How the Cleaver Family Destroyed Our S&Ls
Bennet, James
How the Cleaver Family Destroyed our S&Ls Low mortgages, high CD rates, and money market funds allowed Americans over 40 to take the rest of us to the cleaners by James Bennet After a fair...
...All you had to do was look in the pages of The Wall Street Journal or The New York Times to get similar information...
...According to the chart, Texas and California were “high density” sources of funds...
...these people would get to know inflation...
...If you have a weakened state such as Texas in the late eighties,” says A1 Disposti, the Menill Lynch managing director and senior trader who pioneered the retail CD market, “you’ll find that their attempt to work their way out of the problem was to increase rates and raise money outside the state...
...It isn’t, from an economic point of view,’ he said, ‘but look at it this way, if you don’t do it, you’re out of a job.’ A fellow trader talking to another thrift president on another line overheard DiNapoli and cracked up...
...Though Congress would bump up the rates thrifts could pay during the seventies, those government-controlled rates fell below the inflation rate at least three times between the late sixties and early eighties...
...But Uncle Sam’s standing behind the offer...
...They sure don’t want to join the ranks of suckers that are paying for the Cleaver homes by losing money in the S&Ls...
...Consider this deal offered by a Virginia Having knocked the supports from under the nation’s thrift industry, the triathletes still must profiteer from its attempted salvation before they can collect the gold...
...By 1984, it had become clear who the winners were...
...How could someone possibly ed from the low-mortgage gravy train, they probably put $10 million into a deal that to him was only a will when their parents head for their final reward...
...In February 1986-two years after William Isaac at the FDIC and Ed Gray at the Bank Board had sounded the alarm that many thrifts and banks couldn’t intelligently invest the money that was pouring into them-Money advised its readers in the brief item that accompanied each scorecard: “Now it pays to park your cash out of state...
...Crisis...
...The grownups are the ones who make the rules...
...Now, no one knows how much money was sent directly across state lines...
...In the “institutional” have failed much sooner-probably when rates first market, brokers would take $100 million from a penclimbed in the early seventies-and much less ex- sion fund, say (or from the Bureau of Indian Affairs pensively...
...But how to weed out the winners...
...To say nothing of mortgages...
...almost twice as much in stocks and mutual funds...
...This “unearned income” is precisely the kind of money our gold medalists were making by killing off the S&Ls...
...How the Cleaver Family Destroyed our S&Ls Low mortgages, high CD rates, and money market funds allowed Americans over 40 to take the rest of us to the cleaners by James Bennet After a fair amount of confusion over which vague entity (“deregulation,” “campaign finance”) deserved the blame for the $500 billion savings and loan crisis, congressional leaders and the press are helpfully trying to focus the nation’s resentment on one of two villains: Neil Bush or Texas...
...Such people should be prosecuted, fined into penury, and forced to serve time or scrub floors...
...Sure, it would probably occur to the Cleavers that the thrift was committing suicide...
...Some were building condos in New England (and some New England thrifts were financing projects in the Southwest...
...Howard Wolpe, chairman of the “Northeast-Midwest Coalition,” has introduced legislation that in effect would charge a special tax to those states responsible for “excessive costs” in the bailout...
...It’s silly,’’ says R. Dan Brumbaugh, former deputy chief economist at the Federal Home Loan Bank Board...
...Sounds good...
...They sure aren’t small savers...
...Even a “notorious high-roller’’ like Gill Savings in Texas-whose outlandish populist rates Money dutifully advertised for years-is again offering high rates, though the thrift is under government control...
...It came from investors hunting for high interest-interest that we’re now paying off through the bailout...
...Holy smokes, what about my $87,000 in, umwhere’s that damn bank statement?!-Irvine, California...
...In theory, a thrift is a type of matchmaker...
...It’s the gold medalists like the Cleavers who undermine Edward Hill’s (remember him...
...In these pages in 198 1, Gregg Easterbrook used 1978 census data to total up the number of professionals- lawyers, engineers, doctors, etc.-in the U.S...
...Now the days of those “outlandish rates” (don’t they mean “populist rates...
...Well, sure they are,” his brother replied...
...In November, Money was still whistling the same happy tune...
...Benston recently completed a study showing ate to suck in more deposits to fund new loans, they that most of the S&Ls that failed in the Southeast did kept jacking up their rates...
...Meanwhile, wages grew only 32 percent...
...But those actions alone won’t clean up the S&L mess, because along the way, the affluent-not just crooks, and not just Texans-also cashed in...
...The regional redistribution theory ignores the true culprits behind the slow-motion S&L disaster and the true beneficiaries of the cleanup...
...Once again, we can turn to Money magazine for leadership...
...Their houses weren’t any better-worse, in fact...
...Don’t feel too sorry for these particular purchasing a package can request the name(s) of the people, however...
...The year: 1959...
...That overlap would make for quite a large number of what Easterbrook called “gold medalists’’-Americans who’d figured out how to beat the high cost of living well...
...almost three times as much in investments like money market funds and bonds...
...At Empire Savings and Loan in Mesquite, Texas, brokered deposits accounted for 85 percent of the total...
...In 1934, the federal government guaranteed deposits at thrifts to prevent runs, in which all a thrift’s depositors, upon hearing that a few of their neighbors had defaulted on their mortgages, would mysteriously develop toothaches at the same time...
...Wally, for example, is paying only about $250 per month for his housing-not to lease, but to own-while all around him rents are skyrocketing...
...Although the scorecard lists several thrifts, the purpose of the accompanying item this time is to reassure readers about banks...
...The rate is guaranteed for the term...
...What are they going to do with all the money they don’t have to spend on housing...
...In the interest of keeping mortgages cheap, Congress in 1966 voted to hold down to just over 4 percent the interest rates thrifts .. could pay: This way, S&Ls wouldn’t engage in bidding wars to steal each other’s depositors, so they could keep making a profit on the fixed-rate mortgages they had locked themselves into 5 or 10 years earlier...
...Still, as you pump even more cash into these dying S&Ls, “it’s prudent to keep the principal under $95,000, so that the interest is also indisputably covered...
...Money markets had fed thrift operators a healthy dose of the one thing they couldn’t stand: competition...
...Here’s where the government, out of its deep affection for home ownership, first stepped into the picture...
...But those facts alone can‘t explain all the differences...
...Other evidence indicates that big investors accounted for an even greater share than that of the funds in collapsed S&Ls...
...The S&Ls-then offering about 5.5 percent on passbook savings-were hemorrhaging deposits...
...But why think short-term...
...At this point, another dark Texas is wrong, because of the brokered joyed “circulation growth unmatched by other com- cloud briefly drifts petitive magazines”-125 percent, to 1.8 million...
...What do all these people have in common...
...Aw gee, Wally...
...This may not have caused much trouble had the thrifts been tightly supervised to prevent insolvent ones from playing this high stakes game...
...The simple answer: no...
...Even if they haven’t already benefit- issuing institution(s...
...Consistent gaps that huge didn’t exist between any other consecutive age groups...
...Thrift operators found themselves staring into the yawning chasm that separated their depositors’ shortterm attitude from their borrowers’ long-term one...
...The other 37 states and the District of Columbia are the “losers...
...Who are those culprits and beneficiaries...
...certainly states like West Virginia-which had neither highrolling S&Ls nor high-stakes investors-will be net losers once the dust has settled...
...Well, after rising steadily from 1940, homeownership rates began to drop in 1980...
...You’re at least a cause of the S&L crisis, if not a winner in the Bankers’ Bailout Sweepstakes...
...Of the $4.6 billion in deposits held by Franklin Savings in Ottawa, Kansas, 71 percent were brokered...
...and b) a homeowner, Le., probably on your way to being well off...
...With the exception of the congressmen, these professionals are the same people who are now benefitting from the fees generated by the bailout, as the Basses and the Fails and the Perlmans position themselves at the trough for the incredibly sweet deals being offered through the RTC...
...By now, mortgage rates have climbed a whole half percentage point, to 6 percent...
...If you answered “yes” to any of the above, YOU SAND DOLLARS...
...lose...
...That logic, echoed by governors of northeastern and midwestern states at a July National Governors Association meeting, has found its way to Congress, where some northern representatives are rethinking the benefits of national union...
...Those numbers are pretty meaningless, however, because the Cleavers never lived in Texas...
...Wait a second...
...Despite the new bailout bill, “the rate wars haven’t stopped...
...Among those between 25 and 29 the rate fell from 43.3 percent to 35.9 percent...
...now they were paying interest of around 10 percent just to hold onto their depositors...
...What crisis...
...In March 1980, Congress began to phase out the controls on deposit rates that it had imposed 14 years earlier...
...adults, they control over half of the nation’s discretionary income, 77 percent of all household financial assets, and 40 percent of all consumer demand...
...You’d be a fool not to take it...
...in fact, they would have to keep on locking themselves into more low-rate mortgages, since, as part of the deal, Congress refused to let them offer adjustable rate mortgages, which float with interest rates...
...Consider this memorable scene, recorded by Michael Lewis in Liar’s Poker: “. . . the thrift was being asked to pay a transaction fee of ten million dollars to Salomon Brothers...
...After all, the prices of their homes are floating up with inflation (and possibly much faster...
...And, if they took Money’s advice, they owe at least some of that solidity to the destruction of the nation’s thrifts...
...At Victoria Savings in Victoria, Texas, deposits in this range added up to 65 percent of the total...
...Texans are easier to hate...
...Consider this memorable scene, recorded by Michael Lewis in Liar’s Poker: “. . . the thrift was being asked to pay a transaction fee of ten million dollars to Salomon where the depositors live...
...Oh, also: You’ve gotten clean away...
...No way would a thrift have offered such extraordinary rates without deposit insurance...
...In The Politics of Rich and Poor, Kevin Phillips writes, “In 1980, 23.1 percent of people under 25 owned their own homes...
...By March 1990, Money wasn’t so upbeat...
...While these 50-plus consumers represent only 35 percent of total U.S...
...Joe Kennedy has proposed a variation on McIntyre’s plan in the House of Representatives...
...The vanguard of the baby boom and its elders (today’s Americans over 40) made a fortune thanks to the thrifts’ suicide subsidy...
...name (and a name like “Alamo Savings,” at that) and Those whose parents never boarded won’t be so lucky...
...But what Easterbrook couldn’t know in 1981 was that his money athletes (people like the Cleavers) were in fact competing in a triathalonand so far they’d finished only two of the events...
...According to the chart, Texas and California were “high density” sources of funds...
...As they play in the yard and listen to lectures in the living room from their accountant father, the Cleaver sons, Wally and the Beaver, develop the healthy sense of family values and abiding lust for homeownership that characterizes suburban Americans of their generation...
...The brokers themselves have a somewhat clearer picture...
...in 1983, deposits in those accounts went from zero to $375 billion, while money market assets decreased for the first time...
...Desper1985...
...an interest rate...
...Uncle Sam should invest in the mailing list, and start sending out bills...
...It was a law passed by people who had never really known inflation...
...Why the mad scramble to attract depositors...
...The item started on a somber note, remarking that “The so-called Oil Patch in general and Texas in particular is getting hammered by plunging prices, slumping real estate, and the soft peso...
...And now, the $100,000 question: “But even if you assume the worst, should you still consider sending your money on for the extra interest...
...besides, investors simply wouldn’t have trusted them...
...They’ve been around since the early 1970s, but it wasn’t until interest rates took off that the money funds-which pool shareholders’ cash to make short-term loans at about the prime rate-got popular...
...Even before interest rates dropped, many thrifts were doomed (because of assorted accounting tricks, an S&L crippled by this interest shortfall at the beginning of the decade might not look insolvent until became, the better they looked to investors...
...Sit and rot, because of other steps the government later took to protect thrifts...
...Luckily for them, clever innovators have figured out a way around government regulation of the financial industry: money market funds...
...are coming to a close...
...But some more surprising states were also complicit: Kansas, Minnesota, Pennsylvania, Missouri, and, yes, even Michigan, home of Howard Wolpe, the congressman who introduced the Texas-bashing legislation...
...A lot of that money that went to Texas came from New York, and it’s going back to New York...
...The Resolution Trust Corporation, which mails out the bailout checks, doesn’t keep track of where the depositors live...
...Surely many conventionof the 22 million home-free homeowners and 8 million well-paid professionals overlap,” he noted...
...According to Tom Schlesinger of the Southern Finance Project, a group that is doing the hard work of sifting though the records of failed thrifts, “In many instances the biggest institutions that have been bailed out have deposits of $80,000 or more accounting for 30, 40, or 50 percent of all deposits...
...The Cleavers could cash in on their capital gains right there, refinancing their mortgages at a higher rate in exchange for cash up front from their panicking thrift operators...
...Nothing, with the possible exception of selling the Brooklyn Bridge to some rubes from Iowa...
...One minor inconvenience for a Money reader, one giant disaster for American taxpayers...
...It’s an intergenerational transfer...
...I had a 6 percent mortgage,” says George Benston, professor of finance, accounting, and economics at Emory University’s business school...
...This legislation is designed to hold those who are most responsible to a measure of equity in the bailout burden,” said Wolpe, who hails from Michigan, beneficiary of the Chrysler bailout...
...Some examples: >Half of the $2.9 billion in deposits at Charles Keating’s Lincoln Savings were funneled through brokers...
...a pile-like a billion dollars-and then invest in Benston puts the cost of these low-yield mortgages to monster CDs, all fully insured...
...But are savers incurring undue risk...
...Now,” continues Money, “you can zero-in on the affluent heart of this key consumer target . . . and establish an exclusive franchise with-today’s highest discretionary income marketplace...
...Indeed, to have qualified as ,the Mark Spitz of the S&L Olympics, Wally would have to have worked for a firm like Akin Gump or Jones, Day, Reavis & Pogue, which grew fat off S&L fees...
...By the way, Money readers, according to the official literature, are “exceptionally acquisitive...
...But by 1976, with interest rates at 8.5 percent, he’s ready to make his first major purchase since he sent away for that projector back during his halcyon Mayfield days...
...Finally, in 1981, Congress let federally or the Pentagon, which were two of the biggest chartered thrifts offer adjustable rate mortgages...
...Money certainly wasn’t the only publication promoting unsound thrifts...
...They sure aren’t small savers...
...Wally, the Beaver, and company had more than twice as much money in CDs and other interest-earning deposits as those under 35...
...It’s hard to make loans if you don’t have any deposit money to loan out...
...Thrifts were pulling in a vast amount of new money in an effort to grow out of their troubles by making a whole lot of loans at the new, higher rates...
...The Cleaver men almost surely subscribed...
...fer,” says Bert Ely...
...Hill is clearly enjoying his 15 minutes...
...But the months wear on and you can’t escape the feeling that the party is winding down, as Money clears its throat and edges toward the door, grimly surveying the wreckage and complaining about the mess the hosts brought on themselves...
...In that year, people in the same age group as Wally and the Beaver-35 to 44-had on average more than three times the net worth of heads of households who were younger than 35, according to the Census Bureau...
...In fact, one of the market perversions sponsored by deposit insurance was that the more frantic S&Ls thrift through The Washington Post: “IRA, KEOGH WILDCARD . . .You may open an IRA or KEOGH with as little as $100...
...All in all, “Money readers have an exceptionally solid financial picture...
...It describes one of its target audiences for advertising this way: “The ranks of Americans aged 50 and above have doubled in the past 40 years-from 33 million in 1950 to 63 million today...
...The answer is yes if you stick to federally insured accounts up to $100,000, including the interest income YOU are the Brookings Institution...
...Now, if you’d taken out a mortgage in the fifties and sixties, you were a) at least in your thirties by the 1970s...
...All these go-go investment advisors were more like fans screaming from the stands, egging them on as-a little soft in the middle now, a little gray on top-the Cleaver men went for the gold...
...Advertisements blossomed in the pages of The Wall Street Journal and The New York Times, promoting CDs and other special deposit deals to be had in towns and at rates that the Cleavers had never heard of...
...With the exception of the congressmen, these professionals are the same people who are now benefitting from the fees generated by the bailout, as the Basses and the Fails and the Perlmans position themselves at the trough for the incredibly sweet deals being offered through the RTC...
...There’s the unconscionable wealth transNobody better captured the gogo, intensely cynical exploitation of deposit insurance than did Muney magazine...
...Indeed, if Wally had bought his $30,000 house in one of Washington’s better neighborhoods, today it could well be worth $400,00& allowing for inflation, that‘s almost four times its original value...
...To more and more citizens, the American dream of homeownership was becoming just that- dream...
...One-hundred dollar minimum...
...Charles Keating used deposits from all over the country in his California thrift to build the Phoenician Hotel in Arizona...
...By 1987 that rate was down to 16.1 percent...
...Despite 394 federally insured bank failures in five years, no savers have lost a penny...
...At the end of 1977, the money markets had $3.9 billion in assets...
...For 13 states-the “winners”-Hill came up with a positive number...
...Subsidies exist to foster behavior that the market, left to its own devices, would never reward...
...It wasn’t working very well...
...As a fair remedy to this, McIntyre would apply a 7.5 percent surtax only to those people with total incomes over $100,000 who also have unearned income over $7,500...
...He could picture the man on the other end of the phone, just oozing desperation.’’ It wasn’t an economically sensible move for the thrift president to make...
...The young got screwed by the old...
...The comfortable old 3 percent profit margin from the salad days had vanished, replaced by a monstrous negative number...
...According to Schlesinger, brokered deposits at these thrifts account for 25 to 40 percent of all funds...
...That meant depositors were losing money by trying to save it...
...All this means that in the coming decades, much interest in getting information about the investeven as they’re trying to pay off their higher loans on ment itself...
...In 1984, FAIC securities, the largest broker of institutional CDs, provided a regional breakdown of its clients to a House subcommittee investigating brokered deposits...
...Try taking the following simple test: DID YOU: *Take out a mortgage in the fifties, sixties, or sev>Invest in a money market fund in the seventies >Buy a certificate of deposit in the past 10 years...
...It’s helpful to think of the S&L bailout-which consists of the government making good on its promise of deposit insurance-as a massive retroactive federal subsidy...
...All in all, not a bad reward for people who just happened to be in the right demographic group at the right time...
...And such readers...
...This is one S&L rip-off you’re unlikely to learn about on the evening news, where thrift presidents’ solid gold bathroom fixtures and antics with prostitutes tend to dominate the story...
...100,000 limit...
...Of the $147 billion Bert Ely figures the market, which was dominated by Merrill Lynch, broS&L bailout would cost if the check were written to- kers would dump the savings of many depositors into day, he attributes $25 billion to the original cause...
...During their salad days, thrifts would rent money from their depositors at 3 percent, then turn around and lend it to their borrowers at 6 percent...
...There, investors were generally conservative...
...Behind all the self-righteous regional bellyaching is the work of one man, a professor of urban studies and public administration at Cleveland State University named Edward Hill...
...Taxing all Texans to cover the excesses of these people would be like taxing all New Yorkers to pay Michael Milken’s fines...
...one can plausibly assume that those rollicking cowboys were out to bum down the house for fun and profit...
...June 1988: “Rating the health of the 62 banks that pay you the most...
...Between 1978 and 1989, he points out, personal interest income increased by 106 percent, and capital gains income rose 109 percent...
...Moreover, the Cleaver men probably don’t need the money, since chances are inflation is driving up their salaries as well...
...A primary rule of investing-that where there’s high yield there’s high risk-had been deftly undercut by the federal government...
...You can increase your chances of getting the promised interest rate for the full term of your CD if you stick with the soundest institutions-those listed on page 14 with at least two stars...
...Money...
...You needed only $1,000 to get into a few of these funds, but you had to have some sophistication to be willing to experiment with this odd, uninsured animal...
...As a child, the Beaver once observed, “Wally, the rules are a lot easier on grownups than they are for little boys...
...At the end of 1982, for example, S&Ls were allowed to start offering “money market accounts” of their own...
...Hell, the Cleavers are even considering refinancing their beloved mortgages so they can pump as much cash as possible into this deal: It’s paying 18.5 percent...
...Nightmare from Pine Street One defining characteristic of a capitalist democracy is that a lousy deal for one guy is by definition an incredibly sweet deal for somebody else...
...Nobody better captured this spirit of the age-the go-go, intensely cynical exploitation of deposit insurancethan Money magazine...
...A rogue’s gallery of self-dealing insiders raked in billions from this subsidy...
...that S&L depositors in the seventies were paying (in It was perhaps a first in the history of high-stakes the form of interest income forgone) to keep mortgage investing that in both these markets no one showed rates down...
...Where else could you put your money...
...Many of the names, some listed month after month, sound familiar: “Lamar,” “Vernon,” “Sunbelt...
...Indeed, to have qualified as ,the Mark Spitz of the S&L Olympics, Wally would have to have worked for a firm like Akin Gump or Jones, Day, Reavis & Pogue, which grew fat off S&L fees...
...Cost-of-living adjustments are generally pegged to the Consumer Price Index-the largest chunk of which is determined by housing costs-so most of what the Cleavers are getting to protect them from inflation is in fact pure windfall...
...But some more surprising states were also complicit: Kansas, Minnesota, Pennsylvania, Missouri, and, yes, even Michigan, home of Howard Wolpe, the congressman who introduced the Texas-bashing legislation...
...Charles Keating used deposits from all over the country in his California thrift to build the Phoenician Hotel in Arizona...
...And thrifts were desperate to make new loans, since they were facing a terrifying “interest rate spread...
...The major media notwithstanding, not everyone is convinced by Hill’s analysis...
...Compared to the average American, a Money reader is “131 percent more likely to have a brokerage account,’’ “79 percent more likely to own securities valued at $10,000+,” and (oddly) “55 percent more likely to have recently remodeled a bathroom...
...You may add $100 minimum at any time without extensions of the 5-year maturity...
...Of the record 105 banks that have gone under this year, 19 were in Texas...
...There’s something familiar about the logic...
...the $900,000 line of credit approved by Silverado for Neil Bush’s partner was intended to finance a venture in Argentina...
...As this table shows, of the 13 institutions listed, five are from the Lone Star state...
...It takes the Beaver, who spends a couple of years trailing the Grateful Dead around the country in an ultimately futile effort to rebel against his father, a little longer to pull himself together...
...Funds mediated by brokers have never accounted for more than 8 percent of all thrift deposits, industrywide, but according to a study by James Barth, former chief economist at the Bank Board and currently a professor at Auburn University, of the 50 costliest thrift resolutions in 1988,36 had more than twice the industry average proportional holdings of brokered deposits...
...Up until the late seventies, if you were a small saver you could stick your cash in a thrift or bank and lose a little money, or stick it in your mattress and lose a lot...
...by 1982, they had $208 billion...
...Those judgments are a little harsh...
...Thanks to Uncle Sam, they didn’t have a choice...
...By his own admission, at least one man-George Benston, whose 6 percent mortgage started the whole S&L crisis-bought a CD direct from a Keating phone bank, thereby earning his gold medal...
...Remember, S&L profits were coming from the loans they had made to the Cleavers at 5.5 to 8.5 percent over the previous decades...
...Wildcard, indeed...
...It’s not like they didn’t gather any informathe S&L crisis, the worst financial disaster in our na- tion on the institutions, however: an investor “before tion’s history...
...At one point in 1980, savers were pumping cash into the money funds at the rate of $3 billion a week...
...The trick was to find a state like “Louisiana, where a rate war has been raging since early summer...
...The billions pouring into the money funds had to come from somewhere...
...It’s a red herring issue,” says Edward Kane, professor of banking and economics at Ohio State University...
...There will undoubtedly be some regional redistribution...
...Between 1981 and 1989, in states and cities like Connecticut, Hawaii, Boston, New York City, Philadelphia, San Diego, and elsewhere, home values shot up 50 to 125 percent...
...the idea of insurance appealed to them...
...Ward and June take out a 30-year mortgage at 5.5 percent to buy the new family home at 211 Pine Street in Mayfield, U.S.A...
...across the rosy scenario: deposits,” Says Moreover, Money now boasts newsstand sales more Robert E. Litan of than twice those of Business Week, Forbes, and For“Some experts . . . worry that some of today’s tune combined...
...Savings: Everything is bigger in Texas-except the risk...
...You were even worse off with the commercial banks...
...Savings and loans began offering higher interest rates to lure investors back, with some success...
...Borrowers want to sit on their loans for a long time, while depositors want to be able to get at their money whenever they need a tooth filled...
...Salomon Brothers, for example, made hundreds of millions by tapping into a market-which Congress created by passing a special tax break for thrifts in 198 I-for mortgages that thrift operators facing an interest rate spread were desperate to sell...
...Investors put a higher value on federal insurance than on credit analysis of smaller instiBroker poker tutions,” he explained...
...The bane of thrifts’ existence has always been that the real interests of their two types of clients are fundamentally mismatched...
...Divide by the state’s population and you amve at the bottom line according to Hill: If the check were written today, the bailout would cost each resident of Connecticut (the biggest loser) up to $1,237, while the gain to Texas would work out to $4,775 per person...
...By bailing out the thrifts, the U.S...
...That doesn’t sound like a very good trade for me,’[the thrift president] said...
...The headline of its May scorecard read, “Savings: Shopping among the best little rate houses in Texas...
...Combined with a 7.5 percent corporate tax surcharge, this “revenue enhancer” would pull in $23.4 billion in its first year-enough to make a dent in the bailout cost...
...The money market fund advertised directly beneath is paying only 12.18...
...There’s that subsidy at work again...
...if it weren’t for the abused subsidy of deposit insurance, he’d never have had the opportunity to try...
...I thought rate wars were a good thing...
...Those young Americans are too busy covering their elders’ mortgages to afford their own...
...What do all these people have in common...
...So the thrifts ran for help to the usual source...
...All of this talk about money being shipped to Texas is wrong, because of the brokered deposits,” says of that money that went to Texas came from New York, and it’s going back to New York...
...He came up with 8 million-the same number of people who had money market accounts that year...
...Salomon Brothers, for example, made hundreds of millions by tapping into a market-which Congress created by passing a special tax break for thrifts in 198 I-for mortgages that thrift operators facing an interest rate spread were desperate to sell...
...After a brief flirtation with the notion of joining the Peace Corps during his law school days, Wally in 1967 decides to straighten himself out, join a firm, and invest in a home of his own-a nice place, three bedrooms, two baths, a yard: $30,000...
...The second pocket of concentration would be the eastern seaboard,” he adds, followed by the states of New England...
...Enter the Cleavers...
...The eighties were good to Money...
...Research assistance was provided by Kierstan Gordon and Margaret Gray...
...And then it was every place,” recalls Hill...
...Texans might have been throwing the money away, but Easterners and Midwesterners were getting rich by handing it to them...
...institutional broker, told a House subFever generation will still be paying for their parents’ committee, “CDx.does not represent that it does mortgages...
...Some were building condos in New England (and some New England thrifts were financing projects in the Southwest...
...That money could have been brokered or could have come in direct, but one thing’s for sure: It didn’t come from small savers...
...It’s been fun,” he adds...
...Robert McIntyre of the Citizens for Tax Justice has worked out a scheme to make some of the unindicted co-conspirators in the S&L crisis cover the price of their party...
...DiNapoli [the trader] was ready for that one...
...At Sun State Savings and Loan in Phoenix, 44 percent of the $900 million in deposits were in accounts of at least $80,000 but less than $100,000...
...Money for nothing Every month in its “Investor’s Scorecard,” Money helpfully listed the highest-paying CDs from around the nation, ranked by rate and arranged in groups by maturity...
...They were looking even to Europe...
...Later came The New York Times and The Wall Street Journal, appearing with basically the same story on the same day...
...After all, 77 percent of the magazine’s readers own their primary residence...
...Money market fun But the Cleavers have a problem...
...It defies credulity to believe it was financed by Texas at a time the economy was in a downturn,” says Litan...
...And so it went-until June 1987, when a new phrase abruptly crashed the party: “What the S&L crisis means to you...
...earning, and brace yourself for certain minor inconveniences...
...In fact, except for investments in CDs and stocks (where Ward, given his lengthy head start, had left his kids in the dust), Beaver and Wally in 1984 were relatively closer to their dad in the amount of assets they owned than they were to heads of household just a couple of years younger than they were-the ones who’d missed the boat...
...Texans might have been throwing the money away, but Easterners and Midwesterners were getting rich by handing it to them...
...Frantic S&Ls, which the Cleavers had spumed in the seventies, were looking more attractive every day...
...Loan wolves Their third victory came from bringing the S&L industry to its knees and then charging it for trying to get back on its feet...
...it pulls in people who want to save money and puts them together with people who want to borrow monBy 1984, people in the same age group as Wally and the Beaver-35 to -had on average more than three times the net worth of heads of house holds who were younger than 35...
...and almost twice as much in home equity...
...The situation is worse than during the Great Depression...
...Depending on how thrifty these pass-through agencies were in holding down operating costs, the 3 percent difference was pure profit-a fee for performing the matching service...
...Moneyadvised its readers, “Now it pays to park your cash out of state...
...Knowing that the federal government backed their banker, depositors would be more inclined to let their money sit...
...of $100,000 or slightly less to be placed in the highIt was the interest rate spread that first panicked the est-paying thrifts around the country...
...Sure, the Cleaver boys’ success could in part be attributed to the fact that they had been pursuing careers and saving longer than had younger householders...
...Knight-Ridder picked it up, then the people at Newsweek called me for their cover story...
...The brokers themselves have a somewhat clearer picture...
...No one knows for sure...
...Besides, if you believe the press, there are now concrete numbers to back up that suspicion...
...Parroting figures that have appeared everywhere from regional papers to the network news, Curtis J. Lang wrote recently in The Village Voice, “George Bush’s home state of Texas will benefit from a massive transfer of wealth from the North to the South in which some $80.2 billion will be infused into the Lone Star State-a gain of $4,775 per person-while New Yorkers will lose over $17 billion in the process...
...Money...
...There may be another way to identify the gold medalists...
...It stands to reason that, as the bills come due over the next 30 years, those wealthy people-not all taxpayers-should pay...
...And listening to them tell their grandchil- complete credit analyses on all member banks and dren the story of how the nasty, greedy Texans caused thrifts...
...Explaining the scam requires a brief history lesson...
...If they stayed open an exso not because of fraud, corruption, or mismanage- tra six months or six years, what more could they ment, but simply because of the interest rate spread...
...Safety wasn’t an issue...
...In 1984, the president of CDx, a Washtheir smaller homes, members of the Saturday Night ington, D.C...
...Many credit industry and prompted Congress, state legislators, and unions were also clients of institutional brokers-the regulators to liberalize the rules governing one means through which small savers managed to thrifts-moves that more often than not exacerbated join in the deposit-insurance bonanza...
...Like their dad’s, the Cleaver boys’ low-rate mortgages were letting them invest surplus cash in S&Ls (which paid out $634 billion in interest in the 1980s) and money markets (which paid out roughly $190 billion over the past 15 years...
...Also in 1978, 22 al mortgages paying 9 percent or less...
...Besides, by the mid-eighties our friends were seasoned veterans, savvy enough to find good deals for themselves...
...As Benston says of his kids: “Their mortgage payments were twice mine...
...They were saving the banks and thrifts by trying to screw the small savers,” says Professor Benston...
...Money rent control What, you ask, could possibly have been more American than taking out a mortgage during the Wonder Years to buy a home...
...Deposit broas Congress demanded (if they had tried, they would kers worked in one of two ways...
...And according to A1 Disposti, “The North-Central region tended to be most active in the CD market-your Michigan, your Wisconsin, Iowa, Chicago...
...By the late seventies, mortgage rates are at 18 percent-three times what Wally is paying...
...The federal government tried to maintain thrifts’ deposit base by preventing small investors from putting their money anywhere else...
...Not even my mother gave me this much attention...
...In 1981, 85 percent of S&Ls lost money...
...Brokers could double taxpayers at $51 billion...
...In this case, money swiped from depositors in the seventies went into mortgage-holders’ pockets...
...It’s been wild to watch it break,” he says of the media attention his analysis has been receiving...
...The Cleavers are in a good position to do so, since they’ve got a fair amount of cash to stash someplace: between 1979 and 1981, interest income for individuals and institutions shot up 42 percent, until it accounted for 13 percent of all personal income...
...In 1984, FAIC securities, the largest broker of institutional CDs, provided a regional breakdown of its clients to a House subcommittee investigating brokered deposits...
...To arrive at his numbers, Hill calculated the amount of bailout funds that will flow to a given state and subtracted from that figure the relevant portion of the state’s federal tax burden...
...Sometimes, as with student loans, the government intentionally creates a subsidy to achieve a certain social goal...
...Government savings bonds had been a lousy deal for decades...
...regional redistribution theory...
...Then inflation hits...
...But never fear-even if their economy is in the toilet, the Texans are still out to help the little guy...
...But abusers of this system), and break it up into chunks by then, too much damage had been done...
...As one friend of mine who invested in a simLater that spring, Money was still bullish on these long-distance investments...
...Meanwhile, as long as Mayfield didn’t become crack-infested, the Cleavers’ homes were probably rising in value...
...It all seems innocent enough...
...see “The Meaning of Money Markets,” November 1981...
...But not too concerned: “Federally insured accounts at a bank or thrift with no stars are just as safe as those at an outfit with the top rating of three stars...
...Blaming Neil Bush, however, has turned out to be like shooting at a puppy for peeing on the rug...
...That’s on top of the subsidy an institution’s deposits literally overnight...
...September: “For years now, many desperate Texas thrifts have been offering savers up to a full percentage point more than aggressive banks in other states...
...Between 1985 and 1988, deposits in Texas thrifts doubled, from $100 billion to $200 billion...
...As we’ll see, however, once you poke at them, Hill’s concrete numbers start to crumble...
...And in 1970, Congress raised the minimum investment in the more lucrative Treasury bills from $1,000 to $10,000 (at the time, the average thrift account was $3,045...
...And according to Bert Ely, whom Hill has called “one of the most accurate observers of the [S&L] industry,” “This guy Hill from Cleveland has got it all wrong...
...Who were these smart investors...
...the $900,000 line of credit approved by Silverado for Neil Bush’s partner was intended to finance a venture in Argentina...
...In fact, aside from the not-insignificant question of intent, the main difference between you and the S&L crooks is that, collectively, you took a lot more money than they did...
...the idea of insurance appealed to them...
...And, among the uneconomic projects that got financed during this period, one shouldn’t overlook the outrageous fees paid to assorted S&L vultures around the country-accountants, lawyers, brokers, congressmen...
...Money is suddenly concerned about the viability of thrifts and banks...
...It was the funniest thing he had heard all day...
...In the “retail” the problem...
...I mean, nobody pays attention to me...
...Real popular...
...Without the subsidies of deposit insurance and in- Once a thrift had exhausted its local deposit base, terest rate controls, thrifts could never have offered it had two options for pulling in more money: deposit long-term, fixed-rate mortgages at such low interest, brokers and direct national solicitation...
...Over the next decade, By law, they had to pay a quarter-percentage point less than S&Ls...
...Don’t worry, says Money, you’re covered...
...Don’t automatically chase after such lofty yields,” warns Money, suddenly worried about a point that Forbes had made to its readers three years earlier...
...The second pocket of concentration would be the eastern seaboard,” he adds, followed by the states of New England...
...taxpayer is subsidizing the parasites at Salomon Brothers as well as the corrupt thrift owners in Texas...
...Still, the problem with the “regional redistribution” theory is not just that it’s inaccurate, but that it distracts attention from the real redistribution that has taken and is taking place: upwards, by age and class...
...Settling accounts And the Texans weren’t necessarily throwing the money away in Texas...
...Where did this money come from...
...January 1988: “Savings: What to do if your S&L goes bust...
...The magazine provided the name, the rate, the state, and the telephone number...
...Because of deposit insurance and the jumble of regulations that grew up around it and then were almost haphazardly chopped back, the taxpayers in the past couple of decades wound up sponsoring all sorts of activities to say the least: absurdly low mortgage rates, absurdly dumb construction projects, absurdly high deposit rates...
...And, among the uneconomic projects that got financed during this period, one shouldn’t overlook the outrageous fees paid to assorted S&L vultures around the country-accountants, lawyers, brokers, congressmen...
...There, investors were generally conservative...
...Since that average included tens of millions of people who had no interest income at all, chances are that our friends have been doing quite well for themselves...
...But no one was minding the store, and Ward, Wally, and the Beaver were all too eager to loot it...
...they and the other deposit insurance predators lived all around the country...
...Had interest rates stayed high for another year or two, they would have all gone down the toilet,” says Lawrence White, a former Bank Board member, now a professor at New York University...
...And don’t give the fact that the nation’s financial system is going to hell in a handbasket a second thought...
...And according to A1 Disposti, “The North-Central region tended to be most active in the CD market-your Michigan, your Wisconsin, Iowa, Chicago...
...That’s it-a big chunk of the generation that produced some of the greatest financial competitors in American history...
...And what of the would-be homeowners without the good timing to keep up with the Cleavers...
...Californians will lose nearly $1 1 billion, while New Jersey and Illinois will lose over $8 billion apiece...
...James Bennet is an editor ofThe Washington Monthly...
...Despite it “AII Of this talk all, however, Texas banks have continued about money ilar deal in the early eighties recently put it, “We being shipped to knew they were being fools...
...Every month, Muney helpfully listed the highest-paying COS from around the nation...
...Safety wasn’t an issue...
...According to one of its brochures, it entheir populist tradition of paying high interest rates to savers...
...The bottom line: go for yield, but deal with federally insured institutions and stay within the high-paying Oil Patch banks could be tomorrow’s candidates for insolvency if oil prices keep falling...
...sometimes, the government just doesn’t realize what the heck it’s doing...
...Not only that, but our friends are deducting half their mortgage interest from their taxes, so their loans are really costing then only 2.75,3, and 4.25 percent...
...Settling accounts And the Texans weren’t necessarily throwing the money away in Texas...
...People say, ‘Who stole the money?’ and the answer is me...
Vol. 22 • September 1990 • No. 8
