Hey! Randy

Where Have All the S&Ls Gone?

Posted by heyrandy on July 9, 2012

The Best Way to Rob a Bank is to Own One, William Black, 2005

This book is an insider’s look at the savings and loan crisis of the 1980s. Black was an attorney working for the Federal Home Loan Bank Board. He saw first hand the machinations, cowardice, and corruption that went on within the industry and its regulators.

This book is an example of capture theory. Capture theory states that an industry regulated by the government will eventually capture the agency charged with regulation. In this specific case most of the capture was by one man: Charles Keating.

Keating was such a political force there is a group of five U.S. Senators named after him: The Keating Five. The five men, four Democrats and one Republican, ran much political interference for Keating. This enable Keating to keep looting Lincoln Saving and Loan. The Five have never been held accountable. One of the Five, John McCain, even got the Republican presidential nomination. Who says discipline themselves? Maybe Jim Wright.

Wright, Speaker of the House of Representatives and therefore the second most powerful person in Washington, was largely owned by Keating. This ultimately lead to Wright’s resignation in disgrace.

Black spends a good deal of the book writing about the head of the Bank Board. This key person did the most to perpetuate the problems with the industry. His actions were always politically driven. This shows the one of the problems with regulation. Aggressive enforcement would cause the offenders to play their political cards. This would cause great problems for the Chairman. Even if the Chairman could withstand the political heat, he knew that his future in government was dead. He also knew he would have no job chances in the industry. So it was a case of play along to get along.

The title of the book is a reference to what Black calls “control frauds.” These are the men who control the company they are looting. Most of these men were major stockholders in the company. So why did they steal from themselves? Because that was where the money was. They got much richer much faster by fraud.

Corrupt accountants and real estate appraisers abetted the fraud. They overvalued land, recorded losses as profits. Big accounting firms gave glowing reports about their clients. The auditors and appraisers had play along to get repeat business. An honest appraisal or an audit that exposed the wrong doing would result in the appraisers and auditors not doing any more work for the control frauds.

The author has much expertise in fraud, but he show great ignorance in the real fraud that is modern banking. He says the S&Ls were insolvent because of their bad loans. He overlooks the real problem that comes from fractional reserve banking. All banks are insolvent. All banks are subject to catastrophic runs. When you lend out at thirty year notes but support those loans with demand deposits, you have a fraud.

The author further excuses government bank insurance as not being part of the problem. Apart from the moral hazard issue, the control frauds used their political might to keep the Bank Board’s insurance fund low. This was to prevent the Board from taking over too many banks or even the large ones.

Not answered by the book is why the Bank Board did not refer the obvious cases of fraud to the Justice Department. Black does not record anyone being prosecuted for not doing this.

The book’s inside view and first hand accounts make it a valuable resource for historians. The rest of us see it as a fine example of how the government can make a big problem into a disaster.

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