Fraud a N D Politics in the Savings and Loan Crisis
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:FRAUD AND POLITICS IN THE SAVINGS AND LOAN CRISIS I1 I II II KITTY CA LAV ITA H E N RY N PO N T E L L R O B E RT H TI L L M A N "We built thick walls; we have cameras; we have time clocks on the vaults...all these controls were to protect against somebody stealing the cash. Well, you can steal far more money, and take it out the back door. The best way to rob a bank is to own one." from the House Committee on Government Operations, 1988 /.'\' ; did a handful of savings and loan executives ' : if! bring about one of the worst financial disasters • . ~ .J . of the twentieth century? How did the fraud of a few "Gucci-clad, white-collar criminals" come to cost American taxpayers $500 billion? Despite exhaustive government inquiry and extensive media coverage of the crimes that culminated in the S&L debacle of the 1980s, the roots of this crisis fail to be un- derstood by the public who will foot this exorbitant bill. Examining the S&L crisis as a series of white-collar crimes unparalleled in the history of the United States, Kitty Calavita, Henry Pontell, and Robert Tillman debunk a number of the myths that permeate popular understanding of this multi-billion~dollar disaster. When news broke of Charles Keating's arrest and indictment for fraud just after the 1988 presidential election, Americans learned for the first time of the crimes that had pervaded the S&L industry for nearly eight years. Tempted by the insurance net and federal deregulation aimed at encouraging growth in the banking in- dustry, S&L leaders deliberately defrauded their depositors, stole from their own corporations, and speculated on high-risk ventures " with government:insured capital. What the government ultimately BIG MONEY CRIME KITTY CA LA VITA HENRY N. P O N T E L L ROBERT H. T I L L M A N UNIVERSITY OF CAL FO R N IA PRESS FRAUD AND POLITICS IN =. THE. SAVINGS AND LOAN CRISIS ~,',~ticnat Or m,..~.., ~ "'"" ;X)X ,] U.w, ~, :"' .,-,b:,;'l,, ~I: ~ ~i~AL ~ ~.'1~' -~" BERKELEY LOS ANGELES LONDON The research reported here was funded by grants from the University of California, Irvine, and the National Institute of Justice, United States Department of Justice (90-IJ-CX-0059). Points of view expressed in this book are those of the authors and do not necessarily represent the official position of the United States Department of Justice. University of California Press Berkeley and Los Angeles, California University of California Press, Ltd. London, England © 1997 by The Regents of the University of California Library of Congress Cataloging-in-Publication Data Calavita, Kitty. Big money crime : fraud and politics in the savings and loan crisis / Kitty Calavita, Henry N. Ponten, Robert H. Tfllman. p. crn. Includes bibliographical references (p.) and index. ISBN 0-520-20856-0 (cloth : alk.paper) 1. Savings and loan associations---Corrupt practices-- United States. 2. Savings and Loan Bailout, 1989- 3. Commercial crimes--United States. I. Pontell, HenryN., 1950- If. TiUman, Robert. HI. Tide. HG2151.C35 1997 364.16'8----dc21 96-53295 CIP Printed in the United States of America 987654321 The paper used in this publication meets the minimum re- quirements of American National Standard for Informa- tion Sciences--Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984. For our parents and to the memory of Michd/e Smith-Pontdl "We built thick vaults; we have cameras; we have time clocks on the vaults; we have dual control--all these controls were to protect against somebody stealing the cash. Well, you can steal far more money, and take it out the back door. The best way to rob a bank is to own one:' in U.S. Congress, House Committee on Government Operations, Combatting Fraud, Abuse, and Misconduct in the Nation'sFinancial Institutions CONTENTS List of Tables xi Acknowledgments xiii Abbreviations xvii Introduction 1 "Bad Guys" or Risky Business? 17 Thrift Crime Demystified 46 The Political Connection 86 Cleaning Up 126 Pursuing White-Collar Criminals 143 Conclusion 169 Appendix 18 s Notes 191 Bibliography 229 Index 251 TABLES 1. Institutions under RTC Supervision 31 2. Institutions under RTC Supervision in California and Texas 38 3. Insiders/Outsiders Cited in Referrals 48 4. Crime Types and Losses 70 S. Criminal Networking and Impact on "Financial Soundness" 72 6. Individuals Criminally Referred and Indicted in Texas and California 148 7. Selected Characteristics of Suspects and Offenses in Texas and California 152 8. Major S&_LCases 157 9. Prison Sentences in Major S&L Cases 158 10. Status of Defendants in Major S&L Cases 159 11, Sentences in Relation to Defendant's Position and Offense in Major S&L Cases 161 12. Prison Sentences for S&L Offenders and Selected Federal Offenders 164 ACKNOWLEDGMENTS The research leading to this book would not have been possible without the interest and support of many people. We would like to thank the Committee on Research of the Academic Senate at the University of California, Irvine, without whose initial grant support this work might never have been accomplished. This award was followed by more substantial funding from the National Institute of Justice of the U.S. Department of Justice (Grant 90-IJ-CX-0059). We greatly appreciate the support and help of the institute's staff, especially Lois Mock, our grant manager, who assisted us in numer- ous ways during a particularly sensitive time in Washington, D.C. We also thank the various individuals in the Department of Justice (Executive Office of the U.S. Attorneys and the Criminal Division) who supplied us with information. In our three years of fieldwork we had personal contacts with hundreds of people with special expertise on and inside experience with the S&L scandal. We gratefully acknowledge the many people, to whom we promised confidentiality, who granted us lengthy interviews and freely shared their time. A number of government agencies were particularly helpful. We especially want to thank officials and staff at the Resolution Trust Corporation in Wash- ington, D.C., Tampa, Dallas, Houston, and Costa Mesa in Orange xiii ][iU B I G M 0 N E Y C R I M E County, California; the FBI in Washington, D.C., Los Angeles, Dallas, Houston, and Miami; the U.S. Attorneys in Fort Worth and Los Angeles; the Treasury Department; the U.S. General Accounting Office in Washington, D.C.; the Secret Service in Washington, D.C., Miami, Dallas, and Houston; the Office of Thrift Supervision in Washington, D.C., San Francisco, and Dallas; the Federal Reserve in Washington, D.C.; the Office of the Comptroller of the Currency; and the congressional staff of the House and Senate Banking com- mittees. More often than not we found government officials who were interested in our research and eager to help us. We sincerely hope that we have done justice to their efforts on our behalf. Special thanks go to officials at the Resolution Trust Corporation and the Dallas Office of Thrift Supervision for providing us with invaluable statistical data. Among those we wish to acknowledge by name, special recogni- tion goes to William (Bill) Black, formerly of the San Francisco Office of Thrift Supervision and now a professor in the LBJ School of Public Affairs at the University of Texas. Professor Black assisted us in numerous ways, challenged many of our positions, and pro- vided unique insights into the thrift debacle. He played a major historical role in bringing this dark chapter in American history to an end and shared with us his extensive insider knowledge. We greatly appreciate his support and value him as a close colleague and friend. We thank our colleagues Gfl Gels, Paul Jesflow, Bill Chambliss, Nancy Reichman, John Braithwaite, Neal Shover, Otto Reyer, and Rick ]erue for their special insights and support. Our graduate re- search assistant, Susan Will, was invaluable. Susan's organizational skills, scholarly attitude, and sheer endurance greatly facilitated the timely completion of this work, and we appreciate her devotion to the task. We are also grateful to our undergraduate assistants Kelly Lane, Steven Rennie, Niaz Kasravi, Shadi Sepehrband, Glenda Pi- BIG MONEY CRIME mentel, Jade Wheatley, Sunny Lee, Betty Gonzalez, and Dave Sze- keres. Finally, the staff of the School of Social Ecology at the University of California, Irvine, assisted us in many ways. We especially thank Judy Omiya of the Department of Criminology, Law, and Society for handling project matters, appointments, and clerical tasks in her usual efficient manner. We also thank Dianne Christianson, who assisted us with various word processing tasks and made up for our frequent lapses in technological know-how. ABBREVIATIONS ACC American Continental Corporation ADC Acquisition, development, and construction AP Associated Press ARMs Adjustable rate mortgages CDs Certificates of deposit CDSL California Department of Savings and Loans CPAs Certified public accountants DCCC Democratic Congressional Campaign Committee DIDMCA Depository Institutions Deregulation and Monetary Control Act EOUSA Executive Office of the U.S. Attorneys FBI Federal Bureau of Investigation FDIC Federal Deposit Insurance Corporation FHLB Federal Home Loan Bank FHLBB Federal Home Loan Bank Board (Bank Board) FIRREA Financial Institutions Reform, Recovery and Enforce- ment Act FSLIC Federal Savings and Loan Insurance Corporation GAAP Generally accepted accounting principles GAO (U.S.) General Accounting Office ICS Indictments, convictions, and sentences ~iii BIG M 0 N E Y C RIM E LTOB Loans to one borrower LTV Loan-to-value (ratio) NCFIRRE National Commission on Financial Institution Reform, Recovery and Enforcement OLS Ordinary least squares OMB Office of Management and Budget ORA Office of Regulatory Activities OTS Office of Thrift Supervision PACS Political action committees RAP Regulatory accounting principles RTC Resolution Trust Corporation SEC Securities and Exchange Commission S&L Savings and loan TIMS Thrift Information Management System INTRODUCTION The savings and loan crisis of the 1980s was one of the worst financial disasters of the twentieth century.