, a researcher at S.F.P. "It's not the little old lady from Topeka or the farmer in Lubbock who are being rescued. It's wealthholders whose brokers keep pumping these damaged S&Ls full of hot money."

If this is unfair to taxpayers, it is only part of a larger unfairness that Michael Harrington once pointed out: "Where major banks [or S&Ls] are about to collapse, there is no point in a federal bailout which returns them to private hands. If Washington has to intervene, it makes sense for it to take over the bank and make it a public corporation, with employees and consumers on the board of directors." But that would be socializing profits as well as losses, so no one (except the few die-hard populists) in the present crisis has proposed it.

Crime in the Suites

Three crime waves have washed across the S&Ls. The first was the looting that followed deregulation. The second was the fire sales of S&Ls to favored buyers. And now comes the third wave, and once again the government not only knows it is coming but claims it is helpless to stop the anticipated fraud.

The new wave has to do with the disposal of many billions of dollars in assets at the failed thrifts. "There's a high potential for more scandal and ripoffs," says Charles Bowsher, the Comptroller General. We have reached the place, it seems, when our public officials admit their readiness to hire sleazebags as agents to sell off our property to other sleazebags at bargain prices. David Cooke, executive director of the R.T.C., says: "If 90 percent of the people working for us are honest, that still means there will be 10 percent who won't abide by the rules, and that's a lot of money."

It sure is. At the time he was saying that, the first inventory from 148 failed thrifts included 35,908 properties with a total book value of $14.9 billion. If the R.T.C. gets by with only 10 percent ripoffs, which would be a foolishly optimistic assumption, that still comes to $1.5 billion for the first batch of sales. The R.T.C. expects to sell ten times that much before the bailout is complete.

But anyone who thinks the thievery will end there is daft. Since the R.T.C. doesn't begin to have enough staff to appraise and sell the stuff, it is contracting most of the job out to private real estate brokers and managing agents. That's right, private real estate brokers--need we say more? Kickbacks, money laundering, fraudulent expenses and favoritism are inevitable. Stephen Labaton spelled part of it out in The New York Times: Because there is no screening of the buyers, "regulators expect that many of the buyers of the assets will be the property developers and speculators who defaulted on loans...for the same property. In a way, the process is set up to encourage a holder of property whose value has plummeted in a depressed real estate market to default on the loan and then repurchase the property at a substantially lower price."

Officials at the R.T.C. also admit that some of the bidders will be those whose bad management caused the property to be on the market now and who know the true value of it better than anyone. They'll be ready to pounce on the jewels hidden in the debris they left behind. Seidman says, "We have had cases where we had somebody working for us who was going to sell the property. He set the price low, got the price set low, left us and went on the other side and bought it from us. Things like that....Of course, he didn't show up personally. He had somebody front for him. But there are all kinds of ways that people can sell things and take a little money under the table for having sold it to one group against another."

Seidman and his crowd promise to protect us from folks like that, but the protection is just another huge layer of corruptible bureaucracy: "I can assure that we are going to have more auditors and controls than we have seen around government for a long time?" That was no overstatement. At the F.D.I.C. and the R.T.C., Seidman sits atop a bureaucratic pyramid of 10,000 employees with an annual budget of $3 billion. Hordes of lawyers, accountants and various other overseers and constables are hanging around the lamppost on the R.T.C. corner. It constitutes one of the largest "emergency" bureaucracies ever thrown together. The Dallas regional office alone has hired 1,000 people. In addition to the standard inspector general that most government agencies have, the R.T.C. has been given a Super Cop (with a force of up to thirty special "contractor cops") to ferret out corruption among federal officials and the hundreds of private firms that have won contracts to manage all the entities zombie thrifts lent money on or bought themselves: horse farms, hotels, spas, fish farms, golf courses. The contracts for managing this capitalist flotsam and jetsam are expected to cost $30 billion--a deep ocean of potential corruption.

The worst corruption to surface so far is that of the bureaucratic soul. The R.T.C. is breaking its back to help wealthy individuals and corporations, foreign as well as Yankee, get their hands on bargains. The sales of the big items--shopping centers, office buildings, hotels, warehouses, apartments--are auctioned via satellite, and the prices start at 70 percent of appraised value.

But let low-income people try to find out what cheap houses are for sale--where, when and at what price--and they run into a wall. The law creating the R.T.C. authorized it to sell low-priced homes to low-income people at reduced prices and handy financing. But the Association of Community Organizations for Reform Now, which claims that 70 percent of the R.T.C. housing in Texas could be offered to poor folks, says the agency is withholding its listings from them and selling the houses to speculators instead.

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