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I come before you, at your invitation, as a witness.

I know you will be asking questions today about whether or not certain senators put undue pressure on me in my capacity as

head of the Federal Home Loan Bank Board.

In order to answer that

question, I believe you must know something about the political situation in which I found myself in April, 1987.

The savings and loan system was created in the early 1930s under federal statutes to encourage personal saving and home ownership. As part of these statutes, congress insisted that home mortgages be made at long-term, fixed rates of interest. In the

early '80s, when interest rates climbed to unprecedented levels, hundreds of S&LS failed because what they earned from their fixed

rate mortgages was less than what it cost them to attract and

retain savings deposits.

The federal government chose to respond

by further deregulating the thrift industry in 1982.

with enactment of the Garn-St Germain Act in the fall of

1982, Congress allowed federally chartered S&Ls to move far more

heavily into commercial lending, especially commercial real estate. California and other states, especially across the sunbelt, went much further with their liberalization. California, for example, enacted a law authorizing its S&Ls to go into any

kind of business they wished.

California and other states went

beyond the federal law and gave their S&Ls the right to use federally insured deposits to play the stock market or to buy and run any type of enterprise the mind can conceive of, including

real estate speculation.

These especially liberal sunbelt state laws for state

chartered thrifts attracted a new breed to the S&L business.

These so-called entrepreneurs had the mentality of the venture capitalist. While the temperament may be legitimate, it also can be very dangerous in the absence of a strong commitment to fiduciary responsibility by the operator of a publicly chartered thrift. Almost all of the capital these new S&L entrepreneurs were putting up for these ventures was not their own. It was other peoples' money, and the government stood to make up the loss if their endeavors failed. Their venture capital was, almost completely, federally insured deposits. If their S&L enterprises succeeded, these thrift operators would be rewarded handsomely. If their ventures failed, the Federal Savings and Loan Insurance Corporation that is to say, the taxpayers

would be required to pay all losses. In other words, heads they would win. Tails,

the taxpayers would lose.

Moreover, two years before the Garn-St

Germain Act, the government had decided to increase its insurance coverage to $100,000 per account. This move greatly raised the taxpayers' ultimate exposure to the risk of loss, and to actual

When I arrived to become chief thrift regulator in May, 1983, a burgeoning new industry that of the money brokers was pouring new money, which were called brokered deposits, into the newly deregulated thrift system. The brokered deposits were federally insured if the venture capitalists' projects crashed. Much of this money was going to the thrifts paying the highest interest rates. These high-interest Sels, not surprisingly, were often run by the new breed of thrift operators, particularly those who didn't want to stick to making home mortgages. The brokered deposits often went to weak thrifts which couldn't really afford to pay the high rates the money brokers were asking. Weak thrifts took the money anyway: After all, the deposits were federally insured. Almost as quickly as the money arrived, it was lent and invested in often very speculative endeavors, many of which went


When Congress and the various states deregulated thrifts,

nothing was done to strengthen the regulators' ability to keep

tabs on how all this federally insured money would now be used. California reduced its professional regulatory staff to a few dozen in number, notwithstanding the fact that it had given its thrifts the most liberal banking law in history. The Garn-St Germain Act the federal thrift deregulation law -- made no provision whatsoever to help the regulators cope with the

altogether new, and frankly dangerous, thrift operating environ


The agency I headed, unlike the FDIC and the Federal

Reserve System, was supervised by the office of Management and Budget and the office of Personnel Management. OMB controlled our budget. OPM set the salaries. The Bank Board was consistently denied any help at all by OMB in obtaining meaningful increases in staff and by OPM in setting salary levels high enough to attract and retain staff. For example, OPM would allow us to pay an entry-level examiner only $14,000 a year at most, and our examiner turnover rate was, naturally, horrendous. Half of our exaniners had less than two years experience on the job. Yet we were directed by law to stay on top of events in an industry which held almost a trillion dollars in increasingly risky assets and which

had virtually no tangible net worth to cushion against losses.

Meanwhile, FSLIC's reserves were being depleted by losses

from bad assets, a problem fueled by rapid growth in insured deposits. Moreover, the ratio of FSLIC reserves to insured deposits was deteriorating steadily.

I began warning about this state of affairs not long after

I took office.

Indeed, I warned of the consequences to come so

often and continuously that I became known as Chicken Little and as an alarnist. During my term at the Bank Board, those who

opposed my policies dismissed them

and me

by saying that I

was no expert in these matters.

I did not come to my position on

the S&L crisis because I was an accountant or lawyer or financial

guru. But I did have good judgment, honest instincts and the capacity to work hard. I relied on basic common sense and I had a

skilled and conscientious staff. The information they continued to provide me made it chillingly clear that the PSLIC and the thrift system were doomed without major regulatory and statutory


As Bank Board Chairman, I tried to restrict brokered

deposits, to require thrifts to grow no more than their earnings justified, to rein in the high flyers in the industry, to get rid of dangerously inflated accounting, to increase capital requirements, especially against risky assets, to classify assets appropriately, and to toughen appraisal standards. These initiatives all met stiff resistance from many in the thrift industry.

The very powerful and financially generous thrift lobby in

Washington defeated every effort we made on Capitol Hill to

achieve statutory reforms of the thrift system that would have taken the agency out from under OMB and OPM, gained authority to impose risk-based insurance premiums against high-risk activities, limited state thrift powers to those permitted by Congress for federally chartered thrifts, and granted much tougher enforcement

powers against imprudent and crooked S&Ls.

For two years, the

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