Inside Job by Charles Ferguson Read Free Book Online

going at an annual rate of about $20
billion until he finally hit the wall in 1985. When the government moved in, the assets were worth about $500 million. The Vernon Savings Bank in Texas ran its assets from $82 million to $1.8
billion in about a year. The owner bought six Learjets, and when the Feds finally looked, they found that 96 percent of its loans were delinquent. As late as 1988, 132 insolvent Texas
S&Ls were still growing rapidly.
    Charles Keating was another S&L pioneer—an expert hypocrite, famous for being an antipornography crusader. He claimed that pornography was part of “the Communist
conspiracy”, and made really awful films about the horrors of perversion for profit. The SEC had charged him with fraud in the 1970s, but Keating was still allowed to take over a relativelyhealthy S&L in 1984. He quickly racked up $1 billion-plus in costs to the government, while making (or rather, taking) a fortune for himself. Keating played Congress and
the regulators like a violin, fending off investigators with eighty law firms and the famous Keating Five—the five US senators he persuaded to help him, via $300,000 in campaign
contributions. (They were Alan Cranston, John Glenn, John McCain, Donald Riegle, and Dennis DeConcini.) For $40,000, Keating hired Alan Greenspan, then a private economist, to write letters and
walk around Washington, DC, with him, telling regulators about Keating’s good character and solid business methods. Noting Greenspan’s excellent judgement, Reagan later appointed
Greenspan to be chairman of the Federal Reserve Bank. Keating was eventually sent to prison.
    Then there was Silverado, on whose board of directors sat Neil Bush, son of George H. W. Bush and brother of George W. Bush. Bush approved $100 million in loans to Silverado executives, and
loans to himself too. Silverado’s collapse cost the taxpayers $1.3 billion. Neil Bush was sued by two US government regulators; he paid fines and was banned from banking but avoided criminal
prosecution.
    There were many others. The US government established the Resolution Trust Corporation to take over bankrupt S&Ls and sell off their assets. The cost to the taxpayers was about $100 billion,
which seemed like an enormous amount at the time.
    But there was one important regard in which the US system had not yet been completely corrupted. Although many perpetrators got away with it—particularly those who worked for major
investment banks, law firms, and accounting firms—many did not. As a result of the S&L scandals, several thousand financial executives were criminally prosecuted, and hundreds were sent
to prison. Altogether, the episode was a pointed, but in retrospect very mild, foreshadowing of the outbreak of massive financial criminality in subsequent decades.
    But it wasn’t just the S&Ls who partied hard in the 1980s. The investment bankers, leveraged buyout firms, lawyers, accountants, and insider trading people had a good time too.
    Indeed the first truly disturbing signal about deregulation was thatthe proudest names in American investment banking, law, and accounting had eagerly participated in the
S&Ls’ looting. Merrill Lynch earned a quick $5 million by shovelling more than a quarter billion dollars in high-rate deposits into two S&Ls in the six months before they were shut
down. The law firms that later paid multimillion-dollar settlements included Jones, Day, Reavis, and Pogue; Paul, Weiss, Rifkind; and Kaye Scholer. The accounting profession was just as bad. Ernst
& Young and Arthur Andersen (later of Enron fame) paid especially big settlements for having allowed the S&Ls to fake their books; Ernst & Young alone paid more than $300 million. The
total taxpayer cost, of course, was many, many times the recoveries. 4
    But the real party was with the boys who played with junk bonds.
    Junk Bonds, Leveraged Buyouts, and the Rise of Predatory Investment Banking
    PRIOR TO THE 1980s, only a very few highly rated