A Well Traveled Road To Ruin
First and foremost, what is obvious in reading the book is that a very small nucleus of very bad apples successfully raped and pillaged the thrift industry of many hundreds of billions of dollars. This was not a widespread series of isolated individuals who all happened to have the same larcenous idea at the same time – rather it was a group of predators who all were intertwined in a Gideon’s knot of complex flim-flams that wound up costing the nation an unprecedented amount of its worth.
What is shocking is that so few individuals could so dramatically destroy so much wealth, and leave the taxpayers footing the bill. Follow along and you will see why I believe that there are such strong similarities between that financial scandal, and the hedge fund/manipulation/naked short selling scandal that is unfolding even as we speak.
First, understand that what enabled the fleecing of a country’s banking system was deregulation – the reduction of regulations that had been in place to prevent widespread abuse of the industry – specifically, the elimination of the rule that limited brokered deposits (deposits from entities looking for the highest daily interest rates, which were brokered by guys whose business it was to locate and direct money to the best deal of the day) versus locally generated deposits, and the elimination of regulation governing loan types. The thinking was that the market would work itself out, and that capitalism would prevail, creating a sort of financial evolution in which the superior models survived (note the striking parallel to the elimination of the uptick rule for short selling, as well as the effective elimination of prompt delivery requirements - in violation of 17(a), and in violation with the primary mandate of the SEC from 1934).
This flew in the face of everything we know about human behavior and history, but everyone just kind of ignored that, and pretended that things were different this time.
A lack of oversight and regulation where money is involved invites in the wolves, and they are not a particularly civilized nor conscientious bunch.
Lack of regulation always, and I do mean always, creates an environment where larceny is the rule of the land. Happens every time, no exceptions.
The way the S&L scam worked was that entrepreneurial crooks would buy an S&L, and then get hooked up with the small network of deposit brokers that controlled the money flow, and build up the amount of money the S&L had to lend. This was done by offering a slightly higher interest rate than peers, and doing a sweetheart deal with one of the brokers – generally a tit for tat: "we bring you a hundred million, you make a ten million loan to my buddy Vinnie". The S&L didn’t care, because it was the government’s money – all deposits, as long as they were in hundred thousand dollar chunks, were fully guaranteed and insured by the Fed.
So the depositors were protected, and the borrowers were in hog heaven – million dollar loans were made for literally worthless projects, and the money would disappear into a labyrinth of shell companies and partnerships. And those operating the abusive S&L's lived lives of power and luxury rivaled only by...present day hedge fund managers.
In the S&L game the same names kept appearing time and time again – the same deposit brokers, the same borrower networks, the same associated friends and groups, and ultimately, inevitably, organized crime figures.
Our elected officials were swayed by the powerful and rich S&L lobby, and the fact that their campaign contributions came from many of the wealthy who were a critical component in bilking the system – so they were absolutely against any reining in of this new cash cow business, that was fueling such astounding prosperity and growth.
Our own Fed Chairman, Greenspan, then a prominent and respected economist, sent the head of the S&L regulatory agency (FSLIC) a letter indicating that all was well, and that he (Gray) should stop worrying, that deregulation was working as planned – he even named 17 thrifts that were benchmarks of the new success and prosperity. The irony is that 4 years after writing that letter, 15 of the 17 were out of business and had cost the FSLIC $3 billion in losses. Greenspan was working as a consultant to Charles Keating at the time, of Lincoln Savings and Loan Fame. Small world.
And here we are. Greenspan is assuring us that the hedge fund industry doesn’t need any meaningful regulation, those chartered with regulating the markets are either turning a blind eye or are actively conspiring with hedge funds that routinely violate the rules against naked short selling – and are covering up for them by keeping all FTD info secret (by the SEC’s own admission, per their online FAQ).
Dr. Byrne postulated in his presentation that the conspiracy of greed that was the collection of hedge funds, media personalities, private investigators, high net worth politically connected individuals, class action attorneys, etc. was all being driven by a tactical manipulation boss, and another individual who masterminded the whole scheme.
That was routinely mocked as being impossible, outlandish, silly, deluded, the workings of a disturbed mind.
And yet when we look at the single greatest financial fraud in the nation’s history, we find a network of connected individuals working at the direction (or being led by) several well placed gentlemen who understood the loophole that the brokered deposits represented, and who structured the incredibly complex transactions to funnel loans into the black hole whence they disappeared, never to be seen again.
We find a few strategic operators who propagated their larcenous activity in an almost viral manner, compromising the entire system.
We find a regulator that is hamstrung by elected officials whose allegiance is to rich and powerful lobbies, rather than to the country’s good (Donald Regan, Kevin Ingram’s mentor and the former head of Merril, was the primary anti-regulation guy in the S&L scandal).
We find our beloved Fed Chair arguing against regulation, and using the biggest crooks in the industry’s history as his model of success.
We find huge money moving around without any accountability.
We find repeat offenders who were responsible for being convicted in prior illegal schemes hard at work milking this illegal scheme.
We find a who’s who of supposedly respectable high net worth fellows who were robbing the system blind, and who spent little or no time behind bars for the financial fraud of the century.
Many of the players were previously involved in Wall Street scams, or real estate swindles, and all had a disdain for law enforcement and the regulatory system – which was appropriate given the risk/reward profile of the amount looted from the system versus days spent in jail.
The S&L aftermath and federal bailout left each and every taxpayer in this country with a bill estimated at greater than $2K per person. And it is small potatoes compared to what is being described as the contingent liability arising from the FTDs.
If you aren’t worried, and you are too dim or too naïve to see the pattern here, and the historical precedent, and the marshaling of forces to defend the indefensible, then you are living on a different planet. Not only has there been widespread larceny involving a coordinated scheme directed by just a few players, but there has been one recently, with the best and brightest from Wall Street and our government involved.
So next time you are reading an article about how wacky the whole thing is, how impossible, reflect on the S&L debacle, and the fact that the exact same tactic of denying everything, and then minimizing the size of the problem, and attacking the messengers of warning…all are SOP when the system is caught with its hand in the nation’s cookie jar.
Here we go again.