Move over, Charles Keating - causes of the savings and loan scandal

Washington Monthly, May, 1995 by Amy Waldman

Cranston won reelection that November. James Grogan, a lobbyist for Charles Keating, later testified about meeting Cranston at the 1984 Democratic Convention. "I've worked hard for California savings and loans," Cranston said, whipping out a three-by-five card to write down Grogan's name. Within days, Grogan received a phone call from Cranston's fundraiser.

Cranston and St Germain deserve blame, but it takes more than two congressmen to get a bill through Congress. There was no discussion of the amendment, let alone opposition. The consumer lobby was conspicuously silent.

The success that both the consumer and thrift lobbies had in bamboozling Congress is best evidenced by William Proxmire, the chairman of the Senate Banking Committee, who oversaw the $100,000 sellout. On behalf of the consumer lobby, Proxmire resisted adjustable rate mortgages--he now admits he was wrong--and insisted that the deposit interest rate cap be lifted. And then, although no big thrift bought him--he shunned contributions for his last two campaigns--Proxmire pushed the insurance increase, too.

Proxmire's example also helps explain why the increase went unchallenged when the average saver, whom deposit insurance had been designed to protect, had $6,000 in the bank in 1980. How did insurance, an instrument designed to correct the market, instead become its tool? Because congressmen are light years away from the Main Street they sentimentalize. "Members of Congress get good salaries," says Proxmire. "We didn't feel $100,000 was as exotic as it really was."

On March 31, 1980, President Carter signed the Depository Institutions Deregulation and Monetary Control Act into law. The next day in California, newspaper ads featured a grinning Bob Hope. "$100,000," the ads screamed. "Now California Federal gives you two-and-a-half times more insurance on your savings." Some estimate that the deposit insurance increase trumpeted by Hope boosted the cost of the bailout by a third.

The High Life

For the National Savings and Loan League, the early eighties were a heady time: Ronald Reagan was in the White House, and deregulation was in vogue. The industry regulator, the Federal Home Loan Bank Board (FHLBB), had a new chair named Richard Pratt, a charismatic academic who, like the aggressive S&Ls, fervently believed thrifts ought to be more like banks. So did Jake Garn, the new Republican chair of the Senate Banking Committee. Entrepreneurial S&Ls, which had been lusting after bank-like powers since the early seventies, saw their moment.

The industry as a whole had one lobbying success after another. Accounting standards were relaxed. The amount of capital reserves a thrift had to keep on hand in case of crisis was lowered, then lowered again. Most damaging of all, the U.S. League continuously pushed pliable regulators and congressmen for government forbearance on insolvent institutions. In other words, the government let bankrupt thrifts stay in business. Thanks to higher deposit insurance and the ability to pay higher interest rates, failing thrifts could now lure in "brokered deposits," $100,000 chunks of "hot" money from Wall Street and wealthy investors who perpetually sought out the highest interest rates around the country. The thrifts were desperate for cash, and $100,000 deposit insurance gave them powerful incentive to gamble to get it.