Question: Silverado Banking, Savings and Loan Association–the failed Colorado thrift that was connected with Neil Bush, the president’s son–collapsed with a loss to taxpayers of $1 billion and vanished in 1988. Right?
Answer: Wrong. Silverado will cost the taxpayers a bundle, all right. Yet instead of being closed, it was merged with another failed Colorado thrift, Columbia Savings, in late 1988. Now the “new” S&L–Columbia–is one of the most profitable big thrifts in the country.
How can this be? Basically, thanks to heavy assistance from–guess who?–the U.S. taxpayer. Federal-government subsidies provided at the time of the sale of Silverado to First Nationwide Bank of San Francisco (and the subsequent merger) total well over half a billion dollars. The aid includes a “yield maintenance agreement.” This guarantees that all of the bad, money-losing assets taken over by the new thrift’s operators will be kept profitable (at a declining rate) for 10 years through direct federal subsidies. Those subsidies, combined with special tax advantages, account for the bulk of Columbia’s more than $48 million profit last year–a roughly 50 percent return on First Nationwide’s $96 million investment. A second government safety net requires that the Feds compensate First Nationwide for any loss in the capital value of its bad assets as those holdings are sold off over the next decade.
Rubbing your eyes? Appearances can be deceiving, but yes, it does appear that the taxpayer, already hit once by the failure of Silverado, is being taken to the cleaners for a second time. It gets even better–or worse. Besides Silverado-Columbia, there are half a dozen other recipients of government bailouts on a list of the nation’s most profitable big thrifts, as tabulated recently by National Thrift News. The Robert M. Bass Group of Texas took over the $16.3 billion American Savings Bank of California for just $410 million down. Last year American produced $122 million in profits for Bass-a 30 percent return. Revlon tycoon Ronald Perelman’s investment company, MacAndrews & Forbes, posted a 1989 $103 million profit on its investment of about $316 million in the $9.7 billion First Gibraltar Bank of Texas-a 33 percent return. His investment firm pocketed additional tax writeoffs that congressional experts estimate were worth as much as $91 million.
Sen. Howard Metzenbaum, whose antitrust subcommittee is investigating the late 1988 deals that created these wonders, grows apoplectic at still another sale: of the $3.2 billion Bluebonnet Savings Bank of Dallas. This institution was acquired by Phoenix businessman James Fail for $70 million. Fail got lobbying help from Robert Thompson, a former aide to George Bush, who was then vice president. Bluebonnet, also one of National Thrift News’s big winners last year, got $275 million in government-yield subsidies, which covered all potential losses and pushed its estimated profit to more than $36 million. “An abomination,” Metzenbaum says.
The Ohio Democrat wants all these deals renegotiated, claiming they were often struck in private, and that the government oversweetened the pot. The investors, says Metzenbaum, “had negotiating skills far beyond those of the government.”
Stanley Brand, an attorney for Fail, denounces Metzenbaum as a “political vigilante.” Robert Lackovic, chairman of First Nationwide, argues that Columbia’s profits only look large by comparison with averages in a still-failing S&L industry. As for renegotiation, he says: “If we’d guessed wrong and were losing money, could we now go back and ask the government for more?” Gerald Ford, CEO of First Gibraltar, thinks that in the long run Perelman’s deal will save the government money. (The Bass group had no comment.) M. Danny Wall, who has been criticized for cutting bad deals as head of the now defunct Federal Home Loan Bank Board, says critics are focusing only on the big successes. Many others–there were 200 deals in all-produced ordinary results. One biggie, the $5 billion Southwest Savings, failed this May for a second time, despite $2 billion in government yield and capital guarantees.
Final catch: L. William Seidman, current head of the government’s S&L bailout operations, deplores the ‘88 transactions but says no legal grounds exist for reopening most of the deals. The government does have the right to buy back the bad assets at their book value right now. This would eliminate the need for costly and continuing “yield maintenance” subsidies and “might reduce the estimated $62 billion cost of the 1988 cases by billions,” says Steve Katsanos, a Seidman aide. Yet there’s one final catch: “Where are we going to get the cash for the buybacks?” asks Katsanos. As it is, the government’s bailout agency, the Resolution Trust Corp., announced last week that it will soon be out of money unless Congress votes more. “We’re running out of authorized funds now, says Katsanos. “We’d need tens of billions more to do those buybacks.”
So if you think the S&L crisis has been bad news for everyone concerned, think again. The shrewd vultures who swooped down in 1988 are feasting. End of quiz. Now you can grind your teeth.
