Creature From Jekyll Island by G. Edward

2. "S&L Industry Rebuilds As Bailout Reaches Final Phase," Veribank News Release, Veribank, Inc. (Wakefield, Massachusetts), January 12,1994, p. 2.

HOME, SWEET LOAN

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Then the FSLIC began to issue "certificates of net worth," which were basically promises to bail out the ailing S&Ls should they need it- The government had already promised to do that but, by printing it on pieces of paper and calling them "certificates of net worth," the S&Ls were allowed to count them as assets on their books. Such promises are assets but, since the thrifts would be obligated to pay back any money it received in a bailout, those pay-back obligations should also have been put on the books as liabilities. The net position would not change. The only way they could count the certificates as assets without adding the offsetting liabilities would be for the bailout promises to be outright gifts with no obligation to ever repay. That may be the eventual result, but it is not the way the plan was set up. In any event, the thrifts were told they could count these pieces of paper as capital, the same as if the owners had put up their own cash. And the game continued.

The moment of truth arrives when the S&Ls have to liquidate some of their holdings, such as in the sale of their mortgages or foreclosed homes to other S&Ls, commercial banks, or private parties. That is when the inflated bookkeeping value is converted into the true market value, and the difference has to be entered into the ledger as a loss. But not in the never-never land of socialism where government is the great protector. Dennis Turner explains: The FSUC permits the S&L which sold the mortgage to take the loss over a 40-year period. Most companies selling an asset at a loss must take the loss immediately: only S&Ls can engage in this patent fraud. Two failing S&Ls could conceivably sell their lowest-yielding mortgages to one another, and both would raise their net worth! This dishonest accounting in the banking system is approved by the highest regulatory authorities.1

U.S. News & World Report continues the commentary: Today, scores of savings-and-loan associations, kept alive mainly by accounting gimmicks, continue to post big losses.... Only a fraction of the industry's aggregate net worth comprises hard assets such as mortgage notes. Intangible assets, which include bookkeeping entries such as good will, make up nearly all of the industry's estimated net Worth of 37.6 billion dollars.2

p tennis Turner, When Your Bank Fails (Princeton, New Jersey: Amwell publishing, Inc., 1983), p. 141.

W ? r s T o u c h A n d Go f o r Troubled S&Ls," by Patricia M. Scherschel, U.S. Neivs & 0rUt Report, March 4,1985, p. 92.

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78 THE CREATURE FROM JEKYLL ISLAND

ACCOUNTING GIMMICKS ARE NOT FRAUD

We must keep in mind that a well managed institution would never assume these kinds of risks or resort to fraudulent accounting if it wanted to stay in business for the long haul. But with Washington setting guidelines and standing by to make up losses, a manager would be fired if he didn't take advantage of the opportunity. After all, Congress specifically said it was OK when it passed the laws. These were loopholes deliberately put there to be used. Dr. Edward Kane explains: