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Soldiers of fortune.


The RTC's "Operation Western Storm," a mission to find 7 billion misplaced dollars, was a major victor--for slapstick

To find 800 accountants, the Task Force turned to temporary employment agencies, which produced, among others, a recent high school graduate with no accounting training and a college marketing graduate with little accounting knowledge who was put in charge of an entire field team.

Imagine you've been put in charge of the world's largest garage sale. You've been asked to collect all the merchandise, catalog it, and return the profits to your neighbors after it's over. When the sale starts you encounter a small problem: In your haste you lose $7 billion worth of furniture. Fearing retribution from your neighbors, who stand to lose a lot of money from your error, you hire someone to put things back in order. A fiasco reminiscent of the days of vaudeville ensues and in the end, no one is entirely sure what has to be recovered and what it will cost to get it back.

A suburban nightmare? Not quite. The nation's savings and loan bailout agency, the Resolution Trust Corporation (RTC), lived precisely this scenario, not with used furniture, but with your money. Entrusted to close ailing thrifts and sell their assets to help recover some of the $500 billion lost in the S&L debacle, RTC misplaced $7 billion in loans and other assets--funds that simply disappeared from its computer ledgers amid the chaos of its own burgeoning bureaucracy. Then, in a panicked effort to put its books back in order, it launched a massive campaign that, according to government investigators, was riddled with the same incompetence that led to the initial error.

The story of how the government lost and then found $7 billion is a glimpse inside one of the nation's largest bureaucracies, at the misplaced patriotism, political manipulation, and indecision that have crippled the agency since its formation. It is the story, really, of two giant blunders that began at RTC's birth in 1989.

The first blunder, known as "Operation Clean Sweep," was conceived by three newly appointed RTC executives in a Washington, D.C. conference room in October 1989. Ink on the savings and loan bailout bill that created the agency was barely dry, and RTC was in its infancy with only a handful of bureaucrats in its employ, no offices outside Washington, and only a vague idea of the immense job before it.

The three executives--Lamar Kelly, David Cooke, and Bill Roelle--were career bureaucrats. They had been appointed to help build RTC from scratch. They envisioned Clean Sweep as a symbol of RTC's entry into the world, a debut mission to display all the get-the-job-done, battle-trumpeting bravado the name implied, according to officials who followed Clean Sweep's conception. In one mighty pass, the operation would steamroll the nation, closing or taking control of 189 dead and dying thrifts across the land.

Clean Sweep's planners apparently never considered more modest plans to close a few thrifts at a time, which would have allowed the agency to learn from its mistakes on a small scale before making irreparably large ones. They also apparently didn't realize that RTC had few if any trained staff to do the job or that its computer system was grossly inadequate, patched together from decade-old hand-me-downs from three other government agencies.

What seemed foremost in their minds was the impression their work would make. With an operation as grand as Clean Sweep, who in Congress, or among the public for that matter, could doubt RTC's commitment to the task at hand? Of course, they had good reason to consider public opinion. Americans had watched in horror as the government bungled, played down, waffled, and hushed up different aspects of the savings and loan crisis.

But the bureaucrats catered to public opinion at the expense of the bailour's realities, say some officials in RTC's ranks. "These guys loved the whole military thing," said one official charged with carrying out Clean Sweep. "They liked to pretend we were the army. They talked in terms of missions and code names and deploying troops. They were really caught up in that aspect of it, but I really don't think they understood the magnitude of what we were getting into."

Collateral damage

In January 1990, RTC opened regional ofrices in Atlanta, Dallas, Denver, and Kansas City. It recruited hundreds of workers from its predecessor agencies, the Federal Deposit Insurance Corporation, the Federal Asset Disposition Association, and the Federal Home Loan banks. They were immediately ordered into the field to execute Operation Clean Sweep. "I was just handed a note and told to show up at such and such institution at such and such a time on such and such day," said one of those recruits. "That was all. No explanation, no instructions. Just be there."

The recruits were gathered at each of the 189 thrifts. One of their primary jobs, other than firing management and hanging out a new sign when necessary, was to make sense of each institution's accounting system and transfer it to RTC's own computer ledgers.

It was a crucial task. In order to recover money for taxpayers, RTC needed to sell the myriad loans it seized from dead thrifts. To do that, the agency needed to know what loans it was taking over and how much they were worth.

But as the teams went to work, they found chaos beyond anyone's anticipation. Some thrifts had invented bizarre accounting systems that seemed to defy interpretation. Others seemed to lack any system at all. At giants like Imperial Savings in San Diego, Charles Keating's Lincoln Savings, and Western Savings and Loan in Phoenix, they found warehouses of documents that would take months to sort out.

Despite the complexity, the teams of recruits were left to drift, untrained and with no direction from RTC superiors. "One day, all of us sat in a room together and arbitrarily came up with numbers," said a recruit assigned to a dead thrift in Colorado. "That was how we evaluated the thrift. None of us had ever done anything like it before."

And even if the workers had been properly trained, RTC's computer system couldn't have handled the volume and complexity of the loans involved in Clean Sweep. The system had been designed in more tranquil days to handle a handful of failures each year. Making matters worse, the different pans of the computer system RTC inherited from other agencies spoke different languages, which meant that information, when it was entered, could not be adequately manipulated.

Other teams didn't even try to make sense of the messes they encountered. With Washington's whip to their backs, they decided it was faster simply to disconnect entire computer accounting systems, sending thousands of transactions to oblivion. "It was pandemonium," one RTC manager recalled. "We closed so many thrifts so fast that the accounting just went to hell in a hand basket."

It was arguably the worst mistake RTC could have made. Without accurate records, RTC's entire mission was in jeopardy. Here's why: At every financial institution, thousands of transactions happen on any given day, from receiving monthly mortgage checks to payments on complicated development loans. Loan payments arrive at the institution where they are normally entered into a computer accounting system. That system makes sure the money is credited to the proper loan, calculates the interest and principal remaining, and completes a host of other chores. If the system is disrupted, no one will know which payments belong to which loans. In addition to the obvious annoyance to the person making the payment, such a disruption could cripple a financial institution. It would no longer know how much its loans were worth. And it would have a fountainhead of cash flowing in that it wouldn't know what to do with.

At first, RTC didn't seem to understand the disaster it was creating. But it should have had a clue when Congress's investigative arm, the General Accounting Office, discovered RTC's records were in such disarray that it couldn't even begin an audit. Then, in November 1990, David Pyland, a regional director of contracting in RTC's Denver office, discovered something was very wrong. He found more than $1 billion in an RTC holding tank called a suspense account. Suspense accounts are where RTC puts money it doesn't know what to do with, like monthly mortgage checks written to the wrong bank or payments mailed without a coupon. But the accounts were meant for thousands of dollars, not billions. Cash was flooding into the Denver regional account so fast that five months later it would contain over $7 billion. Where was the money coming from?

The answer was obvious. So many records were missing or confused that RTC didn't know what to do with the loan payments. Unable to locate loans for which the payments were meant, RTC simply dumped the money into holding tanks. If left unchecked, Pyland believed, the suspense account would grow exponentially and the bailout could fall apart before it began. He went to his superiors in Denver and Washington, where, in the fertile soil of bureaucratic politics, the seeds of a whole new catastrophe were sown.

Bank cards

True to the most aged of political cliches, RTC officials in Washington decided to leap into action and study the problem. Sara Aarthun, a senior asset operations specialist in Washington, toured the regional outposts and found what Pyland had already discovered. She also found similar problems at the other three regional offices.

Despite Aarthun's five-page memo describing what by all accounts was an emergency situation, Washington hesitated. The problem presented an acute political dilemma for Lamar Kelly, RTC's top real estate executive in Washington. As the highest official responsible for RTC's assets, he needed to do something and fast. Such a disaster as the one before him could ruin a career.

Adding to the problem was the fact that RTC was under immense pressure from Congress to speed up the bailout. To prove the agency was well on the road, Chairman L. William Seidman scheduled the agency's largest-yet loan auction for the following June. If the records weren't in order by then, the auction could be a disaster of immense proportions.

Meanwhile, in Denver, officials in the regional office had political considerations of their own. Sherwin Koopmans, a mild-mannered and somewhat boyish Midwesterner, was the new Western regional director, appointed just over a month before.

Koopmans and his staff agreed that the books of 92 failed S&Ls had to be reconstructed and put back in order. But how? Russell Brown, acting director of asset management in the Denver office, gave everyone the answer they wanted to hear.

Brown was a workaholic. Overweight, intense, and able to work 16-hour days, seven days a week, he had a vision: "He said, 'If you give me 1,000 people, we can get this done in a month's time," a colleague later recalled. The promise was ridiculously overstated. An RTC accountant who worked on the project said, "We all knew--the people who worked on the nuts and bolts of this thing--we knew how complicated it was. It couldn't be done, not on that deadline. That was a joke from the start."

But RTC management wanted to believe him, and they placed him on the job under Pyland, who was put in charge of organizing the project. Together, they began to formulate plans for an assault on the Western region's 92 failed thrifts.

Their agenda was to hire an outside accounting firm and mount an all-out attack to begin in April and finish in June before the loan auction. The only remaining business was to give the project a name.

The managers wanted something to properly express the adrenaline-pumping scope of what they were about to start. Feeling a certain kinship with the soldiers preparing for Operation Desert Storm, they gave their battle no less noble a title, and Operation Western Storm was born.

Pyland and Brown, set up in a command post they called "The Storm Center," faced problems from the very start. Their assault would require at least 800 accountants, far more than what RTC could provide. So RTC hired a small private firm in Denver called the Financial Management Task Force, whose biggest job until then had been managing 14 failed industrial banks for the State of Colorado. The Task Force was hired as operation managers. To find the 800 accountants it needed for the job, it turned to temporary employment agencies, which produced such professionals as a recent high school graduate with no accounting training and a college marketing graduate with little accounting knowledge who was put in charge of an entire field team.

Qualified or not, these were RTC's troops, and they were rushed into the field in early April to meet the first set of already-looming deadlines. But instead of getting to work when they arrived, they sat idle for as long as a month--billing RTC for their time--while they waited for vital instructions and equipment to come from the Storm Center in Denver.

A field employee in California said: "Some people just packed up and went home and told the supervisors, 'Call us when we can do some work.' And yet they billed 60 hours a week on their time cards." In at least one case, a supervisor apparently falsified weekly progress reports to cover for idle workers at a California thrift, saying his team was "proceeding nicely" on loans that didn't even exist, according to progress reports and loan documents. Part of the problem was that no one was minding the store in Denver. RTC had assigned only five people to oversee the entire project of 92 thrifts and 800 accountants.

The June 30 deadline for finishing the project came and went. Only eight of the 92 institutions had their books balanced. And RTC had already paid the Task Force $10 million.

Some RTC officials began to wonder if the Task Force wasn't taking the agency for a ride. It turned in outrageous bills even for small thrifts that seemed to involve little work. It charged, for example, more than $50,000 for work at the tiny $344 million Independence Savings and Loan in Vallejo, California, whose books were out of balance by just $5,184. Still more disturbing was the work itself. It "contained considerable errors" and in some cases was meaningless, according to internal memos.

None of this seemed to raze RTC's top officials, who appeared less interested in actual success than in the appearance of it. "There was this attitude toward people who tried to point out mistakes," said an accountant who worked on the project both in Denver and in the field. "It was like, 'Shut up. It's going to work.' . . . There was this fear that if you spoke up, you wouldn't have a job."

As the months wore on, tension mounted. In Washington, Kelly was reportedly

furious that the project was so far behind schedule. Apparent acts of desperation began to proliferate. Accountants who worked on the project said RTC field managers ordered them to alter records so that costly mistakes appeared to have been caused by previous management, not by Western Storm. A senior official said he was ordered to alter RTC's computer ledgers at one point to show Congress that RTC's books were in order.

Finally, in November 1991, RTC's worst nightmare came true: The press got wind of the debacle. After news reports detailed the project in December, RTC's new chairman, Albert Casey, admitted before the House Banking Committee that "We blew it." After investigations by the General Accounting Office, RTC's inspector general, and an outside auditor, Treasury Secretary Nicholas Brady said the agency's system of internal controls "completely broke down."

Casey sent a task force to Denver to "let heads roll," in the words of one official. And an outside auditing firm was hired to evaluate Western Storm. When the maelstrom was over, Koopmans, arguably the least responsible of those connected with the project, was selected to take the fall. He was removed and placed in an out-of-the-way post in Washington. Kelly, Brown, and the rest of the RTC officials who ran Western Storm remained. Even the Task Force was allowed to stay another year to finish the project.

Homeowner alone

In July 1992, a year after Western Storm was supposed to have been completed, RTC announced it had finally put an end to the fiasco. All $7 billion was accounted for, it said. General Accounting Office auditors concurred, issuing a "clean certificate" for RTC's books. During an interview in RTC's Denver quarters that month, Casey slapped the palm of his hand on the conference table in front of him and said: "We consider that chapter closed. The problem is behind us."

But is it? The agency still doesn't know how much its accounting troubles cost taxpayers in wasted time and money. How many homeowners were threatened with foreclosure when they'd been making payments all along? How many loans were sold at deep discounts because RTC didn't know what they were worth? One RTC asset expert in Denver estimated the agency would lose 30 cents on the dollar, translating to at least $20 million that might have been recovered for taxpayers. "But that's only a guess," he said. "It could be anything, probably a lot more." The losses rippled to other RTC activities. In February 1992, Salomon Brothers backed out of a potentially lucrative deal to package $67 million in RTC loans as mortgage-backed securities citing the agency's inaccurate information. An RTC accountant said he knew of "at least 10 instances where they sold loans they no longer owned" because the records were so bad. Such accounts are only glimpses at costs that may have spread wider and deeper than anyone knows. And some officials say the agency hasn't dealt with some of the root problems that caused the trouble to begin with: inadequate computer systems and sloppy accounting.

"We still don't know where we are," said one of those officials. "There never was an accurate inventory of what those thrifts really had. Until we have that, we may never really have a handle on it." cameo, making a phone call or two, setting up a meeting, doing 1ogistics work. If Bob gets caught, the mandatory minimums hamstring the judge into giving him between 25 to 30 years, even if it's a first offense. Bob no doubt could use some time to rethink his career ambitions, but odds are good that he's the type of person who would need no more than a couple years to get that thinking done. it's likely he was motivated by money and highly unlikely that he is violent. He needs a very loud wake-up call, not three decades behind bars.

But he'll get three decades. More perversely, Bob's judge will sentence him to far more years than many dangerous criminals get. "1 routinely get drug sentences more severe than anyone I ever convicted for second degree murder when I was a state prosecutor," a federal prosecutor told me. "We get 20-to 30-year sentences for first time offenders. You very rarely see those kinds of sentences for violent Crimes."

The mandatory minimums for drug crimes were drafted, not surprisingly, during the Reagan-era hysteria over drugs. it's been fashionable ever since to be the toughest guy on the Hill when it comes to sending dealers to the slammer. This approach might be justifiable if it served as a deterrent, but there's little evidence dealers have been daunted. The prisons are increasingly loaded with drug criminals--they now comprise more than half of the prisoners in the federal system--as the costs of incarceration climb ever higher.

"Mandatory minimums were such a broad axe that they have produced unfair sentences," says Judge William Wilkins, chairman of the Sentencing Commission, a group Congress created back in 1984 to study the issue. The commission, ironically, is now vocally against the entire mandatory minimum system. "Proportionality in sentencing is so important," says Wilkins, "and the mandatory minimums are not proportional."

Defenders of the status quo, even in Congress, are getting harder to find. "There are egregious cases where mandatory minimums bring about a miscarriage of justice," says Rep. Charles Schumer, chairman of the House Sub-committee on Crime and Criminal Justice and an early backer of mandatory minimums, "and our committee is going to start to look into those."

The Economic Recovery Tax Act of 1981

We can't really blame the whole of the staggering $290 billion deficit on the 1981 Tax Act--but let's anyway. Sure, Reagan and Congress didn't give away the whole farm in one stroke of the pen, and yes, subsequent budget deals and tax laws mitigated some of the act's effects. But '81 was the curtain raiser in the 12-year run of the supply side tragicomedy and, far more importantly, it set the tone for the eighties by putting a president in the historically unprecedented position of defending huge deficits. It also provides an object lesson in what can happen to legislation when lobbyists get-dealt into the game and find themselves holding a couple of aces.

The opening salvo of Reaganomics, you might recall, was billed as an "across the board" tax cut and featured a series of tax reductions fashioned along the lines of the Kemp-Roth proposal to cut personal rates by 10 percent a year for three years. This approach had an irresistible populist ting, but it didn't take long to calculate that middle-and low-income earners weren't going to do as well by Washington's new math as the rich. Back in 1983, Citizens for Tax Justice found that inflation and Social Security tax increases that took effect in 1981 meant that after all the tax cuts, families with incomes between $10,000 and $15,000 actually ended up with a 7 percent tax hike, and that those making more than $200,000 found themselves, on average, $60,000 in the black.

But that was chump change compared to what businesses made off with: tax credits and write-offs that would have reduced the government's intake from the private sector by half a trillion dollars through the eighties if the act had not been undone by later legislation.

How did business--especially oil, chemical, and utility companies--find itself on the fat end of such largesse? At least some credit must go to the Carlton Group, a coven of corporate lobbyists who took their name from the Sheraton-Carlton in Washington, their favorite meeting place. It was the Carlton group that in 1978 dreamed up "10-5-3," a plan that depreciated business investments at a rate dizzying enough to amount to a government subsidy. At first the idea was roundly ridiculed on the Hill, but after two years of lobbying and the arrival of Reagan, enough wavering members--those aware of 10-5-3's potential repercussions but scared of seeming "anti-investment"--had been buffaloed into supporting the idea to create majorities in both the House and Senate. Eventually the scheme became '81's most audacious measure, the Accelerated Cost Recovery System (ACRS), a regime of goodies that translated into Christmas seven days a week if you happened to run a very large corporation. (ACRS's original Senate sponsor: Lloyd Bentsen.)

Steven Wilmsen, a reporter for The Denver Post, is the author of Silverado: Neil Bush and the Savings and Loan Scandal.
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Title Annotation:Resolution Trust's mismanagement
Author:Wilmsen, Steven
Publication:Washington Monthly
Date:Jan 1, 1993
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