A Word on Words; 0912; James O'Shey

A word on words, a program delving into the world of books and their authors. This week, James O'Shea of the Chicago Tribune talks about the daisy chain. Your host for a word on words, Mr. John Siganthaller, publisher of the Tennessee. Good evening, ladies and gentlemen. Welcome once again to a word on words. This evening, we're going to be talking about something that's on the minds of an awful lot of people in the world of finance and on the minds of an awful lot of ordinary citizens. The story of the SNL crisis debacle scandal. The book is called the daisy chain and the author, James O'Shea of the Chicago Tribune. Welcome, Jim. Thank you. A word on words. It's nice to be here. Very good to have you here and it's good to talk about a subject which I think has developed into one of those great scandals that produces wonderful books. And I congratulate you on having the good judgment to seize on the scandal.

Of course, it began with a series of articles that you wrote for the Tribune. Yeah, I was a series called Barrow Trouble in 1988. And the scandal was still really not front page news at that time. Most everyone said that it wouldn't result in a taxpayer bailout and that the industry could take care of the problems. It was a manageable crisis. So we did a series of stories and then after that, I decided I wanted to get into it a little more and try to develop the story to show that it was just more than a bunch of guys stealing a little money. It was something that was a problem that was rooted in the political system that we have. You know, savings and loans, I mean they've become a dirty word. Hardly a day goes by if you listen to radio talk shows or if you watch all the cable stations, financial news networks, sell them a day goes by without another development.

And as we sit here, Charlie Keating is worried about his fate and you knew this was an national story before many of us understood that. Before many of the regulators admitted that. And then you decided after the series had run, it's going to be a story that had a lot of shelf life. And so a book would make sense. And you picked, well you say why you picked. I picked Vernon savings and loan because when I was doing the series, I had touched on a lot of different savings and loans, the Keatings, the Danny Faulkner and a lot of these Texas characters. But when I wanted to do a book, I decided I wanted to find one savings and loan that if I followed it from its birth to its death, it would touch upon every element of the scandal. I think Vernon was uniquely that it had the excesses, it had the criminality, it had the

color, the trips to Europe, the yachts, the cars, the prostitutes, all of that. It had the political skull duggery and Vernon became intricately involved in attempting to stop the regulatory process and the legislation in Washington from becoming law that would allow it to shut some of these down. And it also, in 1988 at the year end, they had these fabulous sales and Vernon was part of one of these sales and it became part of a ward of the Resolution Trust Corporation so that if you follow it from beginning to end, you really touch upon every single element of what caused this crisis and what caused the scandal and then what caused the scandal to develop into a crisis and it's not like it's typical, I mean not every savings alone had everything going, everything going on like that. But this one uniquely and I think of all of them that I looked at was the only one that if you followed it from beginning to end, you would hit every single element of it and

you could probably just kind of figure out what went on. Talk a little bit about what it takes to corrupt the system and the institution the way this one was corrupt at that. I'm really thinking of the unique personalities involved. It seemed to me that in addition to having every other element, you did have some personalities here who sort of emerged as great characters, almost prototypical symbols of the problem. That's true. You had Mr. Tanner who originally owned the savings loan, was the sort of salt of the earth type. Everybody trusted them. Everybody trusted them and he was the kind of guided owned savings alone. In the late 70s and early 80s, that sold out to the arch-typical developer, Don Dixon, who's the kind of the cuisine art cowboy kind of guy, who mixes a little of the old with the new and then you had the regulatory people were typical, the SNL commissioner didn't

want to take the trips to California and all that. So it was, the characters involved in it were very rich in detail and made a great yarn. Well, everybody wants to do it. It reads like a novel, I mean, you could put it on the screen and make a fictional television mini series. And the personalities, I think, who emerged did indeed contribute to the life of the book and the vitality of the story. Well, Dixon was a typical developer who believed that you could borrow anything and the truth no matter what, anything. And so he made a great character and he was one of the kinds of guys that would just try anything. And so, when it came to some political guy standing in his way or something like that, he believed and he'd try to corrupt him. Biam or Biam? Biam? Beat him. He didn't care which way around him. He was one of these guys and was just going to get to where he was going and he was going to knock down anybody who stood in his way.

And amazingly, I didn't think it was, it took too much to corrupt the system because I think he had, there was a legitimate problem there. The government regulations that had been imposed upon the industry are not imposed upon that the industry had adopted for many, many years. Had started creating problems for him. So there was a legitimate effort to change the system and so Dixon just sort of capitalized on that. And since he was a little more flamboyant and a little more willing to push the limits to that as far as he could, he didn't have his heart of time corrupting the system. You know you say that not every SNL and it was corrupted and indeed most were not. Still all there was a stream of corruption that is traceable through too many SNLs. What was the contagion that took hold? I mean, was there a dynamic in the cases of the SNLs which became involved in the scandal

that collapsed because of the corruption? Was there a thread that linked them, did it take the chemistry of a broader approach to where they could lend money, the involvement of developers who were taking over the SNLs to promote their own businesses, the unique personalities, the corrupt regulators? Is that why it happened and focused only in a few states? Well, I think part of one of the reasons that it focused in two states, really California and Texas initially, part of the reason is that when they deregulated the savings in loan industry, they did allow people in that weren't in before. Before that, you had to have a community-based kind of ownership structure where you would have stockholders from the local community that had to be 50, you couldn't make loans more than 100 miles outside of the, 100 mile radius that the SNLs made in office.

Those sorts of protections were in it and they made them more like the neighborhood credit union is really what it was like, very much like that. And they opened that up and they allowed the developers to come in and own them. They created and just built-in conflict of interest because of real estate development. And by the way, you mean the federal government? The federal government, the Congress, everybody was on board for this too, the industry itself wanted this, but they created and just built-in conflict of interest because a developer cannot use the money that he borrows from a depositor and guarantee the safety unless you have a federal guarantee, which is what we had, which is what caused the big taxpayer loss. But the common threat, I think, was that there was a lot of greed going on. I mean, there were a lot of people who wanted to make a lot of money because Dixon and this group, or his cronies, his small group of people really started the problem because they were the kind of corrupt ones, they would push the limits. But once they got going and they were getting deposits into their savings loans by offering premium interest rate in the Wall Street Journal, drawing in money from pension funds and banks

and other savings loans, life insurance companies, mobsters, oil shakes, you name it. They were all trying to get that extra quarter percent on these huge million dollar deposits. They had deposit brokers that broke the accounts down into smaller accounts of less than 100,000, so they would qualify for the federal insurance. Because as money comes pouring in, they had to lend it out into kinds of deals that would generate a high enough return to pay the interest rates. When those loans started going bad, other savings loans, seeing what Dixon had done and seeing the kind of enormous paper profits he was posting because, you know, in 1985, he was the most profitable savings loan in the nation. All the other people who were kind of deciding they wanted to grow fast, they wanted to be like this guy, they got in on the race and they began buying loans from him and buying his CDs and doing all this and the problem started spreading throughout the system.

It was like a cancer, just spreading and spreading and spreading. And that's how it got so bad because initially you had a couple of hundred savings loans doing this, but as they began selling their loans and getting in the participation deals and all these other savings loans, the problem began spreading. And of course, what you see is, look, in retrospect and what you saw when you first got into it, was the development entrepreneur turned SNL executive, feathering his own nest with gold. Oh sure, these people were, why would you go to a bank in borrow money at 2% over the prime rate? Well, you can eliminate all that, all you do, you're going to the depositor, in effect, the way they set it up, they went to the depositor and they're borrowing the money at a time when interest rates may have been 14%, they're borrowing it at 8. Then they turn around and they lend it to their own deals. So they say they take a million, they borrow a million from depositors and they turn around

and lend it to a land deal that they're involved in. And of course, they take a development fee that's right up front so the first, the million dollars goes through and 300,000 disappears in their pocket right away. That sort of thing went on all the time. You know, we've all read about the weird sorts of developments that some of these, some of these people put money into, I mean, country clubs and exotic spas, I mean, Dixon had his own little list of unique loans, do you want to talk about? Well they, Vernon Savings probably had more access than any other one. They invested in some, some legitimate deals on those buildings and things like that. But Vernon owned six airplanes, they had, they owned their lease, they had a yacht and it wasn't just any yacht, it was the presidential, the sister ship to the presidential yacht Sequoia, which Jimmy Carter sold on economy grounds. They had a beach club in which there was investments, they had a, they had a, they had the yacht

and the airplanes and then they also had a, had a hunting club that was near Vernon where he used to go and hunt birds. They had just, just, just the list went on and on all of this, all of this is investor supported. I mean, it's, it's the money of the investor that's been taken and, and turned into credit. It's the money of the depositor, I mean, really that's what they were doing, they were spending those deposits. See, he invested in an art collection. He also had an antique car collection, which included this Mercedes, it reputedly was actually, by Adolf Hitler's mistress. Well, you know, the book is just chock full of interesting anecdotes and I ask you to tick some of those off because it seems to me that beyond the technical fact of a savings and loan crisis that's now threatening to, to bankrupt, further bankrupt a depressed economy and the burden on the federal government is enormous and beyond that, the technical aspects

of that, which are covered very well, there are these fascinating little anecdotes, tidbits, human interest scandals that are virtually, I mean, they're on the verge of being unbelievable. I'm sure you must have been shocked as you went through initially writing, writing this series to find that it's not just Vernon savings and loan, it's a story that was replicated. It was replicated in dozens of other savings and loans. I don't think they got as bad, I don't think there are many that had their little suarez out in California where they hired the girls and all that, I don't think any of them got quite that bad, but this was repeated in savings and loan after savings and loan. It's almost like these guys would get together and see if they could outdo each other. I mean, some of the crazy schemes they had, the one guy down in Texas that had applied to open an office on the moon and even had it spotted, which part of the moon he wanted

as often. Well, part of what this program's about is how authors come to write books. I think you must have understood as you were working on that series for the Tribune, that the makings of a terrific book were there, but it does take an emotional and intellectual commitment to say I'm going to stop doing what I'm doing, or I'm going to try to fit what I'm committed to do in terms of my daily job and then set aside some additional time each day. I mean, how did you do it? Well, I started off, I decided, when I decided I wanted to do the one book, I did realize right here you had an incredible opportunity because you had a good story. This is, and it's the story that's just, you know, it's made for a book, it's almost

better than fiction because you could make it out of corruption. So, and I thought, you know, it's so tempting to take a very complex subject, it's very much of a challenge to take a complex subject, and then you have all this color that you can wrap in so you can keep a reader moving along. But then I took off basically two and a half months in the spring of 1989, and initially I thought I would write the book there from material that I had gathered during the series. And I decided, though, I wanted to go back to Texas and out to California, well, I ended up using six weeks of that two and a half months doing more reporting down in Texas and California and Louisiana and all around the south, and then I, so the month of August, I spent writing, and then the rest of the time I did it in the morning, I would get up at 4 a.m. and write until 11, then I went to work at noon, and I was at that time I was the news editor in the Tribune's Washington Bureau, so I wouldn't, I wouldn't get off

you typically until later, nine o'clock at night. So I just sort of double shifted for a while, and then the next year, early, the next year, I took some vacation and did some rewriting, so, but it is a tremendous commitment because you have to, but once you get started, you kind of, it becomes a challenge to keep going, sometimes it's a challenge to stay awake. Well, some authors actually find that it in and of itself is infectious, I mean, once they're into it, whether they're working as journalists or whether they're homemakers or whether they've got some job as a lawyer, I don't know, we've all known now the case of Mr. Grisham down Birmingham, the lawyer who wrote the firm is now giving up to practice a law to write books, what has the magnet drawn you to that extent? Well, I think it would be very much, it would be a lot of fun just to write all the time. I think that would be probably the ideal way to make a living, but it's a tough way to

make a living in this current atmosphere when the publishing business is sort of on hard times. But yeah, I would love to eventually do that and would plan on trying that and once the pace of world events ever settles down, I could tear myself away from the business. Let's talk for a minute about just how devastating the scandal is. I mean, each month it seems that somebody ups the ante is going to be required to bail out the SNLs. How threatening to the economy is it? Well, thus far, since we've had the federal deposit insurance, we've been able to insulate the impact of it on the confidence in the economy because they've made everybody's deposits good.

The system, in fact, worked the way it was supposed to. But as you can see from this year's budget deficit, you're looking at $300 billion deficit and it keeps growing. A lot of that is the savings and loan problem. I think when I started writing about this, I remember I had said into my series that although the federal government downplayed the problem, that there were probably 1,000 savings, there were 3,000 savings loans at that time, with about a trillion dollars in assets, which is about, I would say that's about half of the size of the banking industry, half to two thirds. That time I said there were 1,000 that were broke, 1,000 that were almost broke, 1,000 that were in good shape. They said I was crazy. It was much smaller than that. Well, they've closed upwards of 5 to 700 and now go to 1,000 closing. I don't know what will happen to the other 1,000 and 1,000 will remain. But I think that for this is over, the SNL industry will shrink by anywhere from 25 to 50% of the original, or it's a third to a half of the original Los Nels will disappear.

That money will be paid, what it costs is going to be paid for by you and I as taxpayers. I think it is having a drag on the economy right now. I think that's why it's very hard to get the economy going again because you've got the next additional burden and then it's spread to the banking industry and the banking industry is much more reluctant to make loans and you're seeing a lot of the same, they're beginning to deal with the problem and the banking industry. The same way they've dealt with the problem, the savings alone industry, I mean the parallels are real ominous because you have an industry that was in trouble and it was in trouble partially because of rain. And here you mean the banking industry, not the SNL, you have an industry that is in trouble having trouble in its own basic lines of business. So instead of saying it's really got a problem, it denies and has a problem which is what the savings and loans of people did. They fight restoring the solvency, the system by increasing the premiums, they have to pay all the bankers have faced up to that and are now paying it.

They go to Washington with their problem and say we've got to resolve it with new laws, we have to deregulate the industry. That's what they did with the savings and loan industry. We have to allow new blood, new people into the industry, that's what they want to do with the banking industry, that's what created the problem in the savings and loan industry. And you have the Congress dittling around not passing anything, just playing politics with the issue and that's what they did with the savings and loan and that's how it got so bad because the longer that we're allowed to remain operating, the non-dictions of the world could remain operating, the bigger the problem got. You know, many of us were fascinated, almost fixated by the Keating hearings. We saw that turn into a major political scandal, senators on trial in a forum where they were judged by their peers.

The testimony, I thought, focused interestingly on the regulators for a period, which brings me to the question, I mean, Don Dixon found regulators pretty easy to corrupt, got the right people and moved them in one direction. On the other side, you had people who were being regulated going over the regulators to the Congress and get me some relief from these tough regulators. That was the other side of the coin. What's your judgment about how the regulators perform the SNL crisis? I mean, we know that some are corrupt. How much blame can be put for the regulator? Well, I think a lot of them, particularly the lower level guys, really did say, hey, wait a minute, this isn't right, and we should stop it.

They were stopped on the higher levels in Washington because people could get to the, and you know, amazingly, you didn't see a lot of paying off regulators, people taking bribes or anything like that. A lot of it was just in the political system, they didn't want to admit that they had the problem. I mean, they didn't want to admit that this was a much bigger, that they had really screwed up on a massive scale. Well, it raises a parallel question with the current problems in the banking industry. I see bankers every day, every city I'm in, if I'm having lunch or I'm introduced to somebody, even close to the banking industry. The complaint from them now is regulation is much too tight. We have almost no leeway, in some cases, in terms of letting money. Part of it is a natural fear having made bad loans, but how much damage is, if any, in your judgment, is too tight regulation now doing to an economy that needs to grow?

I think they're, I think they, they before what had happened. I mean, you created an atmosphere where it wasn't anything goes atmosphere. A lot of these people didn't know, I mean, they'd say, I want to make this loan in the rate, if it required regulatory approval, they'd say, well, you couldn't have done this two years ago because the law said you couldn't, but now the law has changed and there was a vacuum there. So the regulatory people, I think, in a sense, said, well, go ahead, why not? I mean, that's what the law says, everybody tells me, they don't want me getting involved in this, it was an era of deregulation. Now, depending on the swung the other way, the bank examiners are saying, although they deny it, they're quite obviously tougher on loans, they're tougher on credit quality. I think what that has done is it's made the banker's gun shy of making loans that are marginal loans or not marginal even, you know, loans that they might have made before and they're saying no. I think that restriction of credit is what's a drag on the economy and it's why you can't really get the economy going again because you have, you have, on the one hand, you have

the savings loans, the federal government borrowing all this money to bail out savings loans and keeping an upward pressure on interest rates and then when the Fed eases off and pushes more money into the system, the money's there, but the bankers are sitting there and they're saying they're being stingy with how much they're going to land out because they're afraid they're going to get downgraded by the regulatory people. So I think they are having an impact and there's probably some legitimacy to that complaint. Of course, I come from a state which a few years ago had a massive banking scandal and it was in its first with politics in a very meaningful way. Two brothers, what your brothers were definitely interested in promoting their banking empire and then were involved in politics and one was supporting the other and that collapsed to the concern they expressed was regulators are too tough on us, regulators are too tight. As time has passed, I've heard that repeated again and again and again and problem is that

those of us in the media and those who are in the public have question marks. We know there has been some mismanagement, some gross mismanagement and the question now is how much is too much regulation and how do we find a balance wheel that might help us make the economy more viable, might even save the economy? Well, I think at the time of the Jake Butcher scandal and all that, I think the regulatory atmosphere was quite different than it is today. So for them to have said, oh the regulators were too tough, I mean that's what everybody always says when they come in and expose the mismanagement and the corruption and everything that went on. So I think the atmosphere is totally different today. I think that what happened is when they saw how loose things had gotten under that, that system they began swinging back the other way, getting tighter, I think it's starting to swing back towards the center and that the system on its own momentum will probably ease off enough and it will adjust to the thing.

I think we're almost there now. I don't think that the regulatory people are as tight and as tough as they were just six months ago on loans that the banking industry is trying to make now. I think you'll see that people will start making more loans and the economy will start reviving. But I think what you, in answering to your question, what you really have to do is give people the confidence that you're solving the problem long term by doing something about the entire system and that's what they're not doing. The savings the long thing you always see, oh it's going to cost $100 billion more. Congress says it won't vote the money. Well that's silly. They know they have to vote the money and if they would just get a comprehensive solution to the whole problem and settle up once and for all and give you some kind of a systematic set of rules that everybody's going to follow that are fair and well thought out, they would do a lot more towards restoring confidence in the economy than this playing around and dittling around and the Democrats saying we're not going to show this to you. James O'Shea, author of the Daisy Chain, has been our guest on a word on words.

Your host has been John Siganthaller. This program was produced in the studios of WDCN Nashville.