Move over, Charles Keating.

• Author: Waldman, Amy
• Position: Causes of the savings and loan scandal

Mother Teresa called him Charlie, as in, "How is my friend Charlie Keating?" That was the Calcutta matron-saint's first question to Senator Dennis DeConcini when they met. To her, Keating was the devout Catholic who had given her a $1.4 million donation.

To most Americans, Charlie is a crook. Keating's abuse of his Lincoln Savings and Loan--and the favors he purchased from DeConcini and four other senators--provoked a $2.5 billion taxpayer-financed bailout: 10 dollars from every man, woman, and child in America. Keating personifies the rank thievery that characterized the savings and loan crisis, the largest financial disaster since the Depression. It has already cost at least $110 billion--a figure that could more than triple by the time we finish paying. This debacle made it more difficult for Americans to buy homes. And it left the country deeply cynical about the failure of its political system. Much of this you can blame on greedy rogues like Charles Keating.

But not all.

In the seventies and early eighties, a host of special interests, including some you might not suspect, laid the groundwork for the crisis. Consumer and senior citizen groups--groups often assumed to speak for the public interest--put thrifts in a desperate bind by lobbying to keep loan interest rates low and deposit interest rates high. In other words, S&Ls had to pay out a lot more than they could take in. In return, another set of lobbyists, speaking for a small but powerful group of S&Ls, pushed Congress to jack up their insurance coverage to $100,000 per depositor, exposing their insurers--the taxpayers--to more risk. In 1982, those same thrifts won permission for S&Ls to move beyond low-risk housing loans. This encouraged renegade thrifts to take risky gambles with federally insured money. Charles Keating was just around the bend.

As lobbies press the 104th Congress to give banks greater risk-taking powers, while leaving their deposit insurance safety net intact, it's worth remembering what the S&Ls taught us: When special interests, competitive or cozy, come together to make policy, the outcome rarely reflects the common good. As the S&Ls brazenly remade themselves in the early eighties, special interests got a lot. All we got was screwed.

The Old, the Bold, the Angry

The S&L tradition that lobbyists took two years to unravel dates back to the Great Depression. After thousands upon thousands of home foreclosures, the government stepped in, establishing a contract of sorts. Savings and loans, or "thrifts," would be allowed only to make home mortgage loans; in return, their deposits would be insured. Deposits at full-service banks were given the same insurance, but thrifts were allowed to pay slightly more interest on savings accounts to give them an edge in attracting money. Thrifts would also receive tax breaks. As much public utility as private enterprise, savings and loans--and the millions of homes they financed--testified to the success of New Deal liberalism.

For more than three decades, running a thrift was, for most, a blissfully simple business: Take in deposits from the community, give out loans for housing. Americans bought homes in large numbers, so there was no lack of business. Congress controlled competition among S&Ls by capping the amount of deposit interest they could pay and kept banks, thrifts' main competitors, at bay.

Traditional banks weren't happy, but there was little they could do. America's political culture and power centers were changing: The Eastern establishment was increasingly irrelevant politically, and banks embodied that establishment. Banks mocked the S&Ls as the "polyester lobby," but a Democratic Congress thought of S&Ls as the "salt of the earth," and bankers as snobs. "The banking business was hard to get into if you were in the wrong religious or ethnic group," concedes Denis O'Toole, a former lobbyist for the American Bankers Association. "The industry was dominated by Ivy League types, the Brahmins of the community." Savings and loan executives, understanding that their survival depended on political favor, became powerful political animals. They made friends with legislators, and helped run and bankroll campaigns.

Thrifts also had, as their bodyguard on the Hill, the U.S. League of Savings Institutions, one of the country's most powerful lobbies. The League milked the industry's social function, populist image, and its 4,000 members' presence in every congressional district. Long before fax trees or phone banks, the League had mastered grassroots lobbying. At crucial moments, it would blanket the Hill with S&L executives and flood Congress with mail.

But in the seventies, clouds began to mass over this pastoral scene. The thrifts' income came from portfolios of low, fixed-rate 30-year loans--loans to which they were bound. And when inflation began to push up interest rates, S&Ls were hamstrung. They began losing deposits to money market accounts and mutual funds, which, unlike S&Ls, could pay as much interest as they wanted.

In 1979, the storm broke. Paul Volcker, the chairman of the Federal Reserve, "spiked" interest rates--sending them over 20 percent at one point--to control escalating inflation. That year, only seven percent of S&Ls were losing money; only one year later, 85 percent were in the red.

Throughout the seventies, as deposit interest rates rose, the thrifts had been pushing for adjustable rate mortgages, which would allow them to tie home loans to market interest rates. In other words, if a thrift's deposit payments went up, so would its charges on loans.

This was crucial. Thrifts' primary income was the interest they collected on loans. And their primary expense was the interest they paid on deposits. Take yourself as...