This column was a fun one to write. Here’s hoping it’s a bit fun to read. It deals with about seven years in the 1980s that were one of the wildest periods in the financial history of the U.S. When the dust settled at the end of the decade, 504 savings and loan associations (thrifts) had gone broke, and some 403 thrift executives had been convicted in criminal activity. The debacle cost the U.S. taxpayers a bundle.
But, if one enjoys watching true crime in the act of commission, it was a hoot. In the aftermath, extensive and draconian statutes and regulations were implemented to make sure it never, ever happens again (snicker).
Ronald Reagan had barely lowered his right hand after reciting the oath of office when the administration began deregulating just about every business and industry in sight, and none was more ripe for a new regulatory structure than the S&L business. It was a segment of the banking industry with its feet firmly planted at around 1850. Up until the late 1970s, thrifts couldn’t even accept checking accounts; depositors could open only savings accounts or certificates of deposit.
Lending consisted of mortgages on real estate, and most of those involved single family homes and condos. Many institutions, and some of the biggest, weren’t even owned by stockholders; they were “mutual institutions,” meaning they were owned by the depositors and borrowers. All federally chartered S&Ls were mutual entities.
Then along came Reagan, and the savings and loan business emerged from the 19th century into the blinding light of the last third of the 20th.
Suddenly, an S&L could form a so-called service corporation, own 51%, and invest in a dazzling variety of enterprises. Mutual thrifts could convert to stock institutions, resulting in windfalls for depositors, borrowers and management. And, finally, some very neat accounting maneuvers called regulatory accounting — that were very different from generally accepted accounting principles (GAAP) — made buying a thrift exceptionally attractive. All of these goodies were laid out on the buffet table, and the line to dig in quickly formed. A lot of those waiting were financial cowboys who quickly spotted the potential for quick money, many from Texas. And those good ol’ boys knew each other well. It was an elite club, but easy to join; all you needed was your very own savings and loan.
The service corporation vehicle enabled them to partner up with other entrepreneurs and invest in just about anything. The poster children of this particular scam were Don Dixon and Woody Lemons, the owner and president respectively of Vernon Savings in Vernon, Texas, a small, conservative operation until Dixon bought it. The bank, through subsidiaries, then bought a string of luxury car dealerships, a beach front estate, and no less than three corporate jets — just to name a few assets and investments that used bank money for acquisition. Not exactly single family residential lending. Both Don and Woody were convicted of bank fraud.
Dixon employed a common tactic when he bought Vernon S&L. He kept the existing board of directors in place and pampered them with emoluments beyond their wildest dreams: junkets to conventions on the exec jets, with five-star accommodations and food. And weeklong get aways to the southern Cal beach property, complete with plenty of food, drink and professional ladies strategically placed. Well, not all the directors: The board had one woman, and she was never invited to the latter retreat.
Regulators during examinations were at first intrigued, and then shocked by the relationships between bank owners. As the examiners followed the interlocking tendrils spreading throughout the west and southwest, they dubbed it “The Daisy Chain.”
One bank owner would have a deal he wanted to fund, but his regulatory loan limit was, say, $4 million. No problem; he’d just pick up the phone: “Bubba, this is Jim Bob. Got an $8 million deal here, need a $4 million participation from your shop.”
“No problem, Jim Bob. By the way, my boys brought in a big deal, and I’m short about $2 million. S’pose you can help me out?”
“Sure can. Y’all take care.”
That’s what they called “Texas underwriting.” Big commitments were made on no more than a two-page deal sheet, just a very brief outline of a complicate transaction.
Since a bank’s loans to owners, officers and directors are limited and closely scrutinized, they sought to avoid regulatory sanctions by the Texas two-step of lending to each other.
I got an opportunity to see some of this up close and personal in the late ’80s when I was between banking gigs. The state S&L commissioner of Kansas called me to see if I’d take on managing a failed thrift in Liberal, Kansas. Kansas state law required that the commissioner’s office take over running any insolvent S&L until it was formally closed by the feds.
The operation was a small one, but the Texan that had bought it had been busy, making commercial and development loans in Texas and Oklahoma. Part of my job was to check these out; one, in the Dallas area, I remember well. It was a “luxury” subdivision built around a landing strip for private aircraft, although it’s doubtful whether a plane ever did, or could, land there. It was a desolate scene, and the smell wasn’t that great either, due to the sewer system backing up.
The motivation for all of this was, of course, money. Big fees were paid by developers and others to get the loans, and millions were pocketed by thrift owners and management in flipping properties between subsidiaries and outside entrepreneurs. One limited partnership that I heard about was called MLOMRQ LLC — “Make Lots of Money Real Quick.”
You really couldn’t make some of this stuff up. But it was only the tip of the iceberg.
George Bailey, as played by James Stewart in the classic Christmas movie “It’s a Wonderful Life,” has become the prototype small town savings and loan manager. There were a lot of George Baileys caught up in the the chaos of the S&L meltdown. They weren’t crooks, or didn’t start out to be, although a few did end up indicted. Others simply fell into the rapids of loans going bad, and ended up going over the falls of insolvency. In the next column, we’ll continue the common thread of the elements that have contributed to the last two banking crises, just 18 years apart.
Stay tuned for “It was a wonderful life … for a little while.”
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is firstname.lastname@example.org.