NO-FAULT CAPITALISM MEETS LEMON SOCIALISM
Progressive Review, August 1990
In the early days of the savings and loan crisis the joke was that in Texas if you bought a toaster oven they gave you a free S&L. It turns out not to have been much of a joke. The Resolution Trust Corporation - the government's misnamed S&L caretaker that is neither producing a resolution nor inspiring trust -- is engaged in a massive giveaway that may make Teapot Dome look like a demi-tasse cup,
The RTC is already the nation's largest operator of financial institutions and, according to the New York Times, "quickly becoming the biggest financial institution in the world, the largest single owner of real estate, the largest liquidation company and the largest auction firm." This ungainly monster of America's late empire period was established without meaningful public debate nor with any serious consideration of alternatives,
But official Washington is not alone in its odd indifference to the nature of the S&L solution. The media --even the op-ed pages and Sunday feature sections -- have largely ignored the question. The topic was not listed on the agenda of The Other Economic Summit ~ the progressive alternative to the meeting of economic ministers ~ even though TOES gathered this year at virtual ground zero of the crisis: Houston, Texas. And Ralph Nader's major concern seems to be which group of taxpayers will bear the fiscal burden of the scandal,
Cost estimates continue to soar - as high as $500 billion if you believe congressional analysts or $1.4 trillion (that's right between the GNP of West Germany and Japan, folks) if you accept the calculation of a knowledgeable Wall Street Journal correspondent. But the press, the politicians and even the public interest groups seem far more concerned about how the crisis came about than what we are going to do about it.
One has to admit the former matter is enthralling and appalling. Put rather neatly by one former FBI fraud specialist to the Village Voice, the S&L crisis is perhaps the largest criminal conspiracy ever created. The FBI currently has some 8000 cases of S&L fraud before it, 1300 of them gathering dust for lack of funds to pursue them. Another 13,000 tips haven't even been followed up, according the Newsweek. According to Rep. John Conyers, to date the government has recovered less than 2% of the money lost through criminal fraud in thrift cases, even though fraud was involved in at least three-quarters of S&L insolvencies,
The sum of money involved is staggering,
Newsweek estimates that even at a conservative $250 billion cost, this is an amount that would pay for existing education programs for the next four years; or nearly pay for universal health insurance and long-term care for the next four years; or overhaul the nation's water systems, repair all bridges and have money left over to start fixing highways. There are currently some 40,000 law suits over all this money and the figure is expected to double by year's end,
But recounting neither the sum nor the sin involved leads to a solution. After all, the broad scandal have been known for some time yet in its wake the president and the Congress have fashioned an extraordinarily shoddy, dangerous, expensive and corrupt jury rig to correct the matter,
Not only is the government failing to solve the problem, it is creating massive new scandals, inequities and public deficits. Not the least of these is the likelihood that the major beneficiaries of the S&L bailout will be the very states responsible for it. . .
Among the other clear beneficiaries of the bailout are the quick-rich financiers who, with their soul brothers, helped to create the scandal. Small business and ordinary citizens are not invited to the RTC's extraordinary fire sales. You can't get a catalog and order by mail. Yet The New York Times reported on July 3 that RTC owns 35,908 properties and "though no specific list has been released, the agency's holdings include coal and uranium mines, ranches and pasture lands, 162 golf courses, oil fields, marinas and boat yards, athletic dubs, garages, parking lots and mobile home parks, 84% of the total inventory is residential - mainly in Texas." Public Citizen notes that the assets include "a buffalo sperm bank, a Nevada bordello, a windmill farm, a share of the Dallas Cowboys, [and] an entire town in Florida." With a few exceptions - such as the RTCs grudging, miserly and belated offering of housing to non-profit groups - the marketing of assets is what they call in the trade a private sale. As a result you may not heard about the satellite auction that will take place in September to sell 98 properties worth $341 million. The government reports that buyers in Japan, Britain and Canada are expressing the most interest. You won't be able to get it on cable,
Billions of dollars worth of assets are being traded at prices that challenge even Crazy Eddie's Emporium in the midst of a recession Memorial Day weekend, - but for the benefit only a handful of huge corporations and redundantly wealthy financial bustiers.
We know - or should know by now - that the crisis was created in no small part by the gluttony and stupidity of advocates of the so-called free market running rampant through America's fiscal countryside. What you may not realize is how far the government's acquiescence went. For example, until the deregulation of the 1980s, S&Ls had to have at least 400 shareholders. By 1981, the government had made it possible for there to be only one shareholder and that shareholder didn't have to have any hard equity in the institution. It was also possible for a S&L to have only one borrower. Further, Congress raised the limit of federal insurance from $40,000 to $100,000 - and that per account rather than per individual depositor. As Rep. Charles Schumer put it, "The government behaved like a fire insurance company that said to its customers, go ahead, play with matches. We'll cover you if anything goes wrong."
Although some Democrats are smugly blaming the Republicans for the S&L disaster, the truth is that this bill passed the House 380 to 13 and by a voice vote in the Senate. In another spate of misdirected bipartisanship, Senator Jake Garn and Rep. Ferdinand St. Germain introduced successful legislation which allowed S&Ls to get into such new activities as junk bonds, unsecured commercial loans and major real estate projects,
Thanks to recent revelations we now have a better idea of why Congress didn't look after our interests more assiduously. As just one small example, one study has found that S&Ls gave $45 million to congressional candidates during the past three elections, including more than $1 million to members of current congressional banking committees. The aforementioned St. Germain, according to the newsletter PACS & Lobbies, received nearly $150,000 in campaign contributions, over a six year period. In contrast, S&L and HUD prober Henry Gonzalez received only $1750 during the same time,
Such facts blast huge holes in arguments that S&Ls were largely victims of changing world economics, regional recessions and other macroeconomic rationalizations. They were, in fact, victims of the avarice of their owners, licensed in their greed by the United States Congress and the executive branch. And the media hardly said a mumblin' word. _ It is this same cast of characters that have given us - or are overseeing - the so-called S&L bailout. The same hidden agendas, the same fiscal fast shuffles, the same class of beneficiaries, the same lack of media concern for the import of public actions,
The drama is reminiscent of corporate reorganizations described many decades ago by Thurman Arnold in The Folklore of Capitalism: "In reality the struggle which attended the 'insolvency' of a great organization could be nothing other than a struggle for political control of that organization. The symbols were debts and credits and sales, and men had to plan their practical campaigns in those terms. This created a situation in which the rules of debts and credits became like the platforms in a political campaign,
"They didn't mean anything. They were full of contradictions. . . The conflict could only be resolved by a public drama where the rules paraded in dress clothes, while a political machine directed the play from behind the scenes."
Behind the public drama of the S&L solution is the most egregious example to date of no-fault capitalism and lemon socialism. The former is the remarkable principle that - notwithstanding all the fawning over the "free market economy" - our largest business institutions are philosophically, fiscally and criminally exempt from the ultimate consequences of laisse faire. The latter is the equally inconsistent principle that to maintain the free market the government is responsible for anything out of which private enterprise can't make a profit. It may not, however, help support this magnificent non sequitur through activities that might actually provide income for the government,
No, the rules of the game are that a major industry is allowed to make whatever mistakes it wishes in pursuit of the holy grail of free enterprise, the costs of which to be fully borne by the taxpayer,
Further, the S&L solution has the hidden goal of moving America towards increasing financial oligopoly. The government is prepared to guide, assist, regulate and tax to accomplish this goal. This sort of economic policy has been seen before in fully developed form and it has a name: fascism, described by Mussolini biographer Adrian Lyttelton as "the product of the transition from the market capitalism of the independent producer to the organized capitalism of the oligopoly." As Italian fascist economic theorist Alfredo Rocco put it, such an economy "is organized by the producers themselves, under the supreme direction and control of the state."
What has taken place certainly involves fraud, malfeasance, misfeasance and nonfeasance. But beyond that, what we are experiencing approaches a fiscal coup. Using the not unreasonable cost estimate of $500 billion we are talking about a sum the size of the combined 1986 assets of General Motors, Exxon, Ford, IBM, Mobil, General Electric, ATT, Texaco, Dupont, Chevron, Chrysler Philip Morris and Amoco,
Our last line of defense - the media - has been absorbed in the human interest and fraud aspects of the crisis, but woefully unskilled in reporting what is really going on. Reading separate stories about an RTC deal is unnerving. In one S&L case, The New York Times listed an institution's assets at $1.8 billion, while the Washington Post pegged them at $3.3 billion. Deposits were $2.1 billion in the Times and $52 billion in the Post. Remember now, we are talking billions. In another story, the Times put the government's annual assistance to an S&L deal at $250 million; the Post called it $250 thousand.
There has been a stunning lack of discussion of alternative approaches to the S&L problem. In fact, the plan represents an escalation in no-risk subsidization of big business even in comparison with such recent precedents as the Chrysler bailout, in which the government retrieved money through exercising stock warrants. Below are some alternatives:
o Provide for government profit-sharing. Although this has occurred to some degree, even in these cases it has been inadequate. After all, in private enterprise, if you put up the bulk of the money, you expect more than 20% of the profits,
o Wait for the market to improve. The sale of government-held assets at prices depressed by current economic conditions and further depressed by the urge to dump them is foolish and costly. The government is ideally positioned to wait for improved conditions,
o Keep a stake in the business. The government could take stock in companies buying failed thrifts as part of the deal,
o Don't pay off depositors who don't need their money. In some failed thrift cases, the government is writing checks to the depositors for the amount in their account. This is not necessary. The money will probably just be put into an account somewhere else. These are, after all, savings. The institution getting the new account will then go out and loan the money for a profit, thus providing another hidden subsidy to the financial industry. It could be cheaper, assuming a medium-term resolution of the problem, to keep accumulating the interest charges.
o Tax the S&L industry for its rip-off of the public. The argument that successful S&Ls should not be held accountable for the failures of their soul mates totters on the history of the crisis. Because of extraordinary lobbying and financial contributions, the entire industry is, in no small part, to blame for this crisis. A surtax on industry profits would be in order,
o Part of the losses could be recovered through a windfall profits tax on income and capital of gains of companies purchasing S&L assets from the government.
o Decentralize resolution of specific cases. Imagine, for example, that all bankruptcies in the country were handled through a central Washington bureaucracy and one can get an idea of the fallacy of the current approach to the S&Ls. It would probably be far better, to treat each situation on a more decentralized basis, using court appointed conservators to manage matters and to decide on the amount and nature of federal assistance to request. Among other things, this would reduce the political intrusion on these decisions,
o Lease rather than sell. Operate on the principle of shopping mall owners who know a sale is here today and gone tomorrow but a lease you can have forever.
o Use loans rather than loan guarantees. And get collateral. The shift towards loan guarantees by the government is a dangerous one with most of the benefits accruing to the no-fault capitalists. It represents yet another hidden subsidy to the financial industry, essentially providing it with no risk loan clients.
o Trade assets for stock in growing companies. Allow the taxpayer to enjoy capitalism, too. If the stock doubles, the government has, in effect, gotten twice what it would have gotten for selling the asset outright.
o Make a virtue of necessity. Depending on how you look at it, 20,000 units of real estate can be a burden - or it can be a housing program. Groups like ACORN would like to see the latter alternative, but have received little help from the administration. Similarly, office buildings could be used to relocate federal agencies, golf courses could become Job Corps centers and garages can be turned into homeless shelters. It's all a matter of how you look at it,
o Start a Bank: With many of the S&L failures concentrated in a few states, there is the opportunity to reorganize them as state banks, modeled on the North Dakota state bank established decades ago to aid farmers mistreated by eastern financial institutions. Some S&Ls could be turned into cooperative banks or credit unions,
S&L stories are relegated to the business pages despite their enormous effect on every American. As a result many readers may have missed, for example, a February 3, 1989, financial page story in the Washington Post. The story, just as the government started rushing pell-mell to dump S&Ls, began: "The head of the General Accounting Office yesterday criticized the government's year-end fire sale of 200 failing savings and loans, saying taxpayers would have paid less in the long run if the S&Ls had been turned over to the government or closed. The Federal Home Loan Bank Board, which oversees and regulates the thrift industry should have held onto the S&Ls rather than promising an estimated $60 billion in tax breaks to the investors who agreed to buy the ailing institutions." The GAO said the Federal Home Loan Bank Board weighted its assumptions in favor of sales by not including tax breaks and calculating unrealistic interest rate figures,
The GAO boss, Charles Bowsher, testifying before the Senate, said it would have been cheaper if the regulators had done nothing. Bowsher proposed that insolvent savings and loans be placed in receivership until regulators could figure out whether it would be cheaper to shut them down or merge them into other institutions.
In a more recent example, the media tended to regard as technical information the news that the Office of Thrift Supervision would temporarily allow the strongest S&Ls to lend up to 60% of their capital to a single developer for residential construction. This is four times the amount allowed under the bailout law. Most Americans remain unaware that its government is slipping back into practices that created the crisis in the first place. Does the media really believe it is too hard for the average person to understand the risks involved with a financial institution lending the majority of its money to one developer? Or does the media not understand it?
Certainly the developers understand what is going on. AP quoted the economist for a homebuilders association as saying, "This will give us some breathing room." Unasked questions Among the questions in which the media has generally been disinterested are these:
o How does each of these multi-billion dollar deals compare with what would happen in a normal business transaction? Or even in previous bids for the same company?
o Are purchasers paying fair price for deposits?
o Why are lists of assets for sale not readily available? Why has the media and Congress not demanded more prior information on these sales?
o Why has the media not done its own independent appraisals of various assets to check on the government's work? The rigging of appraisals was one of the causes of the S&L scandal. A 1985 study by the House consumer and monetary affairs subcommittee said, "Faulty and fraudulent real estate appraisals contributed directly to the insolvency of the nation's financial institutions and have helped cause billions of dollars of losses." There is no reason to believe this manipulation has ceased. As one small appraiser once told me: "There are different types of appraisals. There's an appraisal for an arms-length transaction. There's an appraisal for a deal between friends. There's an appraisal for a divorce settlement. There's an appraisal for insurance purposes and there's an appraisal for estate purposes. Depending on which appraisal you want, that table over there is worth anywhere from $50 to $500." Neither of us at the time had heard of appraisals for a government trying to get a $500 billion monkey off its back and keep campaign contributors happy at the same time,
o Are the government agencies involved in the bailout competent to do the job? Scattered reports from the field should raise far more concern than they have. For example, Rep. Bruce Vento tells of "growing reports of overpaid individuals running RTC-held institutions [and] of officers from failed institutions staying on the government payroll with six figure salaries." Newsweek says of the RTC: "Many of its 3000 employees have little experience in the field." True enough. The government has advertised for staffers in banking magazines and the like but, as one banker put it, "who are you going to get willing to leave" a stable situation "for an 18-month career?" But if this is the case, what does it say for the underlying approach government has taken towards the S&Ls?
If the approach is premised on staking the future of the worst financial crisis of our history on such people, what does it say about the premise? And why so little concern? One of the more extraordinary tales to come out of the S&L crisis is the GAO report that found that the Federal Savings & Loan Insurance Corporation had netted only $57,000 on more than $3 million in S&L assets. The government spent over $2 million with four firms for communications equipment, inventory and appraisal, moving and warehousing. It turns out all four firms had the same owner and competitive bidding had not been used. As New Jersey banking analyst James Marks notes, "When there's that much money flowing, there's always someone who figures out a way to stick his finger in and divert some of the flow."
o Who picked the real estate brokers, appraisers and outside lawyers involved in the bailout and how? We're talking $500 million in outside legal fees alone,
o How does the RTC - and Congress and the media -- determine the difference between bad assets and bad borrowers? The fact that a borrower is going bankrupt does not reveal much about the nature of a particular asset. The media and much of the public seems to have bought the idea that the assets owned by failed S&Ls are all dogs. This is highly unlikely but helps to justify fire sale prices,
On the other hand, the questions the media have asked often miss the mark. Because these questions are frequently planted by "official sources," however, they do reveal some of the hidden agenda behind the bailout. Here is an exquisite example from the Times in a recent weekend roundup of the news: "Does the nation need a specialized industry to finance housing when it now has an efficient mortgage market? Does the nation need 13,000 independent banks and 3000 independent thrifts, or should institutions be allowed to consolidate across state lines, which would also enable them to spread their risks by diversifying their sources of loans and deposits? Most important is ft time to consider changing the system for insuring deposits so that there is less of an incentive to gamble with taxpayer's money?
The clue to the source of such queries is the phrase "efficient mortgage market," one of those delightful terms of art used by economists and financiers which would never be used by the average homeowner or wistful would-be purchaser. The latter would be more incline to favor words like "gouging." In fact, the mortgage market is efficient only to the extent that it has made some people and some institutions a lot of money. It has also developed in such a way that the average age at which someone can afford their first home is rising rapidly, people are paying an exorbitant percentage of their income, and the standard home mortgage has been increasingly replaced by such economic Russian roulette techniques as variable rate financing . . .
In the first part of the 20th century, in the wake of the San Francisco earthquake, as other bankers watched their money disappear in fire and rubble, Amadeo Peter Giannini of the Bank of Italy walked 18 miles from his home to the bank where he retrieved some $80,000 in gold and silver from the vaults, loaded it on a wagon, and made his way to his brother's house in the hills. There he opened for business, loaning the money to San Franciscans so they could rebuild their homes and businesses. He gambled that hs action would encourage others to deposit funds they had been hoarding so he could loan still more. It worked and on this shaky foundation arose the Bank of America, later to become the largest banking house in the world.
In the last decade of the 20th century, in the wake of another great disaster, America has reversed the parable. The money of the taxpayers, needed for their homes and businesses, is being loaded on the wagons of the state for deposit in the vaults of those few who have the means, the political power and the gall to profit from the rubble of the fiscal crisis that has struck the S&L industry,
And America, its politicians, its captains of industry, its media, can think of little else to do about it except tacitly sanction the continued looting in the wake of the great capitalist riot of the 1980s.