The Scandal at RTC

I recently found myself in a coffee shop interviewing a nervous woman who works for the Resolution Trust Corporation. She was afraid we might be spotted and knew she would be fired if her name were used in my story. She talked of a witch-hunt in the agency and suggested a plot to defraud taxpayers. This was not some crank or screwball. I had been given her name by a respected business professor who had vouched for her credibility.

After a long career in commercial real estate, this woman had gone to work for the government agency that was set up by Congress in 1989 to help straighten out the S&L mess. What she found was that the RTC, after spending $85 billion and asking for $45 billion more, represents a scandal even greater than the original caper. The conspiracy she hinted at involves an attempt by Wall Street and the government to defraud taxpayers. It doesn't matter that Democrats now control the White House, since the key players in this scandal, which has been bipartisan from the beginning, remain in place.

The history of the RTC is one of incompetence further tainted by avarice. Even in its better moments, this agency has managed to bungle the smallest details of the operation, including the mundane tasks of office work. Perhaps you recall the story a few months ago of how the accounting firm of Price Waterhouse charged the RTC 67 cents a page for photocopying millions of pages of records. It was only after a congressional committee expressed outrage that the accounting firm returned $4 million of the $17 million it had been paid.

But that was a minor misdeed. The real problems with the RTC have to do with the waste of billions of dollars, not millions, through the rushed sale of seized assets at well below market value. And we are talking many billions. The cost of the S&L bailout is now at $200 billion--a conservative estimate--paid by interest-bearing 40-year government bonds. Servicing that debt will cost as much as $500 billion over the next decades.

Neither President Bush nor President Clinton was willing to make an issue of the S&L or RTC scandals during the campaign. Bush's reasons were clear: The debacle occurred on his watch and his own son was implicated as a director of the failed Silverado S&L of Denver.

Then, too, during the Bush years, wealthy Republican contributors had a field day picking the assets seized by the RTC from failed S&Ls. The Robert Bass Group, for example, which was a financial backer of Bush campaigns, joined with General Electric Capital Corp. in 1991 to buy $1 billion in bad real estate loans at the bargain-basement price of $527 million. No wonder the RTC-asset auction list at one point cost $50,000.

Under Bush the RTC forced out or demoted lawyers who dared to suggest that the agency was making sweetheart deals in settling cases of fraud. A policy was set in motion to ignore smaller independent investors while favoring the largest Wall Street brokers at a considerable loss to the taxpayers.

This should have been a hot issue for the Democrats, but the Clinton campaign pointedly ignored it. "The Democratic party as a whole has seemed inclined to help Bush try to bury the mess," The Los Angeles Times reported in the last month of the presidential campaign. "Some outside analysts believe that questions about the involvement of Clinton and his wife with a failed Arkansas thrift, an issue that surfaced early in the presidential campaign, may have stifled his criticism of Bush on the issue."

Now we have Clinton's trusted childhood friend, chief of staff Thomas McLarty, whose company was a defendant in a $535 million lawsuit brought by the RTC. The federal agency alleges that McLarty's firm, Arkla Inc., is responsible for "misdeeds and negligence" in the operation of University Savings of Houston, a failed thrift seized by federal regulators in 1989. It is estimated by the RTC that the failure of University Savings will cost taxpayers $2 billion.

McLarty, who was chairman and chief executive officer of Arkla, says his holding company is not responsible for the irresponsibility of the thrift. In 1988 Arkla bought a natural-gas company called Entex, which owned University Savings. Entex had owned the thrift for the previous ten years.

Presumably, Arkla had looked into the operations of the subsidiary and should not have been shocked when it went bust in 1989. But McLarty insists his company bears no responsibility for the loss to savers at the thrift. His reasoning typifies the flimflam world of financiers in the Eighties. The poor suckers who got burned by the S&L may react viscerally, but to McLarty, University Savings was evidently just another property pushed around the board of high finance.

Pushing around paper profits was what mangled the U.S. economy during the Eighties, but, unfortunately, Clinton has turned over the day-to-day operation of economic planning to two old pros. Robert Rubin, recently cochairman of Goldman, Sachs & Co., the Wall Street investment firm, is coordinator of economic policy in his job as chairman of the new National Economic Council. Roger Altman, a close friend of Clinton's since their college days at Georgetown, is deputy secretary at the Treasury Department. He was vice chairman of the Blackstone Group, a New York investment bank.

Altman's boss is Treasury Secretary Lloyd Bentsen, known as "Loophole Lloyd" to his colleagues in the Senate. Bentsen also has a potential conflict of interest on S&L matters. His son Lan Bentsen is being investigated by the RTC for a possible violation of contracting rules concerning a $54 million default to the RTC by a company in which Lan was a principal. In a separate case, the RTC has already concluded that one of young Bentsen's firms, Lan Bentsen Interests of Houston, had what The Washington Post reported in March as "legal and ethical conflicts that should have barred it from doing work for the RTC."

No wonder Senator Bentsen didn't raise any questions about Altman's possible conflict of interest when his name came up as the deputy overseeing RTC activity. Bentsen also supported the selection of Rubin as economic czar. Rubin once managed a portion of the superrich Texas senator's personal investment portfolio.

Nor did President Clinton look askance at the fact that his two top economic advisors (continued on page 174)Scandal(continued from page 57) had been involved in some of the more questionable transactions of the agencies they will now supervise. He has shown no concern that BRW Inc., a joint venture of the Blackstone Group, Goldman, Sachs and J. E. Robert Co., has been one of the main beneficiaries of the fire sales of failed S&L assets.

A study by the Southern Finance Project, a highly regarded nonprofit research center, shows that BRW paid the RTC only $39.8 million for $65 million worth of property, indicating a bargain rate of 61 cents on the dollar. This was during a period when the RTC was turning down smaller would-be investors who were offering close to full price for properties.

How did the RTC make such bizarre policy decisions? Among other things, it turned to Blackstone and Goldman, Sachs, paying them handsome fees for advising the agency on policy, even though they were also customers. "It is an incestuous environment," Tom Schlesinger, director of the Southern Finance Project, told the L.A. Times. "The companies that make up BRW are simultaneously playing different sides of the S&L bailout." Goldman, Sachs, for instance, profited perhaps more than any other firm from the RTC fire sales. In one case involving City Savings, a failed New Jersey thrift, Goldman, Sachs ended up with the right to buy $3 billion of RTC mortgages, which the RTC didn't have in its inventory at that bank. Instead of just paying off Goldman, Sachs, the RTC granted it the right to pluck $3 billion of the lower-quality loans from the RTC inventory. The L.A. Times reported that "critics within the RTC said the deal amounted to a windfall for the firm that could add $150 million to the bailout bill."

The cozy relationship between Wall Street firms and the RTC should get cozier now that the top executives of the firms have been brought in as the foxes protecting the government's henhouse. Rubin is likely to oversee the S&L bailout in his job as coordinator of economic policy. Altman will head the RTC oversight committee at the Treasury Department.

Contributing to the losses at the RTC is the failure to value accurately the assets being sold. Despite a $52 million computer system built to RTC specifications by IBM, the RTC never got a clear idea of its own inventory. The General Accounting Office found the slow and erratic system useless and concluded that 80 percent of these all-important records are missing crucial pieces of information. As the L.A. Times reported after its own investigation: "The system is riddled with data errors. A modest home in Phoenix with an appraised value of $73,000 is listed by the computer system at $79 million." An IBM spokesman defends the company by asserting, "The system is doing exactly what the RTC asked it to do."

Critics within the agency charge that the RTC used its incompetence as an excuse for abandoning the sale of properties to smaller individual buyers. Instead of methodically selling properties to the highest bidder, the agency threw up its hands and invited top Wall Street firms to package pools of resources to sell back to the very firms that were doing the packaging. Ordinary buyers, lacking the huge cash reserves needed to bid at auction on such expensive bundles of property, were simply out of luck.

Then the RTC hit on the idea of securitization, selling shares backed by large groupings of sound mortgage loans through Wall Street. This decision, made at a time when the Wall Street investment houses were advising the RTC, also benefited those houses because they had the means to buy and sell large property blocks and securities.

As The Washington Post noted last December, "Goldman, Sachs already has been one of the biggest players in the three-year-old S&L cleanup and hopes to play an even larger role as the government relies more heavily on Wall Street to sell its thrift industry." A Goldman, Sachs spokesman told the Post that "Rubin is taking steps to ensure that his holdings at Goldman, Sachs don't compel him to step aside from government decisions affecting S&Ls and other financial institutions."

Big deal. His holdings will be put in a blind trust. Does anyone think for a second that Rubin and Altman will suddenly start thinking of the interests of the taxpayer rather than of the Wall Street giants that spawned them?

I'm not much of a fan of Albert Casey, the former head of American Airlines who has been running the RTC this past year, but it worries me that even he is alarmed. "What are we going to do now, when we do all this business with the Blackstone Group and Goldman, Sachs and Clinton brings all those people in?" Casey asked in an interview reported in The Wall Street Journal. In the case of Goldman, Sachs, "all this business" meant the purchase of $890 million in assets from the RTC and in underwriting securities based on $15.2 billion in mortgages from defunct thrifts--plus the purchase of almost $3 billion in junk bonds at much-reduced rates.

While all of that was going on, Rubin managed to gain a net worth of between $50 million and $100 million in Goldman, Sachs. And Dee Dee Myers, Clinton's press secretary, tells us, "We're going to work very hard to remove the appearance of a conflict."

Soon after Myers made her statement, The New York Times published parts of a letter from Rubin to Goldman, Sachs' clients telling them they would be well served by the firm while he is in the White House. He ended his statement by saying, "I look forward to continuing to work with you in my new capacity."

I bet he does, and Goldman, Sachs will make out as well as it always does. But what about the rest of us? Doesn't Congress have an obligation to say enough is enough? The taxpayers have paid dearly for this S&L mess. In return for the $4 billion handed the RTC, Congress should insist on playing with a clean deck. At the very least, a full-blown congressional investigation of the manner in which failed thrift assets have been sold is in order. And in the spirit of free enterprise, let's allow ordinary investors a fair shot at these properties.

Justice is not likely. At the same moment in March that Loophole Lloyd asked Congress for the new handout, he appointed Altman acting chairman of the RTC. These people have no shame.