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"The Risks Were Too Good to Pass Up," by Anthony M. Solomon, The New York Times Book Review, October 29, 1989. More on
A hard-hitting, credible expose of the government and private management fraud that ushered in the national S&L disaster.
"Crisis? What Crisis?" The Economist, December 2, 1989.
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by Anthony M. Solomon |
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page 1 of 2 The insolvency of huge segments of the United States savings and loan industry marks a sorry chapter in this nation's financial history. The magnitude of the corruption, greed, incompetence and cynicism of those who mismanaged or plundered hundreds of thrift institutions--or covered up what was going on--breaks all records. Many lawyers, accountants and regulatory specialists who should have blown the whistle were either duped or inept. A disturbing number of high Government officials displayed appalling judgment. In the end, the costs to the taxpayer, the real victim, will be colossal. Now the whole disgraceful episode, though far from over, has spawned a flock of carefully researched, well-crafted books chronicling the fiasco. Three particularly good ones are "Other People's Money," by Paul Zane Pilzer with Robert Deitz; "Inside Job," by Stephen Pizzo, Mary Fricker and Paul Muolo; and "The S&L Insurance Mess," by Edward J. Kane. Each has a somewhat different focus and different audiences in mind, but all provide genuine value to their readers, whether they are already reasonably well informed or only casually acquainted with what has happened. If none are fully successful in coming to grips with the broadest policy dimensions and implications of the thrift industry debacle, that is surely forgivable, for the situation is still fluid. Because Mr. Pilzer is in real estate development, he has some firsthand experience of what went on. He has teamed up with Mr. Deitz, an editor of The Dallas Times Herald, and together they have written a highly readable introduction to the thrift disaster. They recount the history, the legislative background, the gambits used to exploit new powers granted to the savings and loan institutions in the early 1980's by a deregulation-minded Congress, and the duplicity of Washington heavyweights who used their influence to stop remedial regulatory action. Of the three books, this one is probably the best all-around treatment, despite sometimes irritating overgeneralizations and hyperbole. * Mr. Pilzer reveals a key point: the dangers inherent in a system of large- |
scale Government insurance of deposits.
These were clearly foreseen right at the outset--and by none other than
Franklin D. Roosevelt in 1933, as he was about the become President.
He (and others) understood the potential for abuses, and tried to head
off legislation supported by populists like Huey Long and Texans like
John Nance Garner (the incoming Vice President). But the political
pressures for deposit insurance were overwhelming. In 1933, the
Federal Deposit Insurance Corporation (F.D.I.C.) was established for
banks; in 1934, the Federal Savings and Loan Insurance Corporation (F.S.L.I.C.)
was added for thrifts. Through the system, as Mr. Pilzer explains, held together until the 1970's, it was always fundamentally fragile. Savings and loan institutions provided long-term fixed-rate mortgages that were financed by short-term savings deposits. As long as interest rates remained relatively stable, this was a profitable activity. But when inflation dramatically escalated in the 1970's, the business was doomed. Many thrifts, subject to an inadvisable interest-rate ceiling imposed by Congress decades ago, faced calamity as deposits were withdrawn, lured by the far higher yields available on money market funds. But interest rate deregulation, which began in 1980 under Jimmy Carter, was no panacea, either. Once free to compete, thrifts could hold onto deposits, but at the stiff price of offering higher interest to depositors--and that meant losses on the savings institutions' existing low-interest mortgage portfolios. What ultimately proved more disastrous, as Mr. Pilzer and the other authors show, was a string of poorly thought-out decisions by Congress. The first was to increase the maximum deposit insured by the Government from $40,000 to $100,000. This encouraged deposit insurance brokers, who could place large sums divided into lots of $100,000 each, to shop for the thrift willing to pay the highest interest rate--no matter how shaky its assets or bad its management. These so-called "brokered deposits" poisoned the system. Egged on by thrift industry next |
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