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The S&L Collapse: Did Anyone Learn Anything?


Books

THE S&L COLLAPSE: DID ANYONE LEARN ANYTHING?

S&L HELL

By Kathleen Day

Norton x 384pp x $24.95

TRUST ME

By Michael Binstein and Charles Bowden

Random House x 420pp x $25

Try this quiz: The collapse of the savings and loan industry during the 1980s was caused by:

A) Reagan-appointed regulators who freed the industry to engage in wildly speculative lending;

B) Greedy thrift operators who plundered their institutions to support lavish lifestyles;

C) Cowardly politicians whose reluctance to shut down the party drove up the costs of the rescue; or

D) All of the above.

The answer is hardly trivial, as most taxpayers now know. While the U.S. economy has endured speculative booms and busts before, few events matched the magnitude of the thrift debacle, which will cost $200 billion plus interest. Of course, the answer to the quiz is D, and two new books go a long way in explaining just why this is so. Trust Me: Charles Keating and the Missing Billions profiles the best known of the many cowboy entrepreneurs who flooded into the industry after Washington deregulated S&Ls in the early 1980s. A collaboration between Washington journalist Michael Binstein--who now shares a column with legendary muckraker Jack Anderson--and Arizona writer Charles Bowden, Trust Me is chockful of revelations about the politically ultraconservative Cincinnati lawyer who went West to construct a fragile financial empire out of Arizona sand.

The authors unearth rich detail about the enigmatic Keating, whose life is a bundle of contradictions. How else to explain Keating, a devout Catholic who gave generously to religious and charitable causes, but whose female employees were sometimes pressured into undergoing breast-enlargement surgery? A man who flew in Mother Theresa to bless his Phoenician Hotel, but who acted in a self-indulgent, uncontrollable fashion at corporate parties, once tossing china, crystal, and clocks into a swimming pool? A slave to detail who fussed over every menu item at his hotel restaurants, but who on a whim would lend millions of dollars to virtual strangers?

As well-reported as it is, Trust Me nonetheless figures as one of the most unconventional business books of recent years. In their effort to capture the surreal atmosphere that permeated Keating's financial empire, the authors resort to literary devices that give the book the feel of a novel, such as recounting events in the present tense. But unfortunately, the prose is often overwrought, and when the authors try to become cosmic, it comes out comic: "There is in Charlie Keating a hatred of control. And also, a deep hatred of things out of control. Or perhaps not a hatred but a deep fear..." With a subject as colorful as Keating, this is one story that needs no embellishment.

By that standard, S&L Hell: The People and the Politics Behind the $1 Trillion Savings and Loan Scandal, by Kathleen Day, succeeds much better. Day relies on extensive legwork from her years spent covering S&Ls as a Washington Post beat reporter to provide a behind-the-scenes look at how Washington mishandled what became an orgy of speculation. She paints unflattering pictures of legislators and regulators blinded to the gathering clouds by their cozy relationship with S&Ls. Day recounts, for instance, a 1985 Christmas party at which Federal Home Loan Bank Board staffers staged a skit mocking their boss, Ed Gray, as a puppet on the knee of thrift lobbyists.

If there's a shortcoming to Day's otherwise admirable reporting effort, it's her inclination to reconstruct the S&L disaster as a morality play, with most of the losses resulting from avarice, fraud, and incompetence. That's a deceptively simple view of the disaster, which was largely the result of structural problems. Yes, the shenanigans of Keating and other fraud artists cost taxpayers billions. But the sad fate of the thrift industry was largely sealed by the early 1980s, thanks to the double-digit inflation of the prior decade that crippled thrifts left holding 3% mortgages. In the 1970s, Congress aggravated matters by letting S&Ls offer higher interest rates to depositors without lifting investment restrictions. That made profitability all but impossible.

Alas, by 1982--when Day's narrative moves into high gear--much of the damage was already done. According to the Congressional Budget Office, fraud represented between just 3% and 25% of the cost of the S&L cleanup. Much of the other money went to pay for the losses on the low-interest mortgages taken out by middle- and upper-class Americans during the 1960s. When interest rates soared during the 1980s, these same people bought certificates of deposit from shaky Texas S&Ls yielding 12% or more. When the thrifts collapsed, the government bailed these depositors out.

This might not matter, except that in Washington, politicians seem just as inclined as journalists to make scapegoats of such rogues as Keating rather than enact politically unpopular reforms of the financial system--namely, curtailing the liberal deposit-insurance program that represents a middle-class entitlement. Trust Me and S&L Hell make for engaging reading, but they raise questions about whether we have learned the right lessons from the thrift crisis and whether we might be doomed to repeat those mistakes again.DEAN FOUST


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