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Egads! The S&L scandal lives!

Why the government's S&L supercops still let the bad guys break the banks

"Beginning today ... those who loot [the savings and loan system] deserve-and will receive-swift and severe punishment. "

Perhaps it was the light in the Rose Garden, but for a moment back in August 1989 George Bush looked distinctly like Ralph Nader. By penning his name to the numbing 371-page savings and loan reform bill, our laissez-faire leader had somehow given birth to one of the U.S. government's most powerful regulatory apparatuses: the Office of Thrift Supervision (OTS), deputized to drain the swamp of our nation's S&Ls. With unprecedented power to ferret out corruption and safeguard depositors' money, 3,000 OTS examiners soon descended, pencils poised, on America's remaining thrifts. And for a legendarily unscrupulous industry, a scrupulous new era had begun....

This is the way taxpayers, tagged with an astounding $500 billion bailout cost, surely wish the story of the eighties' S&L scandal had ended. And to be sure, thanks to Bush's reform package, the S&L industry of the nineties is cleaner than that of a decade ago. Yet as the S&L crisis fades into the mural of yesterday's scandals, a Washington Monthly investigation of three major thrifts suggests that the problems that brought the thrift industry to its knees in the eighties may persist. While top thrift cops in Washington starchily pledge regulatory toughness, nearly 20 current and former OTS examiners (most of whom spoke on the condition that they remain unidentified) tell a different story-a tale of looking the other way while prominent bank managers squandered hundreds of thousands of dollars on penthouses, pleasure trips, and hunting expeditions. Same old, same old? Not exactly. Unlike the fraud of the eighties, this time the bankers are playing not just with depositors' money, but with billions of dollars from the government's generous bailout.

How are the bankers getting away with it again? To find out, you've got to stash the White House press releases and congressional testimony and track down the folks on the front lines: the OTS examiners.

That these field examiners tend to have the wan countenance of latter-day Bartlebys is no wonder-other government employees tag their work the loneliest job in the world. For weeks on end, they hunker down in back offices to pore over boxes of receipts, loan applications, and thrift managers' personal expense accounts. If their diurnal duties sound a little tedious, their administrative potency is astounding: These are Bartlebys with M-16s, not eyeshades. To make sure the S&L scandal had no sequel, the Bush administration granted OTS accountants and examiners the power to call for FBI investigations and issue fines of a million dollars a day when confronted with cooked books or dissolute spending.

Yet two years later, these S&L supermen are more like a clique of Clark Kents-a phenomenon rooted in a nonpartisan bureaucratic truth: You can change the laws in a matter of days, but to make them work, you have to change the attitude of the officials charged with carrying them out. In the case of the Texas thrifts, the Bartlebys' supervisors in Washington and in the field are the very ones who helped create the S&L rescue plan in the first place. Their stake in proving that their idea was a good one may be so great that, in time-honored bureaucratic tradition, they prefer to silence a few concerned examiners in order to preserve their brainchild.

Of course, the three thrifts we investigated may be isolated islands of S&L self-protection-or they may be the tip of the iceberg. With $500 billion on the line, it should be worth it to Washington to figure out which is the case.

Short thrift

It sounds like a story from the eighties: The CEO of a multibillion-dollar Dallas S&L dips into the thrift's petty cash for a few personal perks. There's the $700,000 or so spent on the lavish private hunting lodge in South Texas, where he, along with friends and clients, unwinds by hunting and shooting trucked-in game. There's a plush New York City penthouse condo costing the thrift more than $7,000 a month. There's even a leased private jet.

Sure enough, government examiners spot what appear to be questionable uses of thrift funds and dutifully report the findings to senior officials at the Dallas-based regulatory office. Given an array of options-from issuing a fine to turning the case over to the FBI-they decide to send a letter urging the thrift to be more careful in the future.

Perhaps the letter gets lost in the mail. For when the thrift's books are reexamined a year later, the examiners spot more unlikely expenses: a $13,000 dinner for four; a ritzy suite at Dallas's only five-star hotel where guests are routinely treated to Dom Perignon and beluga; and a parade of petty cash withdrawals at more than $ 1,000 a pop, many of which go unexplained. Again the examiners cart the evidence back to the office, where this time the punishment is yet another slap on the wrist-a $25,000 fine and a warning to be more careful next time.

The salad days of the S&Ls? Unfortunately, no. The years are 1990 and 1991, and this is the tale of Texas's largest, richest S&L: First Gibraltar, where thousands of depositors blithely invest their savings.

While the Bush administration, egged on by banking leaders, has cried in recent months that regulators are too tough, examiners in the field tell a very different story. First Gibraltar is receiving billions of dollars in federal relief money, but examiners say that its CEO has siphoned off bank funds for personal use. Yet when a disgruntled regulator tried to blow the whistle, it was the regulator, not the CEO, who ended up losing his job.

Nor is First Gibraltar's nonregulation an isolated case. A look at two other thrifts, Bluebonnet Savings in Dallas and El Paso Savings and Loan, reveals that when regulators have uncovered evidence of wrongdoing, field supervisors have repeatedly made the same remarkable choice. Instead of disciplining or punishing the wayward thrifts, they've disciplined the regulators who sought to bring the abuses to light.

Savings and drones

"All in all," said President Ronald Reagan as he signed the Garn-St Germain Act of 1982, "I think we've hit the jackpot." A jackpot, indeed-but not for the American people. The bill essentially deregulated the S&L industry, unleashing a crew of freewheeling risk-takers eager to invest billions of dollars of depositors' money-all insured by the government-to build their personal fortunes. And build they did-condos, shopping malls, housing parks, and office complexes-as their S&Ls keeled over and died.

If, in the eighties, there seemed to be an unlimited number of ways to steal from the system, there was also an unlimited number of ways that the government's regulation, carried out by the languid Federal Home Loan Banks, could be circumvented or ignored. The remedy for such regulatory haplessness was the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which dissolved the Federal Home Loan Banks and erected in their place the powerful OTS to supervise the remaining thrifts. Under a tougher set of regs, thrift managers were limited in how and where they could invest depositors' funds. And if S&Ls didn't follow those rules, regulators for the first time had real power to take them on. "To us," OTS director Timothy Ryan explained, "saving the money of the hard-pressed American taxpayer is job one. And we live by that standard every day."

Two years later, OTS's tough cop routine still plays pretty well in Washington. Only problem is, the thrift examiners-the guys in Dallas, Dubuque, and Philadelphia charged with sussing out S&L corruption-are still being asked by upper-level OTS officials to live in the soft-policing past: a past of political timidity and regulatory laxness promoted by holdovers from pre-reform days. The hands-off attitude is astonishingly easy to preserve thanks to the nation's rigid banking secrecy laws, which in effect shield all regulatory decisions-and all bureaucratic action or inaction-from public scrutiny.

"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.

Back in the forties, the Atomic Energy Commission helped create the atomic energy industry-an industry it was then expected to oversee. But the commission was so vested in the success of the field that it routinely looked the other way whenever its child corporations misbehaved. When it comes to the megathrifts, the OTS is much the same. Like anxious parents, several key OTS field personnel have a profound interest in assuring the success-or at least the apparent success-of their offspring.

One examiner recalled a memorable interoffice squabble between Dave Bradley, a Midwest region official who oversees the approximately 80 examiners charged with monitoring the area's megathrifts, and his boss, Midwest Regional Director Billy Wood. Wood, who was getting pressure from the Justice Department because the number of criminal referrals coming from the region had dried up, told the staff to pick up the pace. But Bradley openly objected, arguing that writing referrals was taking too much staff time. "No one could understand this," the examiner said, "because it only takes at most a few hours to actually write the referral up."

Nevertheless, shortly after the meeting, the office procedure regarding criminal referrals changed. Instead of simply writing up referrals and passing them along to superiors after discovering suggestions of criminal activity, examiners were now required to get approval before even writing them, sources said. "After this," one examiner said, "almost nothing ever made it through the approval process."

While the writing rule meant that problems didn't always get the attention they deserved when examiners discovered them, other OTS procedures have ensured that problems aren't discovered in the first place. Once inside the doors of a thrift, examiners say, they're expected to check only if the proper guidelines are in place-not whether those guidelines are actually being followed. For example, an examiner might be asked to verify whether a thrift has a policy forbidding loans of more than $100,000 to a single borrower, but he won't have the opportunity to check whether the thrift has actually adhered to that rule.

How can this be? In part because these days, many of the OTS officials implementing the new rules-folks like Dave Bradley-are holdovers from the old days, when the Federal Home Loan Banks watched the thrift industry destroy itself. And-also just like the old days-that vestigial laxness is exacerbated when the object of examiners' questions is a prominent ally of politicians.

Slumming It

Alfred D. Hughes is no Neil Bush, but he may be the classiest slumlord in Texas. A well-known Austin businessman, he presided in the eighties over one of the largest federally assisted housing empires in Texas, building or renovating nearly 50 low-income housing projects throughout the state. Known for his astute political connections, he was named chairman of the Texas Board of Corrections in the mid-eighties (and even had a Gatesville, Texas, prison named after him). But by 1988, Hughes had decided to move up from the projects. That year, he purchased El Paso Savings from the federal government by pledging nearly $100 million of his personal property to the S&L's equity capital-a not uncommon practice in such deals. By mid-1990, El Paso Savings was one of the largest thrifts in West Texas.

But in 1989, after OTS had been formed and thrifts were under fire, examiners decided to take a closer look at Hughes's books. What they found, people close to the case say, was evidence of possible fraud worth tens of millions of dollars.

Examiners allege that while Hughes said he was putting up $100 million worth of properties to acquire the thrift, his assets were really worth less than half that amount-a mistake that would eventually come out of taxpayers' pockets. For example, Hughes contributed a 4,400-acre tract of undeveloped Austin property to the thrift in exchange for $48 million. But., according to an Austin businessman who sold Hughes the land, Hughes had purchased it only a few days earlier for $29.5 million.

Hughes also contributed 12 Houston apartment complexes appraised at $35 million. But just five months after Hughes bought the S&L, a Housing and Urban Development inspection revealed that the apartments, troubled by rat infestation, sewage backups, leaking roofs, and no hot water, were essentially uninhabitable. The real value of the apartments, people close to the case say, was less than a third of what Hughes had told the government.

But there were questions about more than Hughes's land deals. Shortly after he purchased the thrift, he used it to make illegal political contributions to key Texas officials. In a wonderful display of political activism, the El Paso thrift's employees and affiliates gave more than $12,750 in contributions to state and local pols. Unfortunately, their largess was being reimbursed by the thrift in an apparent attempt to circumvent campaign finance limits. Yet after being made aware of Hughes's alleged misdeeds in both 1989 and 1990, Midwest region OTS supervisors refused to act, examiners say. In 1990, when two examiners persisted in arguing for a criminal probe of Hughes, they were not only turned away; this time they were suspended from the OTS on charges related to insubordination.

Only after the suspensions ended and the examiners threatened legal action against OTS did supervisors agree to an FBI investigation, which is now in progress. But the delay ultimately cost taxpayers big. Instead of moving swiftly and decisively against what it knew was an institution in trouble, OTS allowed the losses to mount. Finally in 1991, the thrift failed-leaving the government to pick up the more than $150 million tab.


"We feel we are taking enough action," said a spokesman for the OTS. "You don't have people committing fraud on a major scale like we had in the past." To back up this contention, OTS officials point to an array of statistical evidence. For example, the Midwest region office issued enforcement actions against 65 thrifts in 1991, more than in any previous year.

But a close look at exactly whom the OTS is going after is revealing. While the ballyhooed larger thrifts get a certain respectful discretion, examiners have been relentless in tracking down the little guys. In September 1991, in one of its more highly publicized cases, OTS leveled 17 enforcement actions and more than $100,000 in fines against Davy Crockett Federal Savings Bank in Crockett, Texas. Crockett's $50 million in assets is a widow's mite compared to El Paso's $500 million or First Gibraltar's $11 billion.

Although the OTS doesn't keep figures on enforcement action by thrift size, an examination of all the agency's public enforcement actions in the past year shows that only a handful were registered against the nearly 100 thrifts with more than $1 billion in assets. "Go take a close look at the smaller ones-those with less than $300 million-well, they get closed real fast," said an OTS insider. "But the big ones with high-powered attorneys-no one wants to mess with them."

Supervisors' fear of messing with the big thrifts might keep regulators quiet even when the people running the thrift have criminal records and a history of well-cooked books-as in the case of Bluebonnet Savings Bank.

Bluebonnet, created as part of the Southwest Plan in 1988, was purchased by Arizona insurance executive James M. Fail with $1.8 billion in federal assistance. Nearly two years later, Senate investigators claimed that when bidding for the thrift, Fail suppressed the fact that he had pled guilty on behalf of one of his insurance companies to a felony charge in Alabama in 1976-a bit of information that would have disqualified him from acquiring the thrift.

It wasn't the only thing Fail was apparently hiding. According to people familiar with an April 1990 OTS examination of Bluebonnet, examiners discovered that one of the nation's most prominent insurance executives, Robert T. Shaw, who had lent Fail $35 million to help him acquire the thrift in 1988, "had a greater stake in the institution than had been previously realized"-that is, than Fail had previously reported to the OTS. The problem, however, was that one of Shaw's companies had been convicted of securities fraud in North Carolina in 1982-a fact that would have also disqualified him from owning the thrift.

While examiners say the evidence was compelling enough to warrant a further look-if for no other reason than to clarify Shaw's role in Bluebonnet-supervisors closed down the investigation. "We were told by people in Dallas to act like we never saw this," said an OTS employee who worked on the case. "They said they didn't want us to 'stir the pot. "'

After another examination of Bluebonnet uncovered other potential problems, examiners say, Midwest region supervisors finally agreed to allow further investigation of the thrift. But the inquiry never took place. Supervisors refused to allow the examiner to travel to Arkansas where key documents were located.

In the end, it wasn't the powerful OTS that exposed Bluebonnet's problems; it was Congress, which independently called for an investigation. But even then, when Senate investigators requested documents from the OTS relating to Bluebonnet, the agency ran for cover. After employees prepared a huge packet of material for shipment to Washington, OTS supervisors removed a significant portion of documents. The examiners were forced to circumvent their field bosses in order to get the damaging material to Capitol Hill.

Since the congressional hearings, an embarrassed OTS has tightened the screws on Bluebonnet. But the question remains: Should it have taken the full force of the U.S. Senate to reveal the problems? After all, that's why the OTS was created in the first place. But as with First Gibraltar and El Paso Savings, OTS higher-ups appeared more concerned with protecting themselves than with rectifying their problems.


So what's the OTS doing with its time and money if not concentrating on tracking down the big thrift cheats? It's doggedly tracking down the whistleblowers-a time-worn bureaucratic tactic to stifle internal criticism. It's easier for the agency to discredit a few agents than to answer to Congress, the press, and the public about an issue that has already proven to be a national embarrassment. In the OTS's lopsided cosmos, one big-mouthed Bartleby is as dangerous as a dozen James Fails.

In the case of First Gibraltar, Jeff Potter, an OTS analyst, provided a book agent with parts of the thrift's examination report showing CEO Gerald Ford's lavish spending habits. But his attempt to expose the thrift's problems backfired when Gary Anderberg, an OTS internal investigator, got wind of Potter's plans.

While Potter's attempt to leak confidential documents was a violation of law, the vigor with which he was pursued stood in striking contrast to Gerald Ford's mild rebuke. Because bank secrecy laws prohibit public release of any examination information, Potter was immediately fired. And when he refused to turn over his book outline and documents to Anderberg and his team, they continued to pursue him, freezing Potter's last paycheck, his vacation pay, and his retirement account. With no job, approaching bankruptcy, and facing possible prosecution for attempting to leak the documents, Potter turned over the goods and was permitted to go about his business -that is, provided he kept mum about the First Gibraltar fiasco. Potter refused to comment for this story.

Even more vitriolic was the revenge the agency exacted on Wayne Frena, a former OTS analyst whose was to testify before Congress in the 1990 Bluebonnet hearings. As with Potter, Frena refused to comment about the incident, but sources describe the following series of events:

Frena, who from 1988 to 1990 had firsthand knowledge of the inner workings of Bluebonnet Savings, was asked by Senate investigators to provide information about the thrift for the July 1990 inquiry. His remarks and documents helped reveal the array of troubles that plagued the creation of Bluebonnet-revelations that acutely embarrassed both the Bush administration and the OTS. But soon after, Frena, who left the OTS to work for the Federal Deposit Insurance Corporation (FDIC), found himself being pursued by the OTS, as Anderberg and his team had dug up an eight-year-old cocaine possession conviction against the former analyst. They presented this information to the FDIC, noting that Frena did not disclose the fact on his job application there. Although court records showed that the conviction had been expunged years earlier, the FDIC cooperated with the OTS and dismissed Frena. The former analyst was now out of work, with a mortgage, a family, and $20,000 in lawyers' bills. Still, Anderberg and his team continued the hunt, requesting from the U.S. attorney in Dallas a criminal indictment against Frena for failing to disclose the drug charge information. This past summer, the U.S. attorney, after examining the evidence, dropped the case. Frena is still unemployed.

In the case of El Paso Savings, two examinersAlfred Beltran-Romero and Rick Benavidez-also found themselves on the wrong side of the OTS. According to agency sources and court documents filed by the pair in a suit against the OTS, they were ordered in January 1990 by superiors in Dallas to stop investigating the S&L even though they had uncovered evidence of fraud. After insisting on an investigation, the pair were labeled "problem examiners" and punished with poor work assignments, a short suspension from the agency, and a warning that they would be fired if they refused to cover up financial improprieties at the thrift. And finally, in September 1990, charged by the OTS with leaking confidential examination documents to a journalist, they became targets of an internal investigation. Beltran-Romero and Benavidez, who deny the charge, continue to work for the OTS as their case works its way through the courts.

Aside from a few annoying legal entanglements, the agency's strong-arming appears to have worked pretty well. The stories of the examiners' travails have traveled through the ranks of the OTS. "Nobody wants to stir up trouble," summed up one OTS examiner. "Everyone knows: You buck the system, you pay the price."

That play-it-safe attitude is only compounded these days, as Bush-even as he hails his S&L watchdogs-quietly starves them. Since 1989, his administration has trimmed the OTS staff from 3,200 employees to 2,700; another 11 percent drop is expected by 1992. The Midwest region alone has suffered a staff cut of more than 33 percent.

OTS spokesmen downplay the effects of the cuts, saying that because many thrifts are being closed, fewer examiners are needed. But because the thrifts examined these days are generally larger and more complex than in past years, it is also true that more people, and more time, are needed for each review. "We go into a $2 billion shop and we have five weeks to look," said one frustrated examiner. "Not long ago, I'd go into a $100 million shop and have three months."

Cutbacks like these make it harder for good examiners to do their jobs; they also give whistleblowers legitimate reason to fear that they might be the next ones cut. But more than that, they ensure that the once turbo-charged OTS becomes just another second-tier government operation, as the young, bright staff slip through the revolving door. "Whenever you have cutbacks like this and people see that there is no future for advancement," said one examiner, "the best people-the most employable people-get out."

Let the sunshine in

Not that we can expect the Bush administration to be worried if a few dozen righteous investigators pack it in to work for the local S&L. With billions of dollars of taxpayer funds invested in the cleanup, and with Congress and the administration staking huge sums of political capital on seeing that their solution to the crisis works, no one's inclined to acknowledge the new red flags. "It's a political hot potato," said one OTS examiner. "The feeling is the less reported, the better." This goes especially for the megathrifts that the government has spent billions of dollars to "save."

As record bank failures are predicted for this year, OTS officials have lately convened to talk about toughening the rules-for example, requiring that all thrifts are examined on-site at least once a year. But they seem to be missing the point. All the political posturing that takes place in the nation's capital isn't worth a depositor's dime when an examiner is weeding through boxes of bank records in Lubbock. At the Environmental Protection Agency or at the Department of Defense or at the OTS, tough laws on the books and tough talk in the press don't necessarily mean tougher regulation. It's up to the regulators in the field to put decent rules into practice. So what we need, first and foremost, is a way to make the examiners and their field bosses accountable. One of the smartest ways to do that is to shed a little sunshine on bank secrecy laws.

While there was no single cause of the thrift scandals of the eighties, regulations requiring confidentiality of thrift examinations helped keep the industry's deep troubles under wraps far longer than they should have been. And while thrift regulations have been reformed, secrecy laws have not. A major exemption in the federal Freedom of Information Act (FOIA) continues to protect government officials from releasing information "contained in or related to examination . . . or supervision of financial institutions." The result is that while the regulators watch the thrifts, no one watches the regulators.

Secrecy laws covering financial records were originally enacted during the Depression years to prevent the release of "sensitive" information that could cause consumer panic and lead to runs on banks. But the establishment of govemment-backed insurance for every depositor has significantly reduced that risk. Eliminating the exemption and opening up the books would do three critical things to clean up the S&L mess. First, it would let depositors know when the people who manage the thrifts are running a sloppy ship. Second, it would keep the Bartlebys-whose work could well become public -on their toes. And most important, it would make it tougher for their OTS supervisors to cover up whenever politically expedient.

With billions of dollars of taxpayer money to be poured into the thrift system for decades to come, the stakes are enormous-then again, so is the thrift industry lobby. But until Congress and the administration decide to make OTS accountable as well as powerful, we can only expect more of the same: cowed regulators whose big weapons can't even neutralize the bureaucracy, let alone the bankrobbing bankers.
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Title Annotation:savings and loan crisis
Author:Georges, Christopher
Publication:Washington Monthly
Date:Jan 1, 1992
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