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

Washington Monthly, May, 1995 by Amy Waldman

The Garn-St Germain Act showed the true meaning of an omnibus bill: Everyone gets on the bus. Realtors got exempted from the Truth in Lending Act, insurance companies got an amendment keeping banks off their turf, the securities lobby got a lower minimum investment for their money market accounts than banks, and so on. In 1982, all the financial industries, from realtors to securities to banks, had given Congress a total of nearly $12 million--a substantial increase over 1980, reflecting both the rising cost of campaigning and the high-stakes frenzy provoked by financial legislation. Nobody walked away unhappy.

Except for the taxpayers. Regulators, the Office of Management and Budget, and Congress combined to reduce sharply the supervision of thrifts, which could now take greater risks. State legislatures worried that they would lose money if state-chartered S&Ls switched to federal charters for Garn-St Germain's freedoms, so the states passed laws allowing even crazier risks. California, for example, decided that thrifts could invest 100 percent of their money--federally insured money, don't forget--however they wanted. And so they did.

The Low Lifes

The thrifts' new powers and diminished supervision enticed a whole new breed of developer, speculator, and crook into the industry. Charles Keating was only one of many. The business grew rich with characters like Don Dixon of Dallas's Vernon Savings and Loan, a builder who used federally insured deposits to buy six Lear jets, a yacht, a mansion, $5 million in art, and prostitutes to "entertain" customers. And Ranbir Sahni, a former airline pilot whose American Diversified Savings Bank funded windmill farms, chicken farms, and junk bonds, but never a single home loan.

Home ownership was dropping during this period for the first time since the Depression, as even thrift executives who had spent their whole lives making simple home loans ventured, usually unsuccessfully, into the wilds of shopping centers and ski resorts. Thrifts with nothing to lose "gambled for resurrection." They lost. If plain, humble S&L buildings and suburban homes embodied the success of the New Deal, the architectural symbols of its undoing were the see-through office buildings lining I-30 in Dallas, the windmill farms alongside California highways, and the giant resorts now overcome by cacti in the Arizona desert.

The money lost by loose-cannon S&Ls didn't just disappear. It went into cars and condos and concrete. It also went into the pockets of politicians, as the thrifts spent vast amounts (of our money, it turns out) to keep government's hands off the industry. S&L interests invested more than $11 million in Congressional candidates and party committees during the eighties. It was public campaign financing--in the service of a private interest.

If insolvent thrifts had been closed in 1983, the cost would have been $25 billion. Instead, with industry encouragement, politicians afraid of having a bailout on their watch successfully postponed action until after the 1988 election. Finally, in 1989, Congress stopped letting the industry try to solve its own problems and started doing its job. It passed the Financial Institutions Reform, Recovery and Enforcement Act, which closed insolvent institutions and repaid depositors, radically reordered the industry's regulatory structure, and officially confirmed that taxpayers would foot the bill.