Egads! The S&L scandal lives! - savings and loan crisis

Washington Monthly, Jan-Feb, 1992 by Christopher Georges

"A senior regulator likes to have a problem thrift on his beat about as much as an air traffic controller likes to have an airplane crash on his shift," said Steve Pizzo, national correspondent for the Home Mortgage News and one of the nation's leading thrift reporters. But air traffic controllers can't hide the crash. OTS officials can-at least temporarily.

The high-flying First Gibraltar-a Texas-sized headache for the government since its inception-is perhaps the classic example of the crash-avoidance mindset. The $11 billion institution, one of the 20 largest thrifts in the nation, rose out of the ashes of the S&L cleanup under something called the Southwest Plan, a strategy concocted by the government in 1988.

The plan-whose prime purpose was to create safer, easier-to-regulate S&Ls-lumped 88 troubled Texas thrifts into a handful of gigantic "megathrifts." After pouring in billions of dollars, the federal government sold the new institutions to a few lucky investors.

Purchased by Revlon Chairman Ron Perlman and run by banking magnate Gerald J. Ford, First Gibraltar (the offspring of five defunct thrifts) was one of the biggest of the megas. As part of the purchase, the thrift received $5 billion in federal money and a wealth of other goodies, including guarantees of $600 million in tax benefits and a promise to cover losses from the thrift's bad loans until 1998. So sweet was the deal that Gibraltar's creation ended up costing taxpayers $2.4 billion more than if the five thrifts had been closed and their depositors paid off.

With the federal spigot turned on full blast, you'd expect regulators to be watching the books with eagle eyes. But in a strange twist, it was because the thrift received so much attention and federal aid that the S&L sleuths dozed off. "People were told not to upset the Southwest babies," said one OTS examiner. "It would look bad for us and for the people who put them together if they came up with problems."

And when problems did arise, OTS was actually willing to lend a hand to keep them quiet. In 1990, for example, after examiners uncovered the first round of squandered funds on private jets and the like, OTS supervisors worked out a neat arrangement with First Gibraltar management to bump some of the questionable expenses to the thrift's holding company, a bookkeeping adjustment that only technically removed the expenses from the institution itself. A year later, when First Gibraltar broke the rules again, the $25,000 fine levied against its CEO for violations "regarding the leasing of aircraft and reimbursement expenses" was one of the milder rebukes the OTS could dole out.

OTS employees close to the case insist that criminal charges should have been pressed, but this never happened. Instead, sources say, supervisors sought to scuttle the case. Why were they so concerned about First Gibraltar? Perhaps because a number of senior regulators helped assemble the Southwest Plan panacea in the first place. For bureaucrats that brings up an age-old conflict of interest.