Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, April 1, 1990 TAG: 9004010226
SECTION: HORIZON PAGE: F1 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
That is much more than the government will spend on such critical social problems as preschool education, drug control and aid to the homeless.
It is more than will be spent on highways, air traffic control and pollution abatement.
It amounts to more than $1,300 for every American taxpayer, and it will not enhance national security, promote economic growth or improve public welfare one bit.
It is, by any measure, the biggest debacle in public finance in the United States since the Great Depression.
One way or another, the public will pick up the tab, in the form of higher taxes or reduced spending for other programs.
A natural question is, why has it not become one of the biggest political scandals as well?
To be sure, some elements of scandal are there. Lies, greed, graft, negligence, back-room deals and outright corruption were behind a huge raid on the public till.
Powerful politicians and tycoons were largely responsible.
But it has not become a scandal like Watergate or Teapot Dome in part, and perversely, because too many politicians have had their hands soiled by the savings and loan mess.
So many are to blame that few are left to blame them.
"Literally hundreds of people have culpability on the issue, either through sheer negligence or by working on behalf of savings and loan executives operating renegade financial institutions," said Peter Teeley, an adviser to George Bush in the last presidential campaign. "It is impossible to say this is a Republican problem or a Democratic problem because you have so many people involved on both sides."
Other factors have also limited the political damage:
The enormous scale of the problem makes it difficult for people to grasp.
"Small corruption is easy to understand and, for politicians, usually fatal," said Ted Van Dyk, a longtime Democratic strategist.
"Big corruption is seldom fatal because it is beyond most people's comprehension. People can't understand a $200 billion loss."
The difficulty is concentrated geographically. Although isolated problems have arisen elsewhere, the vast majority of thrift institutions that have failed have been in the Southwest and California.
"In most parts of the country, it's a non-issue," said Donald Kettl, a professor of political science at Vanderbilt University, who has been studying the situation.
No depositor lost a dime. The deposits in the savings and loan associations that went belly up were government insured.
That is why the government became involved in the first place and why it it is costing so much money to bail out the institutions.
The investors alone suffered directly, not the general public.
For an issue to be a cutting issue, said V. Lance Tarrance, a Republican poll taker based in Houston, it must have three characteristics: People must be aware of the elements, it must be meaningful to them in that it affects their pocketbooks or their trust in government and it must highlight a difference between the political parties.
The savings and loan situation fails all three tests.
The seeds of the financial disaster were planted in the Carter administration, when galloping inflation and sky-high interest rates threatened to bankrupt the savings and loan industry.
With their money tied up in long-term low-interest home mortgages, the thrifts could not compete with other financial institutions permitted to pay high rates of interest.
In 1980, the last year of the Carter presidency, with Congress controlled by Democrats, a law was enacted lifting the limits on interest rates the savings associations could pay and allowing them to make a limited amount of consumer loans and investments in commercial real estate.
Moreover, in a deal made in secret that was never debated in public, the law raised the ceiling on federal deposit insurance from $40,000 to $100,000.
In 1982 and 1983, with Ronald Reagan in the White House and the Senate under Republican control, legislation was approved that vastly broadened the institutions' capacity to make unsecured commercial loans and to invest in huge amounts of commercial real estate.
In the years that followed, for budgetary and perhaps ideological reasons, the Reagan administration appointed far too few regulators to monitor the rapidly changing system.
Many savings institutions remained conservative in their investments, but others rolled the dice in the hope of a jackpot.
In the mid-1980s, falling oil prices led to a collapse of land values, especially in the Southwest and California, creating huge losses for those thrifts that had heavily invested in commercial property.
Once they had lost their own investment, unscrupulous owners of the thrifts could essentially gamble with government money.
If a risky investment paid off, they got the profits. If, as often happened, the gamble failed, the government had to pay off the depositors.
Savings and loan executives bought some insurance of their own by developing unusually close relationships with lawmakers and contributing millions of dollars to their campaigns.
"They became a source of loose change in virtually every congressional district," said Professor Aaron Wildavsky, a political scientist at the University of California at Berkeley.
Finally, the bubble popped. Thrift institutions began to fail by the hundreds.
In the last years of the Reagan presidency, the administration, in Kettl's words, "fiddled while the savings and loans burned," ignoring the burgeoning crisis at a time when it might have been solved much more cheaply than now.
In 1987, Congress was assured that the problem could be solved for about $10 billion.
By last year, the estimated cost had reached $159 billion.
And now, as troubled savings institutions that have not been closed continue to lose money, private analysts say the total is rising by almost $12 million a day and is likely to exceed $200 billion.
In 1988, the chairman of the House Banking Committee, Fernand St Germain, D-R.I., was defeated for re-election primarily because of revelations about his connections with savings and loan lobbyists.
Last year, the top two Democrats in the House of Representatives - Jim Wright of Texas, the speaker of the House, and Tony Coelho of California, the majority leader - were forced from office in part because of questionable dealings with savings officials.
Five senators, four Democrats and a Republican, came under investigation because of their relationship with Charles H. Keating Jr., perhaps the highest roller of all.
The failure of his Lincoln Savings and Loan Association will cost taxpayers more than $2 billion.
None of the five senators - Democrats Alan Cranston of California, Dennis DeConcini of Arizona, John Glenn of Ohio and Donald W. Riegle Jr. of Michigan and Republican John McCain of Arizona - is up for re-election this year.
But public opinion polls show their standing has slipped, and the issue would probably complicate their campaigns in 1992 or 1994.
Other lawmakers who could be hurt include Rep. Denny Smith, an Oregon Republican, who sat on the board of an Oregon savings and loan that went under, and Rep. Frank Annunzio, D-Ill., who is chairman of the subcommittee on financial institutions supervision, regulation and insurance and who accepted large contributions from Keating.
But the detritus is so widespread that hardly any politician can afford to point a finger.
Gov. Michael Dukakis tried tentatively in the last presidential campaign to blame the Reagan administration for ineptitude in the matter and had to pull back quickly when Republicans began to turn the tables on Wright.
Rep. Charles Schumer, D-N.Y., accused the Bush administration last month at a Banking Committee hearing of failing to move swiftly enough to meet the growing problem because of internal bickering and turf battles within the government.
But no one joined Schumer in his foray.
"It's regarded as a tar baby," Schumer said afterward. "No one wants to get ensnarled in it. You know, there aren't too many ribbon cuttings when you deal with S&L matters."
But last week as the government reported that the S&L industry lost a record $19.17 billion in 1989 after a fourth-quarter loss of $6.5 billion, L. William Seidman, head of the Federal Deposit Insurance Corp., announced a major probe of a failed Florida S&L.
He said a "fraud squad" of federal examiners is investigating the legality of contributions by David Paul, chairman of CenTrust Savings Bank of Miami, to state and national politicians. Any evidence of wrongdoing will be given to the Justice Department, he said.
Seigman told the House Banking Committee the failure of CenTrust will cost taxpayers "probably in excess of $2 billion."
by CNB