How to win friends and influence regulators; the delayed closing of Lincoln Savings cost the taxpayers $1 billion

ULTRA-LIBERAL U.S. Senator Alan Cranston (D., Calif.) and arch-conservative businessman Charles Keating joined hands three years ago to help create the savings-and-loan debacle, the biggest congressional scandal of this or any season. Now, as the S&L cost mounts by the hundreds of billions and elections approach, they are doing what comes naturally. They are going on the attack.

Senator Cranston stumped California in mid January to denounce his main accuser as a "liar." One of these lies, said the Senate Majority Whip, was the notion that he and the other "Keating Five" senators--Dennis DeConcini (D., Ariz.), John Glenn (D., Ohio), John McCain (R., Ariz.), and Donald Riegle (D., Mich.)--who met privately with government savings-and-loan regulators in 1987, had in any way delayed the closing of Charles Keating's Lincoln Savings and Loan. (When the government finally did seize Keating's thrift in April 1989, the cost to the taxpayers was put at $2.5 billion.) Cranston's denials apparently have had some effect on none other than ABC's Sam Donaldson. In an episode of Prime Time Live rehashing Keating's million-plus in political contributions to Cranston et al., he concluded the money didn't affect the regulators' conduct toward Keating.

Wrong again, Sam. Cranston, his colleagues, and dozens of their compatriots have devastated S&L regulation over the past decade, often in defense of outright crooks. In spite of the intense publicity about the Keating affair, and marathon hearings in U. S. Representative Henry B. Gonzalez's House Banking Committee, few really understand just how Keating's political influence infiltrated and demoralized the bureaucracy. The case illustrates why the S&L debacle grew to such immense proportions, and why it continues to swell to this day.

Most reports set the S&L "rescue" bill at $167 billion, but this is the Treasury's figure for ten years of payments on thirty- to forty-year bonds. Try to get out of your mortgage after paying for only ten years. At current interest rates, the amortization tables show that you'll have paid off only 5 per cent of the principal. The unacknowledged twenty years of paying off the S&L rescue will double and even triple the total cost. And the Treasury's starting price is low; losses at this moment may exceed $225 billion. Paying this bill off through bonds, the only feasible way, will easily run the total past $500 billion. Some observers say it could reach one trillion dollars.

THE TRAGEDY IS that losses could have been cut to one-tenth by timely action all along the line--timely action that still isn't taking place. The tale of how interference by Jim Wright and others prolonged the crisis, and how federal deposit insurance and "deregulation" combined to exacerbate it, has already been told in these pages. [See, inter alia, "The Wright Stuff," NR, April 21, 1989, and "Too Little, Too Late," May 19, 1989.] But the tale of missed opportunities still continues.

The rescue plan passed last summer was supposed to raise the money to close down the real turkeys. But something has gone wrong. Congress created such cumbersome layers of bureaucracy that decisions can't be made. The previous S&L regulator, the Federal Home Loan Bank Board, was run by three directors. The current system of review boards and oversight committees is run by 34. The executive director of this rescue recently quit in disgust. Even worse, the strongman of the operation, Federal Deposit Insurance Corporation Chairman William Seidman, has revived the old practice of keeping the turkeys open, in the absence of funds to put them out of their misery. And now the FDIC has a good chance of going under itself.

Examiners are the regulatory front line, keeping an eye on the most troubled thrifts and banks, which their supervisors are supposed to bring under control if necessary. But often enough examiners have predicted trouble well in advance of a crisis and found that nothing was done. Only rarely can they point to a specific cause. Here is where the Keating Five come in.

IN EARLY April 1987, four of the five senators summoned the chief S&L regulator, then chairman of the Federal Home Loan Bank Board Edwin Gray, to a private meeting in the office of Senator DeConcini. A week later Riegle, chairman of the Senate Banking Committee, joined them to call in senior supervisors from the Home Loan Bank of San Francisco, which had jurisdiction over Keating's Lincoln Savings and Loan. The supervisors were called on this highly unusual three-thousand-mile journey just as they were recommending that the Bank Board take over Keating's thrift. The senators say they didn't mean to interfere. Yet, interestingly, the supervisors' recommendation didn't take effect for another two years.

What went wrong? The Bank Board bureaucrats gave Keating every break, at the expense of destroying their own staff morale. They created an oppressive atmosphere of suspicion and backbiting, and they are still in charge.