S&Ls, Big Banks and Other Triumphs of Capitalism (Page 13)

13. DON'T PLAY IT AGAIN, UNCLE SAM

If, as seems entirely likely, there is no wholesale imprisonment of S&L scoundrels and no massive ouster of the politicians who betrayed us, who is going to feel most of the pain? You know the answer. You will, sucker. You, O citizen of this wretched Rome, are going to get raptus regaliter. Royally screwed.

And I don't mean just the bailout cost that the press loves to play with, contrasting it with the cost of other federal programs. David Maraniss and Rick Atkinson of The Washington Post--timidly using only the base $150 billion, and not the $500 billion it will come to, counting interest--pointed out that it could finance "the U.S. Food for Peace program at its current level for 136 years or the Drug Enforcement Administration for 262 years or the federal prenatal care programs for 717 years." I prefer to use $500 billion and play the game in traditional S&L terms, housing. The median price of a house in the United States today is $98,000. Rounding that out, it's obvious that for the price of the bailout we could build and give away 5 million homes. If, for the sake of the game, we figure four persons per family, that means we could supply free of charge a home for every family in our nine largest cities--New York, Los Angeles, Chicago, Houston, Philadelphia, San Diego, Dallas, Phoenix and Detroit.

Painful as the bailout cost will be, it is not nearly so painful and dangerous to the economic health of America as the shift in and concentration of the control of credit, which we are already beginning to see. Ten years ago there were about 4,500 S&Ls in the country. Now there are fewer than 3,000. By the time the bailout storm troops get through selling them off, the number is expected to be down around 1,500, with a corresponding drop in mortgage money. Most will have disappeared, via mergers, into super-S&Ls and superbanks whose social usefulness will be equivalent to supertankers like the Exxon Valdez.

When locally owned S&Ls and commercial banks are bought up, their loans are whisked away, usually far away. A super-S&L in California has precious little interest in lending mortgage money in Luling, Texas. A superbank in North Carolina couldn't care less about giving a loan to an Abilene machine-shop owner. So applicants aren't getting their loans as they used to.

In the past decade, nearly twice as many banks failed in Texas as did in the whole nation between 1943 and 1979. Nine of the ten largest Texas banks (which had 40 percent of their loans tied up in oil) went under. Nearly all of them were bought up by or merged with out-of-state banks. Sometimes the new ownership didn't stop at the high-tide line.

Jim Hightower, Texas's best-known corporation baiter, gives a stunning example of how small-town banks and S&Ls, by convoluted buyouts and re-buyouts, sometimes even disappear over the waves: "Depositors in Corpus Christi, Gonzales, Luling, San Antonio, Seguin and Yoakum now find their money--and their borrowing fate--in the hands of something called Pacific USA, which is not to be found in the U.S.A. at all, but across the water in Taiwan. It is a subsidiary of the Pacific Wire and Cable Co., one of the largest conglomerates in Taiwan."

The moneylenders, who were willing to take any risk for big borrowers in the 1980s, are now reluctant to take any risk for small borrowers. This, by the way, makes them lawbreakers, but they don't seem worried about that. The Community Reinvestment Act of 1977 declares that banks and S&Ls are chartered to serve the public and that they must help and give credit to low- and moderate-income citizens and small businesses.

Only once in its history has the Federal Reserve Board enforced that law. Today it is violated more than ever. Banks and S&Ls bailed out with your money are the stingiest of the lot. They have revived and pumped adrenaline into the ancient practice of redlining. In Texas, for example, where 40 billion bailout dollars have been lavished on banks and S&Ls in the past two years, virtually none have been reinvested as loans to minority neighborhoods. The Southern Finance Project found, for example, that although no banking establishment has grown fatter and wealthier from gobbling up failing banks and S&Ls in Texas than NCNB, in 1989 it loaned only one-half of 1 percent of its total mortgages in Houston, Dallas, San Antonio and Austin to minority borrowers.

Ordinary people are, obviously, being screwed--in the name of "reform." Whenever the money-masters of government carry out something "reformist," we are in deep trouble. The disastrous S&L rule changes of the early 1980s were called "reforms." Now the bailouts that concentrate wealth and credit are also called "reforms." And the Bush Administration has other even more noxious "reforms" planned for the immediate future.

Monopoly Capital

The plan adds up to the complete deregulation of commercial banks. Since 1985, when Vice President Bush was head of a task force studying financial market restructuring, he has been a patsy for the banks, which have been lobbying and finagling with considerable success to (1) reduce the S&L industry to an insignificant source for government-backed home mortgages (that goal is in sight), (2) allow banks to enter the securities business (the Federal Reserve recently made the first ruling in that direction) and (3) let banks do just about any damn thing they want to do.

The tainted S&Ls have provided the banks and the Administration with a wonderful rationale: The S&Ls are booed as the bad guys--ruffians, vandals, thieves--and the banks are patted and praised as the gentlemen--decorous, wellregulated (by comparison), sound, safe.

In fact, commercial banks are anything but. Since the mid-1980s they have been lending with as much abandon and stupidity as the S&Ls, and with as little supervision from the Feds. The industry has been falling apart for at least five years (Seidman's vaunted chairmanship of the F.D.I.C. notwithstanding).

Only ten banks, with assets totaling $232 million, failed in 1980. Eight years later, 220 banks, with assets of $54 billion, either closed or were given emergency cash injections by the Federal Reserve. Bad management, bad luck, fraud and lousy supervision by Seidman's cops all contributed. In 1986, with 1,400 of the nation's 14,500 banks in serious trouble, Seidman admitted that half the problem banks hadn't been examined in more than a year. "We're spread very thin," he said. "We don't have enough people to catch the problems."

Things didn't improve. Nor did thrifts have a corner on crooks. In 1987 the F.D.I.C. admitted that one-third of the banks that failed were brought down, at least in part, by insider dishonesty. The same year, with banks collapsing right and left, Stephen Aug reported on ABC Business World that "huge segments" of the commercial banking industry were "restructuring in what some say is a giant controlled bankruptcy organization." And much of the emergency oxygen was being fed to the giants--Citicorp, Chase Manhattan, Bankers Trust, Manufacturers Hanover and Bank America.

But most of the popular press, to the extent that it was writing about moneylenders' problems at all, was concentrating on the S&Ls. Don Dixon's prostitutes were much more entertaining than Chase Manhattan's disappearing Third World loans. And they were indeed disappearing. By last year all the big banks mentioned above were writing off huge portions--some by as much as two-thirds--of their Third World loans, thus admitting they would never be repaid.

In the past two years particularly, there was an orgy of bank gambling with leveraged buyouts and takeovers financed by junk bonds, and now the earth is beginning to shake. Indeed, the General Accounting Office has warned that seven of the nation's ten largest banks plunged so deep into those risky loans that if even one of the highly leveraged companies should go bankrupt, an extremely dangerous chain reaction could result. Oceans of speculative commercial real estate loans made during the 1980s are also turning rancid.

The percentage of banks losing money keeps climbing; by this summer it had passed 11 percent. The bigger they are, the wider their cracks. In late September Chase Manhattan, the nation's second-largest bank, laid off 5,000 employees, cut its stock dividend by half and admitted a probable $625 million loss for the quarter. Chemical Banking Corporation, the holding company for the nation's sixth-largest bank, was right behind, only its stock dividends were cut 63 percent. And then Citicorp, the nation's largest bank, answered sick call with a 38 percent drop in earnings. Poisoned by lousy loans, the biggies up and down the East Coast were turning green. Will California banks, which have been playing Nathan Detroit for the developers' floating crap game, be next? Many experts think so.

The rot in commercial banking has been carefully covered up for years--just as the rot in the thrift industry was covered up. The duplicity is shared by bank owners and regulators. Writing two years ago about this trickery, Jerry Knight of The Washington Post told us, "For months, Seidman and Comptroller of the Currency Robert E. Clarke have insisted publicly that the problems of Texas banks are not serious enough to require any extraordinary government action. Behind the scenes, however, federal regulators have been bending the rules of banking to keep weak Texas financial institutions from going under and taking unusual steps to keep the public from learning how bad things are."

Sound like a replay of the S&L coverup? Stanford economist Brumbaugh, who was one of the first to discover the true condition of the S&Ls, sure thinks so. He says, "We are in the midst of the largest government cover-up of a financial scandal ever in the country's history."

Just how big is the mess they're trying to hide this time? Last year 200 banks failed; another 200 are expected to go under this year. That's for starters. In those numbers are none of the monster banks that are "too big to fail"--that is, banks so big the government is afraid to let them collapse, lest they drag down the whole banking system. What shape are the monsters in?

The scariest appraisal was given three months ago by Brumbaugh: "I believe that the following banks are very close to true insolvency...Chase, Chemical, Manufacturers Hanover, Bankers Trust and even Citibank and Bank of America.... In addition to that, there are 460 banks with $42 billion [in assets] that have had losses in each year since 1986. Those institutions are going to exhaust their net worth on an accounting basis this year. There are another $30 billion in assets at institutions that have had negative net income for the last two years."

By "true insolvency" Brumbaugh means that the government's bookkeeping system is phony: "The accounting method that we use in this country covers up true market insolvency when these institutions get to the end of the rope, and that's exactly what happened with the savings and loan crisis, and it's happening all over again with commercial banks. And in my opinion, the total losses that are embedded in those banks that are insolvent...are so great that the bank insurance fund is not going to be able to handle it, and taxpayer dollars are going to be necessary.... In order to resolve the problem, the taxpayers are going to have to pay a large portion of the losses that are embedded in commercial banks."

What? Another bailout, and this time one that will make the S&L bailout seem trivial? No, no, no, Seidman sputtered furiously (he and Brumbaugh were facing each other on Nightline). Brumbaugh, he said, was being "irresponsible." He was "shouting fire in a crowded theater." He was launching "a typical professorial-type attack." Brumbaugh's charges were "preposterous."

But, as evidence showed in the next few weeks, Brumbaugh's charges were not at all preposterous. In early September Charles Bowsher, who as Comptroller General heads the General Accounting Office, the agency that does audits and investigations for Congress, gave the chilling news: His investigators had discovered that whereas the F.D.I.C. claimed to have $13.2 billion on hand to help failing banks (an inadequate amount, even if it had been accurate), in fact, "if we had a more realistic" accounting practice, it might turn out that the fund was sucking air. Whatever the right figures were, he said, "not since it was born in the Great Depression has the federal system of deposit insurance for commercial banks faced such a period of danger as it does today."

Once again Seidman rushed in to contradict the evidence, sounding very much like the cheerful Danny Wall of 1988: "I've said it before and I'll say it again, the fund will be able to meet its obligations." Is he bothered by the fact that more banks have failed in the past two years than in any comparable time since the Depression, and that these failures have reduced the insurance fund by 40 percent? Oh dear no. "I don't think it's a question of crisis and panic," he told reporters after a Congressional hearing. "It's a sign of increased stress."

Back to the 1920s

Nevertheless, though it is obvious that the tottering commercial banking world needs tighter regulations than ever, the industry and the Administration push on pell-mell for deregulation. In fact, the dismal condition of the industry is being used by the deregulating claque as their strongest, and weirdest, argument. Just as St. Germain, Garn, Pratt and Wall argued that the best way to help zombie thrifts recover was to remove all regulations so that they could "grow out" of their problems, now Bush, Fed chair Greenspan, Treasury Secretary Nicholas Brady, Seidman and others demand that the government dismantle what Seidman calls the "archaic laws" that for many years have controlled commercial banking. They, too, want to "grow out" of their perilous condition. What these laws do is protect the banking industry from its worst instincts by insisting that banks remain banks, and not become gamblers, hucksters and hustlers in other lines as well.

The deregulators will probably make their big power-play next spring, when, under mandate from Congress, the Treasury Department must come up with its "reform" plans for the banks. You can expect the other side to try to sell some blind horses to us, like offering to swap a lower ceiling on deposit insurance for wholesale abandonment of regulations--as if the rotters wouldn't be just as happy engaging in risky activity under a lower ceiling as they have been gambling under the present one. If there is a double agent to be on guard against, it will be Donald Riegle, chair of the Senate Banking Committee. He and the moneylenders are--could any old saw be more apt?--thick as thieves. Riegle is recorded as receiving $200,900 from S&L officials and PACs between January 1981 and May 1990--second only to California's Senator Pete Wilson ($243,334). Now that S&L money is seen to be tainted, Riegle has scrambled to redeem his reputation by returning $120,000 of it. But the commercial banks have stuffed his pockets too, and there is no record of his having returned any of that money.

Recently Greenspan--that trustworthy fellow who guaranteed the morality of Keating and was one of the chief boosters of junk-bond purchases by S&Ls--guided his Fed colleagues into a disastrous decision. They ruled that J.P. Morgan (Morgan Guaranty Trust) could trade and sell corporate stocks. With this cloven hoof in the door, other banks will follow, and that will be the death of the Glass-Steagall Act, which Congress passed in 1933 to separate commercial banks from investment banks and thereby control some of the outlawry that had caused thousands of banks to fail. Next they will probably be targeting the Bank Holding Act of 1956, which was intended to keep banking out of commerce, and the McFadden Act, which limits interstate banking.

What Greenspan, Seidman and their gang say to critics is, Oh, we want banks to be banks, too, but we want them to be universal banks. Which can be translated to mean uncontrolled banks, banks completely unfettered by regulations that restrict their operations--in short, pretty much a return to the reckless and lawless 1920s and early 1930s, which, if measured by the drama and excitement of collapsing financial structures, had it all over the 1980s.

Brumbaugh, for one, is dumbfounded by what he's seeing. "The administration and Congress just don't want to acknowledge the problem," he says with a sigh. "This is déjà vu all over again. You can't believe it's happening, but there it is."

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