Egads! The S&L scandal lives! (savings and loan crisis)

• Author: Georges, Christopher

Why the government's S&L supercops still let the bad guys break the banks

"Beginning today ... those who loot [the savings and loan system] deserve-and will receive-swift and severe punishment. "

Perhaps it was the light in the Rose Garden, but for a moment back in August 1989 George Bush looked distinctly like Ralph Nader. By penning his name to the numbing 371-page savings and loan reform bill, our laissez-faire leader had somehow given birth to one of the U.S. government's most powerful regulatory apparatuses: the Office of Thrift Supervision (OTS), deputized to drain the swamp of our nation's S&Ls. With unprecedented power to ferret out corruption and safeguard depositors' money, 3,000 OTS examiners soon descended, pencils poised, on America's remaining thrifts. And for a legendarily unscrupulous industry, a scrupulous new era had begun....

This is the way taxpayers, tagged with an astounding $500 billion bailout cost, surely wish the story of the eighties' S&L scandal had ended. And to be sure, thanks to Bush's reform package, the S&L industry of the nineties is cleaner than that of a decade ago. Yet as the S&L crisis fades into the mural of yesterday's scandals, a Washington Monthly investigation of three major thrifts suggests that the problems that brought the thrift industry to its knees in the eighties may persist. While top thrift cops in Washington starchily pledge regulatory toughness, nearly 20 current and former OTS examiners (most of whom spoke on the condition that they remain unidentified) tell a different story-a tale of looking the other way while prominent bank managers squandered hundreds of thousands of dollars on penthouses, pleasure trips, and hunting expeditions. Same old, same old? Not exactly. Unlike the fraud of the eighties, this time the bankers are playing not just with depositors' money, but with billions of dollars from the government's generous bailout.

How are the bankers getting away with it again? To find out, you've got to stash the White House press releases and congressional testimony and track down the folks on the front lines: the OTS examiners.

That these field examiners tend to have the wan countenance of latter-day Bartlebys is no wonder-other government employees tag their work the loneliest job in the world. For weeks on end, they hunker down in back offices to pore over boxes of receipts, loan applications, and thrift managers' personal expense accounts. If their diurnal duties sound a little tedious, their administrative potency is astounding: These are Bartlebys with M-16s, not eyeshades. To make sure the S&L scandal had no sequel, the Bush administration granted OTS accountants and examiners the power to call for FBI investigations and issue fines of a million dollars a day when confronted with cooked books or dissolute spending.

Yet two years later, these S&L supermen are more like a clique of Clark Kents-a phenomenon rooted in a nonpartisan bureaucratic truth: You can change the laws in a matter of days, but to make them work, you have to change the attitude of the officials charged with carrying them out. In the case of the Texas thrifts, the Bartlebys' supervisors in Washington and in the field are the very ones who helped create the S&L rescue plan in the first place. Their stake in proving that their idea was a good one may be so great that, in time-honored bureaucratic tradition, they prefer to silence a few concerned examiners in order to preserve their brainchild.

Of course, the three thrifts we investigated may be isolated islands of S&L self-protection-or they may be the tip of the iceberg. With $500 billion on the line, it should be worth it to Washington to figure out which is the case.

Short thrift

It sounds like a story from the eighties: The CEO of a multibillion-dollar Dallas S&L dips into the thrift's petty cash for a few personal perks. There's the $700,000 or so spent on the lavish private hunting lodge in South Texas, where he, along with friends and clients, unwinds by hunting and shooting trucked-in game. There's a plush New York City penthouse condo costing the thrift more than $7,000 a month. There's even a leased private jet.

Sure enough, government examiners spot what appear to be questionable uses of thrift funds and dutifully report the findings to senior officials at the Dallas-based regulatory office. Given an array of options-from issuing a fine to turning the case over to the FBI-they decide to send a letter urging the thrift to be more careful in the future.

Perhaps the letter gets lost in the mail. For when the thrift's books are reexamined a year later, the examiners spot more unlikely expenses: a $13,000 dinner for four; a ritzy suite at Dallas's only five-star hotel where guests are routinely treated to Dom Perignon and beluga; and a parade of petty cash withdrawals at more than $ 1,000 a pop, many of which go unexplained. Again the examiners cart the evidence back to the office, where this time the punishment is yet another slap on the wrist-a $25,000 fine and a warning to be more careful next time.

The salad days of the S&Ls? Unfortunately, no. The years are 1990 and 1991, and this is the tale of Texas's largest, richest S&L: First Gibraltar, where thousands of depositors blithely invest their savings.

While the Bush administration, egged on by banking leaders, has cried in recent months that regulators are too tough, examiners in the field tell a very different story. First Gibraltar is receiving billions of dollars in federal relief money, but examiners say that its CEO has siphoned off bank funds for personal use. Yet when a disgruntled regulator tried to blow the whistle, it was the regulator, not the CEO, who ended up losing his job.

Nor is First Gibraltar's nonregulation an isolated case. A look at two other thrifts, Bluebonnet Savings in Dallas and El Paso Savings and Loan, reveals that when regulators have uncovered evidence of wrongdoing, field supervisors have repeatedly made the same remarkable choice. Instead of disciplining or punishing the wayward thrifts, they've disciplined the regulators who sought to bring the abuses to light.

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