The Savings and Loan Mess

William Grieder writes a regular column in Rolling Stone Magazine that analyzes political and economic issues having little to do with rock music and bands. In the August 11th issue, he reports on a burgeoning bank fiasco that may suck up more of your tax dollars than you can begin to guess.

Grieder, who authored a book on the Federal Reserve, puts it bluntly: “The destruction of the savings-and-loan industry -­created originally to ensure reasonably priced mortgages for home ownership — is one of the great scandals of the Reagan administra­tion, yet it’s gotten insufficient scrutiny from the press. It is a story of wholesale fraud by some financiers but also of a willful attitude of ‘anything goes’ among Reagan administration regulators. The ultimate cost of this mess. . . will be $60 billion to $75 billion.”

How did this mess come about and why are the “experts” and politicians saying that you, the taxpayer, are going to have to bailout these unthrifty Thrifts sometime next year?

The Savings and Loan banks were for decades an American success story. Over 4000 of them in communities throughout the country financed the American dream of homeownership. As interest rates began their historic rise in the Seventies, powerful segments of both the commercial and savings industry began pressing the federal government to lift its ceilings on interest rates. By 1980, victory came to these lobbyists and the seeds of instability were sown.

Enter the Reagan Administration with its fervent de-regulation policies and the match was put to the dry hay. George Bush headed

a federal task force for President Reagan on restructuring financial institutions. His recommendations: maximum feasible de-regulation, including greatly loosening the restraints on what kind of investments these savings banks can make with your deposits.

De-regulation has been a disaster of booming proportions for the Thrift industry. Especially in Texas, Oklahoma and California, large and small savings banks poured money into commercial real estate developments, new office buildings in Dallas and Houston during the heyday of the oil boom before it collapsed.

The go-go mentality excited all too many savings and loan executives into self-dealing and other corruption as in Maryland and Ohio. Reagan cut the number of federal bank examiners and enforcement went even lower than the normal dismal level. Accounting tricks masked slipping performances from depositors, stockholders and the press.

As the failures of savings and loan institutions increased in 1983-1984, the Reaganites looked the other way and delayed facing up to a problem that all observers knew was going to get worse. In the past three years, the trickle of failures or technically insolvent or nearly insolvent savings banks grew into a torrent. Presently, one thousand of the three thousand savings and loans associations in the country are bankrupt or nearly so.

This year the Federal Home Loan Bank Board (FHLBB) and its Federal Savings and Loan Insurance Corporation (FSLIC), which insures savings deposits, are busy in the bail-out business. Instead of shutting down the bankrupt savings and loan association, the Board is cutting deals with some of the sharpest sharks around, including William Simon, former Treasury Secretary under Richard Nixon.

Simply described, these complex deals are conducted and completed in secret to allow investors to put up very little of their own money at risk in return for controlling a great deal more of the failing banks’ assets. Guess who picks up the liabilities and the risks in the future — the federal government. That is going to mean you, the taxpayer, because FSLIC, the insurer of savings deposits is now vigorously bankrupt itself.

So FSLIC issuing billions of dollars of promissory notes to combine a number of failing banks into a restructured institution. The Bank Board and these investors are telling us that the U.S. Treasury’s “full faith and credit” is behind these notes which, in turn, would mean that it will add to the already huge budget deficit of Red Ink Ronald Reagan.

There is some opposition to these unconscionable back door raids on the Treasury. Rep. James Leach (R-IA) warns that “a constitu­tional cataclysm” is implicit in FSLIC’s writing these promissory notes. Issuing these notes, he asserted, amounts to “an independent regulatory agency using unlimited power to spend the taxpayer’s money.”

The Reaganites are hoping this entire bailout will not become a campaign issue. Toward this end they are refusing to provide completed documents to the House Banking Committee that reflect these arrangements and deals.

Can a government banking agency keep incurring growing debt backed by your taxpayer dollars without taxpayers being able to challenge this corporate socialism in the courts? The Reaganites think you don’t have the right to even get into the courtroom. That leaves other healthy savings and loan banks, who are being tapped for higher premiums for the insurance fund, as potential challengers.

Someone needs to stand up. Congress, some prudent bankers, some political candidates — someone needs to say that the taxpayer’s checkbook is not open for such give-aways and open-ended liabi­lities where the investors, with little risk, reap any future profits while the taxpayer absorbs the losses.