The S&L crisis perfected finance crime
When the Great Financial Crisis hit, suddenly there was a lot of talk about the Savings & Loan crises of the 1980s and 90s. I was barely a larvum then, and all I knew about S&Ls I learned from half-understood dialog in comics like Dykes to Watch Out For and Bloom County.
As the GFC shattered the lives of millions, I turned to books like Michael W. Hudson’s THE MONSTER to understand what was going on, and learned that the very same criminals who masterminded the S&L crisis were behind the GFC gigafraud:
Hudson’s work forever changed my views of Orange County, CA, a region I knew primarily through Kim Stanley Robinson’s magesterial utopian novel PACIFIC EDGE, not as the white-hot center of the global financial crime pandemic.
That realization resurfaced today as I read the transcript of UMKC Law and Econ prof Bill Black’s interview with Paul Jay on The Analysis, when Black says, “Orange County is the financial fraud capital of the world, not America, the world.”
Black is well-poised to tell the tale of the S&L crisis. He served as a bank regulator during the crisis, and his notes on the “Keating 5” meeting were the turning point for public and Congressional attention to the crime:
In 1998, he finished a criminology doctorate at UC Irvine (in Orange County!) on the S&L frauds, entitled “The Best Way to Rob a Bank is to Own One,” a title he used for his 2005 book (updated in 2013) on the scandal:
The S&L crisis shares a lot in common with today’s financial crimes, but it had one key difference: ultimately (with Black’s help), more than 30,000 criminal referrals were made against the bankers involved in the crisis, and more than 1,000 were convicted of felonies.
The story of the S&L crisis is both a roadmap for holding finance criminals to account (a roadmap we threw away and forgot about) and a roadmap for committing gross acts of financial crime with impunity (which the finance sector studied carefully and keeps close its heart).
Black calls finance a “crimogenic environment,” in where deregulated institutions become pathogenic, “like a cesspool that produces lots of bacteria and viruses and such and causes lots of infections.”
The S&L crisis began with the Carter-Ronald deregulatory blitz. Both presidents assumed that because S&Ls (a kind of bank) in California and Texas were doing really well after deregulation, that meant CA and TX had nailed it and their example could be expanded nationwide.
In reality, the rosiness of the California and Texas S&Ls’ books was the result of “control fraud,” when a person who controls the bank is stealing from it.
Black likens this to a homeowner who commits insurance fraud — an ultimate insider, who knows the code to de-activate the alarm system and also knows just where the most valuable items are kept.
The major control fraudster of the S&L crisis was Charles Keating, a “top 100 granter” who was among the 100 highest donors to Reagan and Bush I. Keating has stolen a vast fortune from Lincoln Savings, and he was able to trade some of that loot for political cover.
Keating hired Alan Greenspan (!) to lobby for him, and Greenspan suborned five senators (the “Keating Five”) who threatened regulators with dire consequences if they didn’t stop digging into S&Ls.
This was also a priority for Reagan, whose plan for vast tax-cuts for the wealthy might stumble if it the public found out that the US government needed billions to bail out these walking-dead fraud zombies.
Reagan turned to Ed Gray, a PR guy, to run the S&L operation. Gray was hand-picked by the S&L’s trade association, and they told him flat out that he was there to make S&Ls look good — not to blow them up by investigating their balance-sheets.
The problem is that Gray — who was a hardcore Reaganite partisan and deregulation true believer — was honest, and the fraud was so obvious. The Texas S&Ls were originating fraudulent loans to build housing tracts that didn’t exist.
When Gray went out to look at these building sites, he just found endless rows of desolate concrete pads — he called them “Martian landing pads” — and abandoned ruins. These were the collateral on billions in loans!
Gray is a believer in sound finance, and this is undeniable evidence that deregulation has led to catastrophically unsound practices, so he starts imposing regulation on the S&L sector.
Keating pulls strings to sideline Gray, but Gray keeps pushing. Keating gets the leadership of both parties in the House to sponsor legislation ordering him to stop. He keeps going.
Donald Regan — an ex-Marine who went from CEO of Merrill Lynch to Reagan’s Chief of Staff — leans hard on Gray, but Gray won’t stop.
The Office of Management and Budget swears out a criminal complaint against Black for closing too many S&Ls. He won’t stop.
They go after Gray’s guy in Texas, Joe Selby, a former acting Comptroller of the Currency with impeccable credentials, demanding that Gray fire Selby. Democratic Speaker Jim Wright says Selby should be fired because he’s gay. Gray won’t budge.
Homophobia turns out to be a powerful weapon for criminal impunity. Keating sued Black and the Federal Home Loan Bank of San Francisco, claiming the bank’s gay employees had conspired against Keating because Keating was an evangelical Christian.
Gray took finance crime seriously. He had two priorities: one, eject anyone committing fraud from working at any financial institution, and; two, criminally and civilly charge those former execs and take back all the money they stole and ruin them financially.
Black and colleagues took this to heart, making thousands of criminal referrals. When law enforcement refused to act on these, they started publishing their referrals, and newspapers published stories about how none of these criminal referrals were leading to prosecutions.
Gray eventually gets sidelined by a “team player,” the disgraceful Danny Wall, who studiously ignores all the crime that has been uncovered. But then Bush I replaces him with Tim Ryan, whose marching orders are to root out finance crime.
Ryan ultimately made over 30,000 criminal referrals over the S&L scandal, and brought prosecutions against elite criminals, including Neil Bush, the son of the President of the United States of America.
Black: “Tim Ryan sacrificed his career for the public knowingly…he’s been unemployable since.”
And as for Bush I, his first major legislative priority became the removal of financial crime from the jurisdiction of independent watchdogs, so this would never happen again.
This is as far as the interview gets (it’s part one of nine!), but it’s already answering some of the most important questions the Great Financial Crisis raised, like, “Why didn’t any of the bankers who stole trillions from the world go to jail?”
Dykes to Watch Out For strip #90 (1990), “The Solution,” Alison Bechdel
Cory Doctorow (craphound.com) is a science fiction author, activist, and blogger. He has a podcast, a newsletter, a Twitter feed, a Mastodon feed, and a Tumblr feed. He was born in Canada, became a British citizen and now lives in Burbank, California. His latest nonfiction book is How to Destroy Surveillance Capitalism. His latest novel for adults is Attack Surface. His latest short story collection is Radicalized. His latest picture book is Poesy the Monster Slayer. His latest YA novel is Pirate Cinema. His latest graphic novel is In Real Life. His forthcoming books include The Shakedown (with Rebecca Giblin), a book about artistic labor market and excessive buyer power; Red Team Blues, a noir thriller about cryptocurrency, corruption and money-laundering; and The Lost Cause, a utopian post-GND novel about truth and reconciliation with white nationalist militias.