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News Analysis: Bush Sub-Prime Collapse Echoes Reagan Disaster

By Richard Brenneman
Friday February 01, 2008

When 60 Minutes tackled the FBI investigation of the mortgage implosion Sunday night, producers looked to Stockton, “ground zero for the current financial crisis and a microcosm of everything that went wrong.” 

But their coverage of the current crisis overlooked another foreshadowing crisis for which Stockton was also Ground Zero—another national financial disaster under another Republican president. 

The link was there, early in Steve Kroft’s opening remarks. “A few years ago, it was one of the hottest real estate markets in the country; today it is the foreclosure capital of America.” 

A few years before that, Stockton had given birth to a hometown S&L that rocketed into the deregulated stratosphere of the early Reagan years to become the nation’s largest, and the darling of Wall Street. 

State Savings And Loan transformed itself into American Savings, the linchpin of Financial Corporation of America (FCA), with its vast network of mortgage funds bankrolled by double-digit uninsured jumbo CDs. 

The eventual collapse of American Savings is still the largest-ever bank failure in the country’s history. What is less well known was that its crimes were known to the same law firm that produced the two federal prosecutors in charge of the case: the local U.S. Attorney in Sacramento and U.S. Attorney General—and for years Reagan’s personal attorney—William French Smith. Another senior attorney from the same firm sat on FCA’s board. 

The collapse was completely predictable to someone on the outside, too. 

I know this as an absolute fact, because I did predict it, and I got exiled to the night cops’ beat at the Sacramento Bee because I refused to stop trying to write about it. I still have the letter of reprimand I got when I shouted at my editor. “You insisted we were missing a national story,” he wrote. I give him credit for that. And night cops is the rookie’s beat, the same one I took when I hired on at the Las Vegas Review-Journal at age 19. 

The FBI had a good idea what was happening, enough to merit a thorough investigation. It was their prosecution of a former State S&L vice president who pulled off a trailer loan pyramid scam in partnership with a concessionaire who had previously been the proud proprietor of“Jesse James Motors,” a used car lot in Fresno. But that investigation died an odd death when the culprits entered plea bargains. 

One of the peculiarities of the case I discovered was a lawsuit filed by the fellow from Santa Rosa who had previously brokered the bank’s trailer loan concession. Alleging he was wrongly deprived of the loan business, the Santa Rosan laid out the details of the scam in the court records I found in Stockton. The bank settled after negotiations by its law firm, the same one that produced the attorney general, the U.S. Attorney and one of FCA’s directors. 

By the time I had devoured the trailer case papers, I was tumbling to other schemes, the biggest and most disastrous of which involved mortgages. The bank was lending vast sums for office buildings, shopping centers and subdivisions, but often not quite enough to get things finished—often in the range of 90 percent of final costs. But developers, being the world’s eternal optimists, presumed that once they’d consumed their 90 percent, the bank would cough up the rest. 

When the bank refused to loan the rest, the projects drifted into foreclosure—in the case of one subdivision I toured, minus all but carpets and lawns—and the bank then peddled off the loans for between a quarter and fifty cents on the dollar. 

When I ran the paper trails on the buyers, I found partnerships controlled by partnerships, sometimes as many as five or more levels deep, until I wound up in the telephonic presence of a couple of old fellows who had ties to the old Al Capone Outfit and who had made a fortune during World War II buying up property seized when many of California’s Japanese-Americans were sent to concentration camps. 

The State corporation itself was a circus, with the bankers playing their own financial games on the side. The spouse of FCA’s CEO owned a private jet airline which did business with the bank, and which had its offices furnished by FCA. The bank was buying the furnishings of its branches from another partnership that turned out to consist of another executive and his spouse. 

A group of executives owned a party pad over on the coast through a partnership named Wizbang. The bank president had a pole in his yard he called his “farting post,” where inebriated guests were encouraged to cut the cheese for the uproarious entertainment of all. 

I documented all of it. 

But I was told, in writing, that the Bee didn’t consider my stories worth the effort, despite frequent heartfelt pleas. Finally, when I produced yet another story after being told to drop it for the third or fourth time, I was dispatched to night cops. 

Later, after I had quit the Bee in frustration and not long after the FCA empire collapsed in bankruptcy, I dropped by the paper to talk to a friend. Walking down a hallway after a brief visit, I encountered the editor who had banished me. He greeted me with a nod. I nodded back. “Looks like you were right, Dick.” 

American Savings was the biggest of the banks that fell to a variety of forces, but all of it involved mortgage foreclosures and the reckless pursuit of anything that could pay the high rates promised on those jumbo certificates of deposit. The ensuing oversupply of downtown office buildings led to foreclosures and bankruptcies, while subdivisions stood empty and shopping malls filled only with echoes. 

The banking collapse threatened hundreds of billions in jumbo CDs, many payable at rates far above the post-debacle norms. Jumbo CDs aren’t insured—thus the rationale for the higher rates—but the feds reorganized the deposit insurance systems, and paid off all the certificate-holders. 

The reason the uninsured were so considerately protected was because so many of the notes were held by unions, churches, pension funds, school districts and other branches of local and state governments and a whole lot of very rich and powerful people. The whole thing cost the U.S. Treasury about half as much as the whole Vietnam War. 

I was one of several reporters working on the S&L crisis at the time, and all of us were sidelined in one way or another. I found out why later, when a Sacramento banker took me to lunch to explain why he’d told the paper to either kill the story or lose his advertising—which was substantial. That’s when I realized what “not worthwhile” meant. 

So when I watched the opening of the 60 Minutes segment and learned that Stockton was the center of yet another mortgage catastrophe I wasn’t all that surprised. 

What does have me wondering is just what were the forces this time that kept the press from screaming out something that should’ve seemed ridiculously obvious to anyone who took a good look at the wonderful world of deregulated banking. 

Where the hell was the press this time? Why didn’t admonitions become the dominant memes? Why weren’t a lot more questions on a lot more lips? 

In the conversation to come, as blame-throwers blast away at bankers, regulators and, increasingly, the borrowers themselves, save a few barbs for us, the folks who’re supposed to serve as your representatives to the rich and powerful. Ask us how we fulfilled our role as keepers of public forums. Ask us if we had questions, and what we did or didn’t do to give them voice.