Creature From Jekyll Island by G. Edward

As Treasury Secretary Nicholas Brady told the press, "No one should assume that the estimates won't change. They will."

Indeed, the estimates continued to change with each passing week. The government had sold or merged 223 insolvent thrifts during 1988 and had given grossly inadequate estimates of the cost.

Financiers such as Ronald Perelman and the Texas investment partnership called Temple-Inland, Inc., picked up many of these at fantastic bargains, especially considering that they were given cash subsidies and tax advantages to sweeten the deal. At the time, Danny Wall, who was then Chairman of the Federal Home Loan Bank Board, announced that these deals "took care" of the worst thrift problems. He said the cost of the bailout was $39 billion. The Wall Street Journal replied:

Wrong again. The new study, a compilation of audits prepared bythe Federal Deposit Insurance Corporation, indicates that the total costof the so-called Class of '88 will be $90 billion to $95 billion, includingfax benefits granted the buyers and a huge amount of interest ongovernment debt to help finance this assistance....

But the 1988 thrift rescues' most expensive flaw doesn't appear tobe the enrichment of tycoons. Rather it's that none of the deals endedor even limited the government's exposure to mismanagement by thenew owners, hidden losses on real estate in the past, or the vicissitudesof the real-estate markets in the future.... And some of the deals1- "Review of the News," The New American, Sept. 11,1989, p. 15.

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76 THE CREATURE FROM JEKYLL ISLAND

appear to be sham transactions, in which failing thrifts were sold tofailing thrifts, which are failing all over again....

Although the thrifts proved to be in far worse shape than the BankBoard estimated, Mr. Wall defends his strategy for rescuing them withopen-ended assistance. "We didn't have the money to liquidate," hesays.1

When Congress passed HRREA the previous year to "safeguard and stabilize America's financial system," the staggering sum of $300 billion dollars was authorized to be taken from taxes and inflation over the following thirty years to do the job. Now, Federal Reserve Chairman Alan Greenspan was saying that the true long-term cost would stand at $500 billion, an amount even greater than the default of loans to all the Third-World countries combined. The figure was still too low. A non-biased private study released by Veribank, Inc. showed that, when all the hidden costs are included, the bill presented to the American people will be about $532 billion.2 The problems that President Bush promised would "never happen again" were happening again.

BOOKKEEPING SLEIGHT OF HAND

Long before this point, the real estate market had begun to contract, and many mortgages exceeded the actual price for which the property could be sold. Furthermore, market interest rates had risen far above the rates that were locked into most of the S&L

loans, and that decreased the value of those mortgages. The true value of a $50,000 mortgage that is paying 7% interest is only half of a $50,000 mortgage that is earning 14%. So the protectors of the public devised a scheme whereby the S&Ls were allowed to value their assets according to the original loan value rather than their true market value. That helped, but much more was still needed.

The next step was to create bookkeeping assets out of thin air.

This was accomplished by authorizing the S&Ls to place a monetary value on community "good will"! With the mere stroke of a pen, the referees created $2.5 billion in such assets, and the players continued the game.

1. "Audit Report by FDIC Shows Wall's Estimates for Thrift Bailouts in 1988 Were Wildly Low," by Charles McCoy and Todd Mason, The Wall Street journal, Sept. 14, 1990, p. A-12.