Inside Job: The Looting of America's Savings and Loans

President Reagan glanced over the audience gathered in the Rose Garden that warm October morning in 1982 and smiled. He was about to deliver on his campaign promise to get Government off the back of business. He was signing into law one of his Administration's major pieces of deregulation legislation. The Garn--St Germain act would sweep away 50 years of savings-and-loan regulatory law that Reagan believed was preventing thrifts from competing in the complex, sophisticated financial market place of the Eighties.

His pen swept across the bill and, flashing an impish smile, he spoke to the bill's political parents gathered around him.

"All in all," he said, "I think we hit the jackpot."

Three and a half years later, Ronald Reagan's words could well have been the chorus to Ed McBirney's company song.

McBirney was the fun-loving 33-year-old chairman of Sunbelt Savings Association in Dallas, playfully known around town as Gunbelt Savings for its quick-draw deals. With nearly three billion dollars in assets, Sunbelt was one of the largest of the new-breed thrifts. Like so many others who rushed into the savings-and-loan business following deregulation, McBirney bore no resemblance whatsoever to what Americans expected of a banker.

Instead, he was a hyperactive wheeler-dealer who scratched out multimillion-dollar deals on a butcher-paper tablecloth provided for him at his private table in an exclusive Dallas eatery.

And Ed was a party animal. Often, the turn of season was an excuse for a lavish bash. At one Halloween party, he served barbecued lion and antelope, a magician performed feats of levitation and fog machines piped in the ambience. Two Tons of Fun provided the evening's music and McBirney went decked out as a king.

One Christmas, he rented an entire Dallas sound stage and paid to have it transformed into a realistic winter wonderland, a white Christmas in Texas. The theme was "Babes in Toyland" and Ben Vereen provided that evening's entertainment.

Sunbelt flew guests in private-jet caravans to such faraway places as Hawaii, just to party. But the most talked-about bash was the one at Las Vegas' Dunes Hotel and Casino, to which McBirney flew two dozen of Sunbelt's associates on two private jets.

One evening during that jaunt, in his Dunes suite, McBirney slouched on the floor against a couch and puffed a large cigar as he watched his guests chatting over predinner cocktails. Suddenly, the door swung open and four attractive, well-dressed women slipped into the room full of men. The buzz of conversation softened as everyone took stock of the new arrivals. That stock went way up when the girls began to undress.

After stripping, the women moved to the center of the room and engaged in an enthusiastic lesbian romp. Then they separated and moved out among the guests for some touchy-feely. Targeting four of the older men, the women unzipped their flies and performed oral sex on them while everyone watched, some enthralled, others visibly uncomfortable, hoping--or fearing--they'd be next.

All the while, McBirney sat on the floor, puffing on his cigar and grinning broadly. It was another great party.

Just four months later, McBirney was pressured to resign from Sunbelt, leaving the institution hopelessly insolvent. Playing out Sunbelt's 1.8-billion-dollar losing hand would ultimately cost taxpayers and the FSLIC (Federal Savings and Loan Insurance Corporation) 6.1 billion dollars.

Some jackpot.

•

Ed McBirney was just one of hundreds of characters attracted to savings and loans following deregulation. Some, like him, were carefree entrepreneurs who had been developers--"kamikaze bankers," one former Federal regulator called them. Others were con men belonging to the fraternity of professional white-collar swindlers who tirelessly prowl the halls of business looking for cracks through which they can squirm. Still others came from the ranks of traditional organized crime--the Mafia. Deregulation was the best thing to happen to the Mob since Prohibition.

This financial hit-and-run fraternity soon established a well-oiled network that scoured the country for corruptible thrifts where they could become stockholders, C.E.O.s, loan officers and borrowers. Once inside, they stuffed themselves on Federally insured deposits until the institution folded or regulators belatedly chased them out. Then they moved on to another thrift. Today the repair bill is being estimated at 285 billion dollars over the next 30 years, and much of the missing money was stolen.

It was, quite simply, the biggest heist in history.

In the Beginning

Without becoming mired in the arcane complexities of the thrift industry, it helps to know how this debacle began. Before S&L deregulation, the thrift industry was a sleepy little business that lent local savings to local home buyers, who then became solid members of the community and new depositors--a business cycle that worked flawlessly for 50 years. But first in 1980 and then again in 1982, Congress caved in to thrift-industry pressure to deregulate.

Thrifts were limited by law to paying no more than 5.5 percent on deposits, and they began losing them to the new money-market funds which were not under such constraints. In 1980, Congress phased out that interest-rate cap so thrifts could pay whatever it took to attract deposits.

That did the trick. Deposits poured in. But the thrift lobby was soon back on Capitol Hill, whining that the high cost of deposits was killing them, because they were allowed by law to invest only in low-paying, fixed-rate home mortgages. They were paying more for the deposits than they were earning on the mortgages, and they wanted the right to invest in something sexier.

Congress again complied, passing in 1982 the Garn--St Germain act, which permitted Federally chartered thrifts to invest 40 percent of their assets in almost any kind of commercial real estate--condo conversions, Wendy's restaurants, windmill farms, manure farms, mushroom farms.

The Federal action rippled across the nation, as many states rushed to catch up with Federal deregulation. Some even outderegulated the Feds. California, for example, passed regulations allowing state-chartered thrifts to invest all--100 percent--of their Federally insured deposits in almost anything.

The free-market ideologues who accompanied Reagan to Washington embraced savings-and-loan deregulation with a religious fervor. They talked a lot about level playing fields, where all businesses were created equal and only the strongest survived. (What they didn't mention was that they had kept the taxpayer on the hook for any losses.) They said they believed in leaving business alone. Translated, that meant fewer regulators, and soon thrifts were going as long as three years without a visit from a nosy bank examiner.

It was open season in the vault.

The Golden West

California deregulated its state-run thrifts two months after Congress passed Garn--St Germain, and by 1983, it was easier to get a charter for a savings and loan in California than to get a casino license in neighboring Nevada. Virtually no one was turned down as regulators rushed to draw new blood into the industry. What they attracted were the most colorful characters to darken a teller window since Bonnie and Clyde.

One of those whose applications sailed right past the green eyeshades of regulators was Southern California developer Robert Ferrante, 34. Just a year earlier, he had made headlines when a would-be assassin coldly gunned him down outside his office. Ferrante survived, claiming the hit man had been hired by two disgruntled business partners with ties to the "Israeli Mafia." No one was ever charged.

Ferrante's name popped up again in the press at the very time regulators were considering his thrift application. A Federal grand jury indicted an ex--Redondo Beach city councilman for mail and tax fraud in connection with charges that he was allegedly taking bribes from Ferrante's development company to gain city approval for a condominium-conversion project. (The ex-councilman went to Federal prison but denied that Ferrante had been involved and Ferrante was never charged. Later, an appeals court overturned the councilman's mail-fraud convictions but let stand the conviction for tax evasion.)

During the councilman's trial, Ferrante's past got a thorough airing in the media. But in spite of all the negative press attention, regulators didn't question his S&L application and he opened the doors of Consolidated Savings Bank in Irvine on February 28, 1984. He hired Italian immigrant Ottavio A. Angotti as Consolidated's president.

Within a little more than a year, Federal regulators began to suspect that Ferrante was using Consolidated as his personal piggy bank. They claimed that $15,000,000 had been improperly funneled into a project they believed was controlled by him. And they said Consolidated had made other loans to borrowers who had close ties to Ferrante--such as his sister.

When regulators began pressuring Consolidated for detailed information about the loans, they found themselves eyeball to eyeball with an incensed Angotti, who, they claimed, had threatened two examiners. Angotti denied the charge.

"No, no, no. You see, they got me mad. All the time, they were asking me if I was working for the Mafia. I got so mad one day, I yelled at them in Italian. They misunderstood and thought I threatened to kill them. Ottavio A. Angotti did not do that." A literal translation of his threat, apparently, was more along the lines of "I'm going to cut off your balls."

"But I'll tell you," Angotti said, recalling the moment, "they ruined the good name of Ottavio A. Angotti, and if I knew then what I know now about those bastards, I would have eaten their blood."

•

The sweet smell of money emanating from Consolidated's vault soon attracted flies from the East Coast, among them pudgy, curly-haired Mario Renda. Renda had run a tap-dance school. Now he was a deposit broker on Long Island. As a deposit broker, he routed his customers' deposits around the country to the banks and the S&Ls paying the highest interest (continued on page 167)Inside Job(continued from page 96) rate each day on Federally insured certificates of deposit (C.D.s). The financial institutions paid him a commission of from one to two percent for the deposits.

But Renda's interest in thrifts went far beyond simply brokering deposits for a lousy one percent commission. Renda ran with a fast and hungry crowd--with men such as Salvatore Piga, described on his arrest record as someone who "associates with members of the Carmine Tramunti crime family of New York." Renda called Piga a "Teddy bear"--this Teddy bear's arrest record listed his line of work as grand larceny, robbery, burglary and assault. A Federal informant (and reputed Mob associate) said Renda had bragged that he (Renda) controlled "money being lent for the benefit of the Paul Castellano [organized crime] family" of New York and that he was a close associate of Saudi middleman Adnan Khashoggi.

During his career as a deposit broker (1980-1987), Renda brokered billions of dollars into 3500 financial institutions, including Consolidated Savings. In the last year, he brokered more than six billion dollars. With those billions as bait, he went to thrift executives with a tempting proposition. He offered to put several million dollars on deposit at their little thrifts and waive his normal commission. All they had to do was agree to lend all or a portion of the new-found deposits to some "investors," who actually were fronts, or "straw borrowers," working for Renda and his associates. The straws turned the loan proceeds over to him and his henchmen, who then paid these investors fees (out of the loan proceeds) or other compensation for their services. By the time the S&Ls tried to collect on the loans, the money was long gone.

Renda seemed to have stumbled upon the perfect crime. Even if the financial institution failed, his deposits were safe, because they were insured for up to $100,000 by the FSLIC or the FDIC (Federal Deposit Insurance Corporation), which insured thrifts and banks, respectively, and backed by the full faith and credit of the U.S. Government (i.e., the taxpayers). At least 160 institutions took the bait, and by 1989, more than 100 of them were in deep water--caused at least in part by their hunger for Renda's cash.

To keep the money flowing to S&Ls and back to him, Renda paid kickbacks to Teamster-pension-fund officials. In return, those officials channeled Teamster money into Federally insured C.D.s through Renda's company. Renda and an associate hid from the IRS the commission money Renda's company had made on this deal, more than $16,000,000.

Renda's fortunes swelled. Soon, this former tap-dance school administrator had a Rolls-Royce. He told an associate once that he wished he could put a big sign on it announcing that the car cost $120,000. He moved his family into a 30-room Long Island mansion surrounded by a couple of acres and a wall, and he bought a 103-foot yacht, the Surrenda, and an 88-passenger BAC-1-lljet.

Renda made his pitch to Consolidated Savings after a mutual friend introduced him to Ferrante. A personal relationship soon developed. In 1986, Renda and Ferrante reportedly vacationed together in the Caribbean, renting the Surrenda for the occasion (invoices showed Consolidated paid the tab with a $15,000 check). FSLIC attorneys said the two men also became partners in several business deals. Renda later admitted that a $2,000,000 loan Consolidated had made to him supposedly for a Hawaii real-estate venture had been instead wired directly to his personal Swiss bank account.

Fuzzy

During the Great Depression, hobos marked hospitable barns with a large painted x for those who followed. After thrift deregulation, the fraternity that traveled the thrift circuit left its markers as well, and the x on Consolidated Savings' backside soon attracted Oklahoma City swindler Charles Bazarian.

Fat and gregarious, Bazarian had dropped out of school after the eighth grade and began his adult life as a fry cook. By the early Seventies, he and a partner had a tidy little health-insurance scam going--they sold insurance policies to farmers but paid no claims. Bazarian pleaded no contest to felony charges of mail fraud but got out of going to jail by ratting on his partner, who served hard time in prison.

After thrift deregulation, Bazarian discovered that his felonious past proved no barrier to his ability to borrow millions from deregulated thrifts. Personally and through his Oklahoma company, C. B. Financial, he rang up $242,000,000 in debts.

Bazarian used his booty to build a comfortable life for himself and his wife, Janice, in Oklahoma City. His 15,720-square-foot, $2,400,000 mansion had an indoor pool with a waterfall and a retractable dome ceiling. Charlie (some friends called him Fuzzy) had an entire circus set up on his lawn one weekend for his young son Buzzy's birthday. Singer Wayne Newton and ex--boxing champ Muhammad Ali were occasional guests at the Bazarian mansion.

Bazarian was introduced to Consolidated Savings by Beverly Hills loan broker Al Yarbrow, according to Consolidated president Angotti. Loan brokers were important players on the deregulated-thrift circuit, because they connected horny borrowers with round-heeled lenders. Bazarian and Consolidated soon reached an amiable meeting of the minds and swung into some mutually beneficial multimillion-dollar deals.

All this activity at Consolidated--by Bazarian, Renda, Ferrante and others--finally roused sleepy regulators, who decided they'd better grab Consolidated before there was nothing left worth grabbing. The date they set for the assault was a closely guarded secret--four P.M., May 22, 1986. But early that day, a business reporter got wind of the pending seizure and phoned Angotti.

"We understand the regulators are going to close you down today. Would you care to comment?"

On Angotti's end of the line, there was a moment of dead silence. Then he gasped, "Oh, shit! Thanks!" and slammed down the receiver.

When regulators pushed their way through Consolidated's doors that afternoon, they were covered by FBI agents and SWAT members carrying automatic rifles because they had been told by area law-enforcement officials that Ferrante was associated with individuals suspected of having Mob ties. But the reporter's call had been heeded and upon arriving, regulators found three large trash bags already filled with shredded documents. In front of the shredder, a white-knuckled bank officer was doing the Ollie North shuffle.

That Christmas, the reporter who had inadvertently tipped Angotti opened his mail to find a Christmas card that read, "Again, thank you, belated thanks--Ottavio A. Angotti."

The FBI began a long and lumbering investigation into Ferrante, which reportedly is still in progress. The FSLIC sued him, Angotti, Bazarian and others for losses that were expected to exceed $40,000,000 and--except for a settlement with Angotti--that suit, too, is pending. Regulators claimed Bazarian had walked away with more than $12,000,000 from Consolidated. A process server sent to his Oklahoma mansion said two thugs, one waving a gun, had chased him to his car. He sped off and they followed. For the next 20 minutes, their vehicles careened through the streets of Oklahoma City. Finally, the process server gave them the slip. When the judge in Southern California heard about it, he quipped, "That's the way they do things in Oklahoma."

Casino Federal

Charles Bazarian was a gambler who regularly visited Las Vegas. There, he wormed his way into the exclusive orbit around Dunes casino owner and reputed Mob associate Morris Shenker.

Because of the skimming and money-laundering opportunities inherent in a business that deals in raw cash, casino ownership has always been a burning ambition of people with underworld connections. Within months of thrift deregulation, millions of dollars' worth of Federally insured S&L deposits began to flow to Las Vegas and Atlantic City. Few casino owners benefited more from thrifts' largess than Morris Shenker.

When Shenker was asked once by an attorney how he would repay his enormous debts, he simply rasped, "I'm very good at borrowing money." And so he was.

Shenker, born in Russia in 1907, was a millionaire St. Louis attorney. In 1986, the President's Commission on Organized Crime described him as an associate of Kansas City organized-crime boss Nick Civella. Author Ovid Demaris, in his book The Boardwalk Jungle, alleges that an FBI task force ranked Shenker with the late Meyer Lansky as two of the most important financial figures in organized crime. A Nevada gaming investigator said he was "a financial Svengali with more than a hundred and five corporations among which he was shuttling money."

Shenker was Teamster boss Jimmy Hoffa's attorney and confidant for more than ten years, until Hoffa disappeared in 1975 during a union power struggle (see The Hit on Jimmy Hoffa, elsewhere in this issue). Through Hoffa and his successors, Shenker had access to the corrupt Teamsters' Central States Pension Fund, which Federal authorities claimed was controlled by and for the Mob. By 1974, Shenker was said to have had more than $100,000,000 in loans from the fund, including the largest single loan it ever made. With a big chunk of that money, Shenker acquired control of the Dunes Hotel and Casino in Las Vegas, and in the early Eighties, he was planning to build a Dunes Hotel and Casino in Atlantic City.

But in 1983, the Department of Labor finally wrested control of the Central States Pension Fund from the Mob, and Shenker's empire was in danger of collapse. He was also in default on millions in loans from other pension funds. How serendipitous for him, then, that at that very moment, Congress was obligingly deregulating savings and loans.

After deregulation, Shenker darkened many a thrift door. In one case, he set his sights on Daniel W Dierdorff, president of Sun Savings in San Diego--entertaining him at the Dunes, letting him use his jet and maintaining a $25,000 line of credit in Dierdorff's name at the casino. Sun Savings was good to Shenker, too, making him an inadequately secured loan of which $1,400,000 ended in default. (Sun Savings collapsed in 1986 and Dierdorff was sentenced to prison in 1989 for bank fraud.)

When Shenker decided to sell the unfinished and much troubled Atlantic City Dunes project (a rusting sculpture of I-beams), an accommodating $15,000,000 loan provided by San Antonio Savings Association made the sale possible. The loan later went into default. (San Antonio Savings was taken over by regulators in March 1989.)

The parent company of American Savings in Stockton, California, reportedly became the Dunes' largest creditor, with a $51,000,000 mortgage on the Las Vegas building. (By 1988, American Savings was insolvent.) And a Justice Department official said Shenker had borrowed from Liberty Federal Savings in Leesville, Louisiana (Liberty Federal also later collapsed). The scope of Shenker's appetite for loans from thrifts was enormous. He was, indeed, "very good at borrowing money." He was, unfortunately, not quite so good at paying it back.

In 1984, Shenker was forced into bankruptcy when a jury ruled that he owed a Nevada union-pension fund $34,000,000. The Labor Department added $27,000,000 to the bill and the IRS came after him for an additional $66,000,000. He announced that he would sell the Las Vegas Dunes Hotel and Casino, and Eureka Federal Savings near San Francisco rushed to his rescue.

Eureka at the time was run by Kenneth Kidwell, another nontraditional banker. He was arrested one night and found to be carrying two pistols loaded with illegal armor-piercing bullets. Kidwell had ties to both Shenker and Teamster boss Jackie Presser, who later turned out to be an FBI informant. Kidwell, too, enjoyed a close relationship with the FBI. He even allowed the Bureau to use Eureka as a front for at least two undercover drug operations, including the sting that bagged former car manufacturer John De Lorean.

Eureka Federal authorized at least three major casino-related loans. The largest was a $25,000,000 letter of credit for a California businessman to buy controlling interest in the Las Vegas Dunes. Eventually, the Nevada Gaming Control Board put a stop to Eureka's casino loan business, giving no explanation for its decision. This was surely the first time in history that the casino gaming board had considered an S&L questionable. Kidwell later complained bitterly that his relationship with Shenker had left him tainted with innuendoes of Mob associations. Regulators took control of Eureka Federal in 1985.

Although Shenker was no longer the nominal owner of the Las Vegas Dunes, he was kept on by the new owner as a member of the board of directors while he continued to sweep the country for cash. In April 1985, Bazarian and Yarbrow showed up together at Bloomfield Savings in Detroit with an introduction from Shenker. Bazarian walked away with a $15,000,000 loan (most of which he never repaid) and Shenker stood to share a finder's fee for making the introductions. Later, Bazarian said Shenker had wanted him to buy control of the thrift so he could approve loans to Shenker. Bloomfield has since gone out of business.

Shenker died in August while under indictment for bankruptcy fraud and tax evasion. Bazarian also filed bankruptcy. He said he owed the Dunes Hotel and Casino $174,000 in gambling debts.

A Bad Rapp

Like so many others who fleeced thrifts during the golden age that followed thrift deregulation, Bazarian entertained at his Oklahoma City mansion in a fashion rarely seen since the glory days of Rome. Ironically, it was at one of his glitzy parties, Halloween 1985, that his undoing began. Deposit broker Renda, whom Bazarian had met at Consolidated Savings, flew to Oklahoma City for the gala bash. Defrocked Mafia stockbroker Michael Rapp also showed up, but he had come to discuss business.

Rapp's real name was Michael Hellerman. In the late Sixties and early Seventies, he had been the Mob's wise guy on Wall Street, pulling countless swindles for New York's organized-crime families. He was engineering securities scams decades before Ivan Boesky learned firsthand the difference between a junk bond and a bail bond. Indicted, Hellerman cooperated with the Feds, assisting in the indictment or conviction of more than 90 men, including labor-union racketeer John Dioguardi, Lucchese crime-family boss Carmine Tramunti and Colombo crime-family boss Vincent Aloi. He wrote a book, Wall Street Swindler, about his escapades, and he disappeared, resurfacing in Florida in the Eighties as Michael Rapp.

Rapp quickly determined that thrift deregulation had created the biggest pigeon in history, and he moved heavily into the borrowing business. He joined forces with a handful of accomplished con men and East Coast Mobsters and targeted Flushing Federal Savings and Loan in Queens, New York. He conned the thrift out of millions in loans in a matter of months. Joining Rapp at Flushing's loan window was his old buddy Jilly Rizzo, a longtime pal and former bodyguard of Frank Sinatra.

Rapp reveled in the good life that Federally insured deposits bought him. A heavy gambler, he was said to have blown more than $500,000 in Las Vegas. He furnished his Florida home in lavish style and showered his wife, Janet, with expensive diamond brooches, rings and watches. One day, while they were staying at the Waldorf Astoria in New York, he bought her two fur coats.

According to a Federal agent, both the Lucchese and the Genovese crime families began making demands on part of Rapp's Flushing Federal take. A dispute broke out over how the money would be divvied up, and the matter finally had to be settled at an old-fashioned Mob sit-down.

After the Flushing Federal well ran dry (regulators declared the thrift insolvent in 1985), Rapp, stockbroker Marc Perkins and others had a business dinner at a Fort Lauderdale restaurant to consider how Rapp and his friends could buy their own thrift. The best way to rob a thrift, Rapp knew, was to own one.

Perkins had had no idea what he was in for when he had accepted the invitation. He was only two spoonfuls into his soup when the guy seated next to him leaned across the table and in a hoarse whisper asked Rizzo, "Hey, Jilly, you ain't packing a piece tonight, are ya?"

Rizzo just looked away.

"I almost choked on my soup," Perkins said later.

The last straw for Perkins came when Rapp told him he was a felon and asked if that would bar him from thrift ownership. Perkins told Rapp that felons couldn't own thrifts. He later excused himself, feigning a family emergency.

During this time, Rapp, determined to own his own financial institution, showed up at Bazarian's Halloween party with a new pigeon in his sights. He just needed help bagging it. He told Bazarian and Renda that stockholders of a small institution in Orlando, Florida Center Bank, had agreed to sell him their stock. All he needed was for Bazarian to write him two $5,000,000 (rubber) cashier's checks on a bank Bazarian controlled. The deal, he explained, would work like this:

• Five million dollars would buy controlling interest in Florida Center Bank.

• Five million dollars would be placed in a ten-year C.D. at the institution.

• The bank would pay Rapp ten years' interest in advance on the C.D. and make him a loan using the C.D. as collateral.

• With that money, Rapp would buy another C.D., collect the ten years' up-front interest on it and get another loan on this second C.D.

• Rapp would go through this process three times in quick succession, and in a couple of days, he'd have enough money to make good Bazarian's bogus cashier's checks and, for his trouble, pay him $300,000 (which Bazarian split with Renda).

Once in control, Renda could broker deposits into Florida Center Bank and they could all three become happy borrowers.

The scheme worked just as Rapp had explained it, and he borrowed about $12,000,000 from the bank before an informant alerted the FBI. Rapp, Bazarian and Renda were indicted in September 1986. Investigators discovered that Rapp's merry band had been running a two-year nationwide looting operation, and investigations were also opened in New York, Los Angeles, Denver, Miami and Orlando.

To keep Rapp from frittering away the millions he was accused of stealing, a "tough" Federal judge imposed on him a $7000-a-month spending limit. But Rapp couldn't let go of the golden ring. In just one month, he spent more than $44,000. The angry judge had him arrested.

During their trial, Rapp, Bazarian and Renda conducted themselves like three frat boys, never passing up an opportunity to annoy the Federal prosecutor. Former heavyweight champ Muhammad Ali roamed in and out of the courtroom when the prosecutor was speaking, distracting the jury. And at lunch each day, while the prosecution team munched hamburgers and tuna sandwiches, the three defendants staged a culinary extravaganza. Rapp had gourmet delicatessen food, including cheesecake from Leo Lindy's on Broadway, flown in fresh each morning from New York City. Houseboys served the defendants with linen napkins.

Rapp invited the prosecution team to join them, crooning, "Hey, ya oughta try some of this cheesecake, it's really gooooood."

The jury convicted all three men.

[As we went to press, a flurry of new indictments in the Florida Center Bank case were being readied.]

Gray Skies Over Texas

The three bustketeers, Rapp, Bazarian and Renda, were only three of hundreds who moved into S&Ls within months of the October 1982 Rose Garden signing. Fraud and corruption swept the industry.

The first hint of what was happening out in the field reached Washington one morning in March 1984, when Edwin Gray, chairman of the Federal Home Loan Bank Board (FHLBB), which supervised the nation's thrifts, opened his morning dispatch and found a classified report and video tape sent by his Dallas regulators.

In a darkened board room just a block from the White House, Gray and the two other Bank Board members watched the video tape. The narrator appeared to be in the passenger seat of a car driving on Interstate 30, east of Dallas. The camera panned slowly from side to side, catching in sickening detail the carrion of dead savings-and-loan deals--thousands of condominiums abandoned and rotting in the hot Texas sun. Loose wiring and insulation swung in the quiet, dry air. Some of the units had gotten no further than a concrete slab--"Martian landing pads" a U.S. attorney would later call them.

Texas regulators told Gray that Empire Savings, near Dallas, had sunk tens of millions of dollars of Federally insured deposits in the derelict projects. Most of the money, they said, had been "dissipated." Empire was at least $300,000,000 in the hole.

"I was so shocked and stunned at what I was seeing that it had a profound effect on me," Gray later recalled. "It was like watching a triple-X movie. I was sick after watching it. I could not believe that anything so bad could have happened." He watched the tape over and over, even arranging for his friend Federal Reserve Board chairman Paul Volcker to view it.

Gray had been chairman only ten months. He had been appointed by his longtime friend Ronald Reagan, whom he had served as press secretary and advisor since Reagan's days as governor of California. Gray was certain that what was going on at Empire Savings was not what the President had had in mind when he signed the thrift deregulation act. He realized immediately that easily available brokered deposits were the fuel on which juggernauts such as Empire ran, and he announced that he would establish new regulations severely restricting their use.

From that moment, Gray's life as FHLBB chairman became a living hell. Overnight, he became every thrift lobbyist and politician's favorite punching bag as he pushed for tighter regulations. The free enterprisers in Washington, especially Treasury Secretary Donald T. Regan, would have none of it.

Before joining the Reagan Administration, Regan worked at Merrill Lynch, which became one of the largest deposit-brokerage businesses in the country, and earned among many the nickname "the father of brokered deposits." When Gray moved to ban brokered deposits, Regan hit the roof.

Gray said that within hours of going public with his plan, Regan's right-hand man, R. T. McNamar, called him and kept him on the phone seven hours, trying to get him to change his mind. Gray said he tried time and again to call Regan directly, but his calls were never returned. Word around Washington was that Regan was telling anyone who'd listen that Gray was "off the reservation" and had to go.

Gray ultimately lost his battle to limit brokered deposits when a Federal court ruled that Congress had not authorized the FHLBB to pass such a sweeping limitation. So he decided that if he couldn't control the money going into thrifts, he could at least limit what thrifts did with it; and he proposed strict new limits on how thrifts could invest deposits. He became "the great re-regulator" among Reagan groupies, who saw him as revisionist and counterrevolutionary.

Again, all hell broke loose. This time the "Dump Gray" chorus came loudest from Texas. Dozens of Texas thrift rogues such as Sunbelt's Ed McBirney weren't about to relinquish without a fight their God-given right to wheel and deal with Federally insured deposits. Unlimited access to the vault had fueled a Texas nouveau aristocracy not seen since the days of wildcat oil.

Vernon Savings and Loan owner Don Dixon, for example, regularly jetted off to Europe on one of Vernon's five aircraft. On one trip to Rome, he enjoyed a brief audience with the Pope, presenting His Holiness with a $40,000 Western oil painting--paid for, like the trip, by Vernon Savings.

Vernon's headquarters were in Dallas, but the S&L maintained a swank Southern California beach house from which Dixon often commuted back to Texas. At a three-day meeting of Vernon's board of directors held at the beach house in 1985, nearly a dozen hookers, hors d'oeuvres for hard-working board members and Vernon officers, roamed the halls.

Later, a grand jury indicted a Vernon executive, alleging that he had used Vernon money to hire prostitutes for a former S&L commissioner. The executive's lawyer filed a motion that the charges were improper because the S&L commissioner had been impotent at the time. In other words, the commissioner's assets may have been softer than Vernon's.

Dixon also enjoyed the use of a $1,900,000 Swiss-style chalet in the exclusive Colorado ski community of Beaver Creek and a $2,600,000 112-foot-long yacht, High Spirits, sister ship to the Presidential yacht Sequoia. In the winter, Dixon docked High Spirits in Florida, but as soon as the cherry blossoms were out in Washington, D.C., he had her moved north to entertain politicians.

Brokered deposits from Renda and others helped pay for these perks and funded loans to Ferrante, Bazarian and many others. Vernon became a favorite watering hole on the nation's thrift circuit.

During the same time, Dixon's friend Tyrell Barker was running roughshod over his Texas thrift, State Savings and Loan. A workaholic, Barker often showed up at his Dallas office dressed in a jogging suit. As he cut multimillion-dollar deals with would-be millionaires, he liked to watch his two dogs frolic in the pool and waterfall he had had specially built for them just outside his office.

A developer scurrying to get one of Barker's loans was asked, "How do you know what property to buy?"

"Wherever my dog lifts his leg, I buy that rock and all the acreage around it," came the reply.

Barker's favorite saying was, "If I rest, I rust." The FSLIC now wishes he'd done a lot more resting and a lot less lending. When State Savings took a dive, it cost the FSLIC half a billion dollars.

Dixon and Barker had purchased their thrifts with money provided by Louisiana businessman Herman K. Beebe. From time to time, they visited Beebe at his 11,000-square-foot Colonial mansion nestled in a secluded compound outside Shreveport.

Beebe's flagship companies were AMI, Inc., a $155,000,000 insurance conglomerate with 17 subsidiaries, and Bossier Bank & Trust near Shreveport. He came to be known as the godfather of Southwestern thrifts. A secret report compiled in 1985 for the Comptroller of the Currency said he may have influenced 109 banks and thrifts scattered across Texas, Louisiana, Arkansas, Oklahoma, Mississippi, Colorado, California, Ohio and Florida.

Beebe had a long-established pattern of having affiliated banks and S&Ls lend money to his associates so they could buy financial institutions that would lend him money and purchase credit life insurance from AMI. Dixon's Vernon Savings and Barker's State Savings made such Faustian pacts. Renda's firm brokered deposits into many of these institutions.

Beebe was close to former Louisiana governor Edwin Edwards and former Texas lieutenant governor Ben Barnes. (In the Eighties, Barnes was former Treasury Secretary John Connally's business partner. They reportedly borrowed $40,000,000 from Vernon.) Beebe traveled frequently by limousine from Shreveport to an office in Dallas 150 miles due west and by jet to his second home at California's La Costa resort, built by reputed Mobster Moe Dalitz and others with $97,000,000 from the Teamsters' Central States Pension Fund.

As far back as the mid-Seventies, rumors had circulated that Beebe was associated with the Mob, particularly New Orleans crime boss Carlos Marcello. Beebe has denied the charge. But Marcello, his son Joseph and several companies connected to Marcello reportedly received large loans from a bank that regulators said was controlled or influenced by Beebe.

In 1985, a Louisiana jury convicted Beebe of defrauding the Small Business Administration. In 1987, the U.S. Attorney in Shreveport indicted Beebe again, this time for fraud involving $30,000,000 in loans from more than 16 financial institutions from Colorado to New Orleans. After his trial ended with a hung jury, Beebe cut a deal, pleading guilty to two counts of bank fraud, rather than face another trial. He spent less than a year in prison and was released in April 1989.

"If they'll leave me alone," Beebe told a reporter, "I'll be right back on top after two or three years."

•

Like hogs at the trough, this network of good-ol'-boy Southern bankers sucked loans out of deregulated thrifts. And they got plenty fat. But after FHLBB chairman Ed Gray saw the Empire Savings video tape in 1984, he and his regulators began cutting off the feed supply. By late 1986, constituents' cries of anguish were ringing in Texas Congressmen's ears. Examiners were acting like "hit squads," using "Gestapo" tactics, they complained. House Majority Leader Jim Wright, the Democrat from Fort Worth, who would become the powerful Speaker of the House in January 1987 (but who would have to resign in June 1989), agreed to intervene on their behalf. At first, he tried cajolery and persuasion, but finding Gray unmoved, he switched to hardball.

Gray was desperately pushing a bill in Congress that would replenish the FSLIC fund, badly depleted after two years of picking up the tab for failed S&Ls. Without FSLIC funds to pay off depositors, regulators could not close the hundreds of remaining insolvent S&Ls. Every day these zombie thrifts stayed open, their losses mounted by millions of dollars. The FSLIC recapitalization bill, the "recap," was a critical piece of legislation that could have saved taxpayers billions of dollars. Instead, it became a political football.

On September 26, 1986, the recap bill was on the House calendar, scheduled for quick consideration, but Wright removed it for 10 days. The threat to Gray was unspoken but, he felt, real: "Take care of my friend in Texas or your bill goes nowhere."

In the coming months, Wright asked Gray to "look into" the problems of Texan Craig Hall at Westwood Savings in Los Angeles, Scott Mann at CreditBanc in Austin, Don Dixon at Vernon Savings in Dallas and Tom Gaubert at Independent American in Irving, Texas. Gaubert especially had Wright's ear. He was treasurer of the Democratic Congressional Campaign Committee. Wright's colleague Representative Tony Coelho of California was chairman. In 1986, Gaubert raised $9,000,000 for House candidates, and in 1987, he chaired an event that grossed $1,000,000 for Wright. S&L people in the Lone-Star State were good to Wright and Coelho, giving them free (and sometimes unreported to the IRS) rides on their jets and yachts in addition to the contributions.

When Wright threatened the progress of the recap bill on behalf of these Texas thrift constituents, he got Gray's attention. Gray said he would look into the problems at the four institutions. Meanwhile, Wright's Texas thrift friends were also flooding his office with demands that he get Gray's pit-bull regulator in Dallas, Joe Selby, off their backs and out of their comfortable lives. Finally, Gray said, Wright phoned him one day.

"My sources in Texas tell me that Joe Selby is a homosexual," Gray said Wright announced. He went on to complain that Selby was hiring a ring of homosexual attorneys to work for the FHLBB in Dallas. Couldn't Gray find someone more suitable for the job? Gray told Wright that Selby was just the right man for the job. Wright had to break the bad news to his Texas friends that it looked like Selby was there to stay.

Of the institutions Wright had Gray look into, regulators had to take action against all four. At Vernon, they discovered that a staggering 96 percent of the loans--almost every loan on the books--was in default. They sued Dixon and others, charging them with looting Vernon Savings--now being cynically referred to as "Vermin Savings"--of more than $540,000,000.

The next day, Wright did an abrupt about-face, announcing that he was supporting a 15-billion-dollar version of the recap bill. He denied that his sudden shift had anything to do with publicity surrounding Vernon.

Wright's pimping for rogue thrift owners, particularly his legislative extortion in delaying the recap, allowed dozens of insolvent thrifts to remain open--like arteries hemorrhaging millions of dollars each day. By the time the recap did pass, in August 1987, so much additional money had disappeared that the bill no longer provided anywhere near enough money to close them all down.

A flat learning curve

By 1987, after three years of headlines about thrift failures, had Congressmen learned anything? No.

At six o'clock on the evening of April ninth, West Coast regulators met on Capitol Hill with five U.S. Senators who had summoned them to Washington. The Senators intended to strong-arm the regulators into easing up on troubled Lincoln Savings and Loan of Irvine, California. Lincoln was controlled by fervent antiporn crusader and Arizona businessman Charles Keating, Jr., a campaign chairman for John Connally's 1980 Presidential campaign. Keating, his employees and his associates had donated generously to the five Senators: Alan Cranston of California, or causes for which he solicited, $889,000; Dennis DeConcini of Arizona, at least $55,000; John Glenn of Ohio, $234,000; John McCain of Arizona, $112,000; and Donald Riegle of Michigan, $76,000 (which Riegle later returned).

For two hours, the Senators (except for Cranston, who excused himself after telling regulators he supported the other Senators) hammered on the regulators. Why were they harassing Lincoln Savings?

The regulators replied that Lincoln was party to numerous imprudent and perhaps illegal transactions and had cooked its books with inflated appraisals. "I've never seen any bank or S&L that's anything like this," one said. "They [Lincoln's practices] violate the law and regulations and common sense."

The meeting ended with no clear victor. The Senators left the room, perhaps to consider how to respond to their generous contributor.

But when Gray's term as FHLBB chairman ended in June 1987, he was succeeded by Danny Wall, who announced that responsibility for Lincoln's supervision was being taken away from the tough San Francisco regulators and moved temporarily to his office in Washington--something that had never occurred in the 50-year history of the FHLBB.

Eventually, even Wall had to admit the West Coast regulators had been right all along, and Lincoln was finally seized in April 1989. But by then, experts said, millions more had been dissipated by Lincoln's management. The cost of bailing out Lincoln is being estimated as high as 2.5 billion dollars.

When Keating was later asked if his financial support influenced politicians to support his cause, he replied, "I want to say in the most forceful way I can: I certainly hope so."

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Thrift deregulation was an expensive mistake. Although many S&Ls will survive, at least a third will not, and the cost to this country will be at least 285 billion dollars--much of which was stolen. Offshore bank accounts in the Bahamas, the Cayman Islands and in Panama are bulging. Yet thrift rogues have little to fear from the Justice Department, which was caught flat-footed by the scale and scope of the larceny. Most of these financial strip miners have escaped with their skins, money and reputations intact and have moved on to other digs. The Wall Street Journal reported early this year, for example, that Don Dixon is spending his days "dabbling in offshore insurance companies and playing golf at the La Costa Hotel and Spa." Others on the thrift circuit moved over to pull scams on HUD, where their names are now surfacing in that unraveling scandal. As the Feds turned up the heat, many went into lame-bird routine and filed for bankruptcy protection, claiming they were broke. "You can't get blood out of a turnip," Dixon moaned.

Will anyone ever pay for these crimes? Sure. Each U.S. taxpayer will have to cough up at least $1000 to repay the Federally insured money that was stolen. Still, even while the blood of hundreds of murdered thrifts runs fresh in the streets, powerful forces in Washington push for further deregulation in the financial-services industry. They want to repeal the 55-year-old Glass-Steagall Act, which, among other things, prohibits banks from involving themselves in Mike Rapp's old line of work--the securities industry.

The network that looted savings and loans can hardly wait. After all, there were only 3200 thrifts when deregulation kicked in, but there are more than 14,000 banks.

"In front of the shredder, a white-knuckled bank officer was doing the Ollie North shuffle."