The S&L Blowout and Greenspan’s Game

The following is an excellent excerpt from the book “ALL THE PRESIDENTS’ BANKERS: The Hidden Alliances That Drive American Power” by Nomi Prins from Chapter 16: “The Late 1980s: Third World Staggers, S&Ls Implode” on page 352 and I quote: “The S&L Blowout and Greenspan’s Game – The deregulation of the S&L industry between 1980 and 1982 had enabled thrifts to compete with commercial banks for depositors, and to invest that money (and money borrowed against it) in more speculative real estate ventures and junk bond securities.  When those bets soured, the industry tanked.  Between 1986 and 1989, 296 thrifts failed.  An additional 747 would shut down between 1989 and 1995.

Among those, Silverado Banking, Savings and Loan Association went bankrupt in December 1988, costing taxpayers $1.3 billion.  Neil Bush, George H. W. Bush’s son, was on the board of directors of Silverado at the time.  He was accused of giving himself a loan from Silverado, but denied all wrongdoing.  Records in the Bush archives show seven pages of redacted communication related to Neil Bush in early 1990.  Another son, Jeb Bush, has already been dragged through headlines in late 1988 for his real estate relationship with Miguel Recarey Jr., a Cuban American mogul who had been indicted on one charge of fraud and suspected of up to $100 million of Medicare fraud charges.

But the most expensive S&L failure was Lincoln Savings, a debacle that cost taxpayers $3 billion.  The flameout also led to the Keating Five political scandal, in which five US senators were implicated in accepting campaign contribution bribes from Charles Keating.  Keating had secured a study from Alan Greenspan, then a private sector economist, concluding that direct speculative investments were not harmful.

It took several months of internal political battles before the Bush S&L plan headed to the House floor for consideration, but finally, on June 14, 1989, it was ready.  On the same day that the Bush team was presenting its S&L package, Greenspan was swiping at Glass-Steagall, retreading the well-worn theme of global competition before the Senate banking subcommittee.  He claimed that current regulation put US banks at a competitive disadvantage and thus inhibited the US financial system’s growth globally, and by extension the very stability of the country (using the angle Reagan had mentioned at this swearing-in ceremony).

“There is no question we are being significantly suppressed by the Glass-Steagall restriction,” said Greenspan.  “My concern is that as we continue to internationalize . . . we are in effect inhibiting our institutions from fully participating in that.”

With Greenspan on deck advocating the repeal of Glass-Steagall, New York bankers reinvigorated their drive to expand across state lines and to circumvent New Deal limitations on the financial services they could hold under one roof, such as the inability to purchase insurance companies.  Their argument was that insurance restrictions should not apply to subsidiaries of bankholding companies.  In other words, just because banks couldn’t own insurance companies, why couldn’t their subsidiaries?

In practice, this was a minor but important distinction.  As Philip Corwin, senior legislative counsel for the American Bankers Association, put it, the issue had gone from a “turf fight (between insurance and banks) to a consumer issue.”  In a rather odd alliance, the Consumer Federation of America supported the big banks’ campaign for insurance powers.  The CFA subscribed to the notion that the more firms were involved in insurance, the more it would increase competition and thus decrease rates for individual consumers, an argument disproven time and time again.  For when big firms expand their reach, consolidation, and power, the actual result is higher prices.

Bush’s S&L bailout plan became the Financial Institution Reform, Recovery and Enforcement Act, signed on August 9, 1989.  The FIRREA abolished the Federal Savings and Loan Insurance Corporation (FSLIC) and allowed the Federal Deposit Insurance Corporation (FDIC) to insure S&L deposits.

The centerpiece of the act was the establishment of the Resolution Trust Corporation (RTC) to handle savings and loan failures.  The first resident of its oversight board was Daniel Kearney, a banker who had spent a decade in Salomon’s real estate financing department creating the very securities that had combusted on the books of the S&Ls.  The RTC would be funded via a new privately owned corporation, the Resolution Funding Corporation (FEFCORP), which would issue $30 billion in long-term bonds to raise the needed capital beginning in 1990.

This proved another boon for the big commercial banks.  They could profit by virtue of their intermediary positon selling those bonds into the market, while the government was subsidizing the entire project.

Within six years, the RTC and the FSLIC sold $519 billion worth of assets for 1,043 thrifts that had gone belly up.  Key Wall Street banks were involved in distributing those assets, making money on financial destruction once again.  Washington left the public on the hook for $124 billion in losses; the thrift industry lost another $29 billion.”

(THE FOLLOWING IS PRAISE FOR THIS BOOK AND ABOUT THE AUTHOR AND I QUOTE:

“The relationship between Washington and Wall Street isn’t really a revolving door.  It’s a merry-go-round.  And, as Prins shows, the merriest of all are the bankers and financiers that get rich off the relationship, using their public offices and access to build private wealth and power.  Disturbing and important.”      –Robert B. Reich, Chancellor’s Professor of Public Policy, University of California at Berkeley

“Nomi Prins has written a big book you just wish was bigger: page after page of killer stories of bank robbers who’ve owned the banks–and owned the White House.  Prins is a storyteller.  She turns the history of the moneyed class into a breathless, page-turning romance–the tawdry affairs of bankers and the presidents who love them.  It’s brilliant inside stuff on unforgettable, and unforgivable, scoundrels”     –Greg Palast, investigative reporter for BBC Television and author of Billionaires & Ballot Bandits

NOMI PRINS is a journalist, speaker, respected TV and radio commentator, and former Wall Street executive.  Author of five other books, including Other People’s Money and It Takes a Pillage, her writing has been featured in the New York Times, Fortune, Mother Jones, the Guardian, the Nation, and other publications.  She is a senior fellow at Demos.  Follow her on Twitter @NomiPrins.”

MY COMMENTS: ONE OF THE BIG PROBLEMS IN BANKING WAS THE S&L CRISIS AND HOW THAT ENDANGERED THE ENTIRE BANKING SYSTEM WHEN THE S&Ls PROMOTED JUNK BONDS AND CREATED SUCH A CRISIS THAT THEY HAD TO MERGE THE S&Ls WITH THE BIG BANKS WHICH EVENTUALLY LED TO A REAL CRISIS IN 2008 BECAUSE THE CONSTANT EFFORT TO ELIMINATE THE GLASS-STEAGALL ACT WHICH CLIMAXED IN 1999 WITH IT’S REPEAL.

LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran

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About tim074

I'm a retired dairy farmer that was a member of the National Farmer's Organization (NFO). Before going farming, I spent 4 years in the United States Air Force where I saved up enough money to get my down payment to go farming. I also enjoy writing and reading biographies and I write about myself as well as articles and excerpts I find interesting. I'm specifically interested in finances, particularly in the banking industry because if it wasn't for help from my local Community Bank, I never could have started farming which I was successful at. So, I'm real interested in the Small Business Administration and I know they are the ones creating jobs. I have been a member of Common Cause and am now a member of Public Citizen as well as AARP. I have, in the past, written over 150 articles on the Obama Blog (my.barackobama.com) and I'd like to tie these two sites together. I'm also on Twitter, MySpace and Facebook and find these outlets terrifically interesting particularly what many of these people did concerning the uprising in the Arab world. I believe this is a smaller world than we think it is and my goal is to try to bring people together to live in peace because management needs labor like labor needs management. Up to now, that hasn't been so easy to find.
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