TWELVE
Influence
GOVERNOR PAT BROWN KNEW people in the savings and loan industry. He also had Democratic friends who weren't in the business but wanted to be. And why not? In 1959, when Brown took office, people like Howard Ahmanson were getting very rich. A state savings and loan charter seemed like a license to print money. With a Democrat in the governor's mansion, political insiders, including sitting legislators, lobbied to start new associations. If Republicans were awarded charters over Democrats, party loyalists accused Brown of being disloyal. If other Democrats emerged victorious from the state's hearing process, they accused Brown's former law partner Frank Mackin, the commissioner of savings and loans, of playing political favorites.1 In 1959, Brown's staff concluded that trouble was brewing in the industry and that the governor needed to take action.
Brown wanted to protect consumers, avoid scandals, and ensure that no one was getting rich by taking advantage of the government. He had heard that some thrifts were coercing home buyers into buying high-priced insurance. He asked his advisors—including Los Angeles attorney Warren Christopher, a political confidant—to look into whether savings and loans should be prohibited from having tie-ins with insurance companies. Soon after the governor's inauguration, Brown's assistant Fred Dutton inaccurately wrote to Christopher, “I understand that in Ahmanson's case, for example, the fire insurance company he spun off from his savings and loan operations is actually now a greater moneymaking operation than the savings and loan business.”2 Without addressing Ahmanson's case, Christopher informed Dutton that the legislature, at long last, had recently added an “anticoercion” section to the insurance code. With proper enforcement, this new statute should alleviate any concerns.3 Nonetheless, Brown and his staff weren't satisfied.
Brown was disturbed by the proliferation of holding companies. As Commissioner Mackin told the governor, these entities dodged the state's regulatory authority to block mergers and limit the geographic expansion of a company by putting separate savings 1institutions under the legal umbrella of a single holding company. Letters to the governor suggested that the holding companies were undermining the historic principles of the industry, which emphasized mutualism, localism, and thrift. Brown sided with these critics when he cabled California senator Clair Engle to support the Spence Act, suggesting that these companies were “dangerous to the stock buying public.” If the “gold rush” of acquisitions was not stopped, he wrote, “it could lead to higher mortgage interest rates and greater risk taking by savings and loan associations,” which would endanger the public's investment in these public companies.4 In a follow-up letter, Brown underscored the speed with which holding companies were transforming the industry. In two years, the number of savings and loan holding companies in California had grown from one to fifteen, “most of them Delaware corporations.” These companies controlled the stock of 50 of the state's 175 associations and operated 100 of the 315 state-licensed branches and offices.5 From Brown's point of view, this kind of concentration was not healthy for the consumer.
Brown's concern for consumers belied the assertion that money bought influence. Some of Brown's biggest contributors were on the other side of the issue. Los Angeles oilman Ed Pauley, for example, one of Brown's most important financial and political backers, had formed a holding company to get into the savings and loan business. As Brown was lobbying Engel to pass the Spence Act, Pauley's representatives were in Washington testifying against the law. Savings and loan entrepreneur Bart Lytton, another key Democratic fund-raiser, called the governor to explain that the uproar against holding companies was all a conspiracy by the federal mutuals to repress the California capital stock companies, which had made enormous contributions to the California economy.6 Howard Ahmanson, who owned several savings and loans under the umbrella of H. F. Ahmanson & Co., had provided significant help to Brown's campaign. Admittedly, Brown's courage on the issue was strengthened by the California Savings and Loan League's support for the Spence Act, but his fundamental concern was for the consumer.7
For Brown, passage of the Spence Act in 1959 did not solve the problem. Congress considered the law a temporary measure. It asked the Federal Home Loan Bank Board to study the issue and report back. Brown knew that regardless of what federal regulators learned, the situation in California would be different. In the Golden State, especially in Southern California, savings and loans were bigger and commanded a larger share of the mortgage market. And in California, savings and loans were tremendously profitable.
The governor's sense of urgency was apparent in a memo he wrote to Mackin and the state's new consumer watchdog, Helen Nelson, in October. He noted that savings and loans were charging high interest rates and “demanding from 7% to 10% of the loan as a consideration of making said loan.” Reflecting an inaccurate view of the regulatory structure, he characterized thrifts as “monopolistic” because “only one to an area is allowed.” Thus, he said, “there should be some restraint on the enormous profits made by loan societies.” “They pay no taxes,” he said, “and are merely enriching a few people.”8 Unwilling to wait for the FHLBB or Congress, he asked Mackin to commission an independent study that would set the stage for a legislative effort to win greater regulatory authority.
Ultimately, the investigation into all of these issues would lead to a broad analysis of the structure of the industry in California and a fundamental reevaluation of the state's approach to regulating savings and loans. It would also rupture the comfortable and cooperative relationship between industry and government that had characterized the managed economy of the postwar years.9
A THINK TANK’S REVIEW
Hired by the state to study the savings and loan industry, Stanford Research Institute (SRI) brought a new perspective to the regulatory process and reflected an important change in the way that policy makers searched for expertise.10 Established in 1947 and governed by a board appointed by Stanford University's trustees, SRI operated as an independent think tank. It employed more than 1,550 people in 1958 to study problems ranging from weather data systems to thermal energy to cancer. By 1959, the Los Angeles Times described it as the leading independent applied research center in the West and an increasingly important adjunct of policy making by business and political leaders.11
Free of the vested interests of the industry or the political concerns of the regulator and armed with new economic theories, SRI highlighted in its study the ways in which the savings and loan industry had grown and changed in the previous ten years. While the state's population increased 42 percent, the number of thrift offices (headquarters and branches) had increased 159 percent. Meanwhile, mortgage loan balances held by savings and loans had increased 521 percent, and savings deposits had grown 532 percent. Given the scale of these increases, the authors wrote, the savings and loan had become “a major financial institution” in the state, especially in Southern California, where six out often California associations were located and where 80 percent of the California industry's total assets were held.12
SRI showed that California thrifts were, in fact, more profitable than their siblings across the country. In 1959, they earned almost 5.8 percent on their assets, while savings and loans in the rest of the nation earned nearly a full percentage point less.13 But the difference in profitability did not necessarily reflect a conspiracy against the consumer. As SRI explained, California's relatively young and rapidly growing economy had a voracious appetite for capital. In an era when global financial markets were not well integrated, investment capital commanded a regional premium. As a result, interest rates in the Golden State were often higher than on the East Coast or in other parts of the nation.14 California thrifts were also more profitable, SRI suggested, because they were larger and enjoyed economies of scale. Large state-chartered associations had lower expenses in proportion to their assets and higher income.15
SRI confirmed the governor's understanding that holding companies owned a growing share of the savings and loan business in California, including more than a third of all assets. H. F. Ahmanson & Co., the largest, controlled four savings and loan associations, with twenty-eight offices and assets of more than $764 million at the end of 1959.16 Given the pace of mergers and acquisitions in the industry, the report noted, holding companies seemed destined to capture an even bigger share of the market.
The authors highlighted the positive and negative potential in holding company growth. On the one hand, holding companies could contribute to the development of regional and national markets for home loans and savings. They seemed to have lower operating costs. They also offered more financial security because they built large bad-debt reserves and diversified their risk across a broader geographic area. On the other hand, holding companies seemed to charge higher loan fees than the industry average, which was not good for the consumer. Concentration, SRI pointed out, might also lead to a reduction in competition.17 The SRI report carefully steered clear of policy recommendations, but it gave Brown's staff a better understanding of the landscape. Most important for Brown, it gave the state a source of expertise outside of the industry itself.
As he approached the end of his first two years in office, with the presidential campaign over and fellow Democrat John Kennedy preparing for inauguration, Brown began to think seriously about his campaign for reelection in 1962. The politics of the savings and loan industry wasn't front-page news, but the deep pockets of savings and loan entrepreneurs were sure to play a role in the election. In the meantime, Brown's indispensable but sometimes combative ally in the California legislature had already figured out how to get help from Howard Ahmanson.
JESSE AND HOWARD
A cultural institution provided Howard Ahmanson the bridge he needed between the waning power of Republicans in California and the ascendant Democrats. It also created a personal relationship that would be at the heart of a “new politics” in California that reflected an important transition in the relationship between business and government.
While Republicans still held the governor's office, Howard Edgerton had launched an effort to transform the historic Exposition Building in Exposition Park into a museum of science and industry. After closing for renovations, the museum reopened in 1951 with major exhibit areas designated for agriculture, industry, minerals, and transportation. Three years later, the board of directors decided to launch a campaign to build a new museum with public and private funding. Edgerton asked Governor Knight to appoint Howard Ahmanson to a fifteen-member advisory committee for the museum.18 He then enlisted Ahmanson's help to find a legislative champion to get state funding for the project.19 Ahmanson sent his emissary Robert DeKruif to talk to a freshman legislator from Los Angeles who represented the district that included Exposition Park.
Jesse Marvin Unruh reflected the new face of the Democratic Party in California. For years, Republicans had taken advantage of an anomaly in California election law that allowed candidates to cross-file in the Democratic and Republican primaries without revealing their own party affiliation. Under this system, elections tended to be less partisan, but Democrats, who outnumbered Republicans by the early 1950s, were frustrated that their advantage in registrations failed to deliver victories at the ballot box. To abolish cross-filing, Democrats collected signatures for a ballot initiative in 1952. Republicans responded by qualifying another measure that simply required candidates to list their party affiliation. The Republican measure won. Nevertheless, the new truth-in-labeling law cost the Republicans State Senate and Assembly seats in 1954, and it led to the election of a new generation of Democrats, including Jesse Unruh.20
If Howard Ahmanson reflected the bourgeois midwestern immigrant to Los Angeles of the 1920s, Unruh epitomized the Dust Bowl migrant of the Depression and war years. The youngest of five children born to an illiterate but hardworking father, he had grown up on a series of farms in Kansas and Texas. By the time he reached high school, his parents had resorted to share-cropping cotton. Recognizing Jesse's intellectual gifts, his mother had taught him to read at an early age. Big and heavy, he played center for his high school football team but also graduated second in his class. After working briefly in an aircraft plant in Southern California, he returned to Texas and joined the army. He spent most of World War II in the heat of Corpus Christi and then the cold of the Aleutian Islands. In Corpus Christi he met and married Virginia June Lemon, a California girl. Returning to Los Angeles after the war, Jesse, along with hundreds of other veterans, enrolled at USC under the GI Bill. Active in campus politics, he ran for the California Assembly in 1948, during his senior year. He finished a distant fourth in the Democratic primary, but the experience whetted his political appetite. He threw himself into political organizing, struggling to make a living on the side. Virginia taught intermittently, and their family grew with the birth of four children. With the presidential contest between Dwight Eisenhower and Adlai Stevenson coloring the election of 1952, Unruh ran again for the Assembly. Short of money but bolstered by a strong political organization, he finished second to the cross-filing Republican incumbent. When the cross-filing rules changed in 1954, Unruh won the Democratic primary and the general election.21
DeKruif's visit came not long after Unruh arrived in Sacramento. As Howard had taught him to do when selling fire insurance, the gregarious DeKruif remained standing while he made his pitch. Unruh agreed to support the project.22 After Democrats pulled even with Republicans in the California Senate in 1956 and increased their numbers to thirty-seven in the eighty-member Assembly, business interests feared that new social legislation would hurt their bottom line. They could no longer turn to the one-time “boss” of the legislature, lobbyist Artie Samish. Instead, the business community looked for a Democrat they could work with among the new generation of legislators, “someone they could trust, someone who had the trust of his fellow Democratic legislators.” As the newly installed chairman of the Finance and Insurance Committee, Jesse Unruh filled that bill, and Ahmanson's relationship with Unruh, which began with the Museum of Science and Industry, was pivotal.23
The Ahmanson-Unruh connection was important because it coincided with a larger shift of political and economic power in California in the late 1950s. As Democratic assemblyman Thomas Rees described it, “The power was growing in LA when I was in office. This is where things were done. This is where the banks were moving. This is where foreign groups were locating. This is where major manufacturing was going. This is where UCLA was developing into a university supporting the engineering and technical businesses that we had in Southern California. There was this tremendous growth and everything was going the right way.”24
Unruh worked to consolidate the power of the Democratic Party, power that he felt had been wrongfully denied the party for years. From Unruh's perspective, pragmatic business leaders should come to terms with the new political reality. Unruh stressed this point in an address to the California Savings and Loan League in 1961. “It is no secret that some businessmen regard the present Democratic administration as a temporary inconvenience at best and can hardly wait for the reestablishment of Republican control in Sacramento.” But these businessmen would have to wait a long time to take control of the legislature. Unruh did the political math on registrations and showed that it would take “a revolution” to put the Republicans in control. In the meantime, members of the audience who were waiting for this revolution could choose to sit on the sidelines for what might turn out to be a long period of time, or “they can get in and cooperate with the party in power.”25
Unruh was very creative in the way he leveraged the Democrats’ growing political clout. Developing a strategy that has become commonplace today, he encouraged donors to give to candidates he was backing. He also created a campaign fund that he used to provide additional support. When elected, these legislators were beholden to Unruh, and these political debts had helped elect Unruh speaker of the Assembly in September 1961.
Ahmanson's money and influence played a big part in building Unruh's political power. In 1958, Unruh ran Pat Brown's campaign in Southern California. Officially, he received a ten-thousand-dollar salary for his work. Unofficially, Howard Ahmanson contributed more than this amount to help Unruh do his work and ensure that Democrats loyal to Unruh got elected to the legislature.26 After the election, Unruh became chairman of the powerful Ways and Means Committee in the Assembly. Every bill that needed funding passed through his hands.27
As Unruh deepened his base of financial backers in the Southland, Ahmanson connected the assemblyman to deep pockets. A new generation of political and economic elites in Southern California provided cash, including developers Mark and Lou Boyer, as well as savings and loan executives Bart Lytton, Manning Post, Gene Klein, and Charlie Wellman. This group became known to Rees, Unruh, and other Democratic legislators as the “Poker Club.” Howard Ahmanson was “not part of the group,” said Rees. “Ahmanson really was Jesse's private preserve,” and he connected Unruh to the so-called Los Angeles establishment.28
For his support, Ahmanson enjoyed unparalleled access to Unruh and the legislative process. According to Rees, lobbyists would frequently go to Unruh and say, “ ‘We want to get this banking bill, [or] we want to get the savings and loan bill out.’ And Jesse would make the deal. Then he would go to the chairman [of the committee] and say, ‘Oh, by the way, we want this bill out, this bill that Ahmanson has.’ That would more or less be the marching instructions.”29
“Money is the mother's milk of politics,” Unruh famously said, but Unruh also made clear his belief that this symbiotic relationship between politician and businessman did not make him captive to anyone's will. “If you can't eat their food, drink their booze, screw their women and then vote against them [lobbyists] you have no business being up here.”30 In fact, this famous quotation mischaracterizes Unruh s values. He was first and foremost a champion for his constituency, the working-class Democratic voters who shared his hardscrabble background. But he understood that, in the managed economy, business interests used the regulatory powers of the state to seek competitive advantage. In a battle between corporate interests that had little effect on his constituency, Unruh was happy to accommodate friends and allies like Ahmanson. According to Lou Cannon, who covered the legislature in these years, “Unruh and Ahmanson thought they could do things more efficiently. There was a good-government side to both of them.”31
Unruh's political philosophy hardly warmed the hearts of the champions of Jefferson's virtuous democracy. But Ahmanson was equally pragmatic in his approach to politics. “The Right Wing calls me a pink Republican,” he said, “. . . too rich to be a Democrat and too liberal to be a Republican.”32 With his knowledge of the political system, he also understood, though it sometimes bothered him, that money did not always buy smooth sailing in the sea channels of government. In the office of the commissioner of savings and loans, a great deal had changed since Milton Shaw's tenure.
THE STATE FOCUSES ON THE STRUCTURE OF THE INDUSTRY
Pat Brown's sense that problems in the savings and loan industry could come back to haunt him grew as the election of 1962 loomed. Too many people were looking to get rich quick in the business. Howard Ahmanson called them “carpetbaggers.” To Brown they were apolitical nuisance. To deal with the situation, he needed a stronger commissioner.
Preston Silbaugh, the forty-two-year-old deputy commissioner, succeeded Frank Mackin after Brown appointed Mackin to the bench.33 A former professor and associate dean of the Stanford Law School, Silbaugh had run the commissioner's office in Los Angeles, the hotbed of the savings and loan industry, and he understood politics and the economics of the market.34 Silbaugh knew that the governor's biggest problems in the thrift industry stemmed from the process of granting charters and branches, which had grown far too political and complicated.
By law, to grant a new license, the state required an applicant to demonstrate that an area was not adequately served by the existing institutions. The law also required that an applicant have a sound financial plan and that the new facility be in the interests of the association. In fact, these criteria were interpreted loosely, and the only rule that really mattered was that the population in the proposed facility's service territory should be at least twenty-five thousand per association office. Critics of this formula pointed out that the savings capacity of a given community of twenty-five thousand people could vary wildly. On a per capita basis, Beverly Hills, for example, could sock away more money for a rainy day than the working-class communities of South Gate or Compton. So Beverly Hills could benefit from much more competition.
Silbaugh recognized that the licensing process needed to change, but he needed time to develop a strategy. On February 2, 1962, he took a page from Milt Shaw's book and announced a moratorium on the approval of mergers in the savings and loan industry. During the period of the moratorium, the state would commission two studies. The first, led by Stanford University professor of business Edward S. Shaw, would build on SRI's research and look particularly at issues related to concentration and competition.35 The second, undertaken by Fred Balderston, a professor at the University of California, Berkeley, would focus on the state's licensing criteria. Silbaugh told industry officials that both of these efforts were being made to determine “the optimal structure of the industry.”36
The optimal structure of the savings and loan industry in California and especially in Southern California was not clear in 1962. With new market conditions and competitive forces at work, regulators and managers struggled to choose the right path forward. Increasingly, savings and loan executives lobbied for growth: by acquisition or geographical expansion, or by entry into new markets such as commercial lending or consumer credit. Regulators struggled to decide whether to allow further consolidation or force savings and loans to remain local and focused on the homebuyer market. Political conservatives in the industry predicted less entrepreneurial freedom and more regulation under Brown. Many hoped that the return of a vanquished but still powerful native son would restore their influence in Sacramento.
BROWN V. NIXON
When he left the governor's office in January 1959, Goodwin Knight told reporters: “I have no grudges, no regrets, no recriminations. I ain't mad at nobody.”37 Nevertheless, as the years of Pat Brown's first term passed, Howard Ahmanson's longtime friend was anxious to redeem himself. He believed that he would have won reelection if not for the interference of Know-land and Nixon.
Back in the private sector, Knight maintained his public profile in Los Angeles by serving as a political commentator on the independent television station KCOP.38 In March 1961, after a series of political missteps, the California Poll showed that nearly one-third of Californians believed Governor Brown was doing a “poor” job. In a hypothetical matchup, Knight would win. The only other Republican who would do better was the party's 1960 presidential nominee, Richard Nixon.39 With his eye still on the White House, Nixon told reporters in July 1961 that he did not want to be governor but that if the Republican Party “concludes that I am the only man who can save the state” he would run. He promised to announce his decision by the middle of September.40
Political commentators believed that Nixon wasn't just being coy. Traveling the country to make speeches, Nixon found that he was still very popular. If he ran for governor, he would be pressured to swear off running for president in 1964, and he wasn't ready to make that kind of commitment. With Nixon “apparently out of the picture,” Los Angeles Times political analyst James Bassett concluded, “much of the talk now centers around former Gov. Goodwin J. Knight and San Francisco's Mayor George Christopher.”41
Knight asked a reluctant Howard Edgerton to arrange a lunch with Nixon to confirm that the former vice president would not run for governor. Buoyed by Nixon's reassurances and press reports that suggested it would be a huge political gamble for Nixon to run for governor and risk undermining his presidential ambitions, Knight happily declared his candidacy on September 11. Vowing to be a full-time governor, he told reporters that “nothing will get me out of the race.”42 Others were not so sure. State Democratic chairman Roger Kent noted, “Knight makes brave statements now, but the noise of Republican check books snapping shut has always sounded like the clap of thunder in his ears. If Nixon runs, he'll hear that sound again.”43
Two weeks later, Kent's forecast was put to the test when Nixon announced his own gubernatorial campaign.44 Furious, Knight blasted Nixon and accused him of trying to bribe him to get out of the race, naming Edgerton as Nixon's emissary.45 Edgerton was adamant that he had “never been an emissary of Nixon on any matter in my entire life.”46 The affair made headlines for several days. In an editorial full of tsk-tsking by the eastern establishment, the Washington Post concluded that no one except Pat Brown came out of the mess looking good. In fact, the affair reflected the rancorous state of the Republican Party in California. “Apparently Mr. Knight decided that he would rather pull the political temple down upon both himself and Mr. Nixon than to risk losing the Republican nomination. With this kind of bitterness in the campaign, the former Vice President may be facing one of the toughest campaigns in his political career.”47
Knight campaigned hard over the next several months but withdrew from the race in February after he became ill.48 Nixon then faced a challenge from the right wing of the Republican Party. On the eve of the June primary in 1962, writer Carey McWilliams suggested that the momentum was all going Brown's way. The only thing that might ruin his reelection bid was a scandal, and the place to look, he asserted, was in the regulation of the savings and loan industry. “Driving out Wilshire Boulevard today, one notices that almost every other corner is occupied by an ornate neo-Byzantine or equally ornate pseudo-Egyptian savings-and-loan building.” Proportionately, “there are more ‘S&L’ institutions . . . in Los Angeles than there were saloons in Tombstone.” The enormous success of the industry, he suggested, made it “a good inference that a major scandal lurks somewhere in the background of these burgeoning S&L institutions.”49
Fortunately for Brown, McWilliams continued, any scandal tied to the growth of the savings and loans was likely to be bipartisan. “Every element in California politics has its special S&L tycoon as a patron: the far Right has Joe Crail, Nixon has Howard Edgerton, and former Governor Knight has Ahmanson . . . while the liberal Democrats have Bart Lytton.”50 If Brown's administration had been guilty of favoring political allies with charters and branches, his predecessors had done the same.51
After Nixon's victory in the primary, however, no scandal materialized. Brown won reelection in the fall with a margin of nearly three hundred thousand votes.52 But once reelected, he seemed even more committed to a new order in the savings and loan industry.
THE STATE AND THE INDUSTRY GO TO WAR
In his second inaugural, Brown made it clear that he intended to rein in the growing power of the savings and loan tycoons. Among a list of regulatory reforms designed to protect consumers, Brown suggested: “We must apply greater control both to the issuance of charters and to the operating practices of savings and loan associations.”53 Brown's warning to the savings and loan industry was underscored days later when Commissioner Silbaugh released Edward Shaw's searing report on the structure of the savings and loan industry.
Shaw, a pillar of the economics department at Stanford, had been teaching on “the Farm” since 1929, with only a brief interlude during the war when he worked for the navy. He had a reputation as a tough and demanding professor. His report was characteristically blunt. He described what he saw as the growing concentration in the state-chartered savings and loan industry. Holding companies, in particular, were restraining competition. The state's regulatory system was “outmoded” and imbued with “the archaic principle that savings and loan associations are (or should be) neighborhood cooperatives for savers and home buyers, detached from the profit motivation of normal capital markets; that savings should be used locally; that management cannot accurately appraise property beyond easy travel limits of horse and buggy.” In actuality, Shaw insisted, the industry was “mammoth” and served a “restless, urbanized population.” It belonged in the mainstream of national capital markets “and should not be regulated on the joint principles of mutualism, atomism, and mercantilism.”54
Shaw argued that misaligned incentives in the regulatory system, including tax breaks and competitive advantages over commercial banks, were preventing investment capital from going to its highest and best use. Instead, too much money was going into housing. The system, he wrote, “puts the mortgage on a pedestal.” Shaw wasn't asked to recommend changes to federal policy, where many of these problems originated, but he suggested promoting competition in California by forbidding further mergers and giving a license to any entity that met minimal requirements.55
The savings and loan industry was furious about Shaw's report. Silbaugh tried to get the industry's leadership to allow the Stanford professor to speak at the industry's annual management conference, but they refused. Nine industry leaders boarded two airplanes and flew to Sacramento to take their complaints directly to the governor, boycotting an information session hosted by the commissioner.56 After almost two hours of talk, Brown emerged from the meeting to tell reporters that he had agreed to mediate a conversation between the commissioner and industry representatives.57
While the press speculated that the savings and loan executives were engaged in a pure power play, others recognized that the nature of the industry's relationship with regulators was changing. The industry insisted it was not trying to censor reports commissioned by the state. It only wanted the right to have its perspective included. Silbaugh responded that academic experts wouldn't undertake the work if they thought their findings would be changed. Deputy Commissioner Kenneth Scott noted particularly that industry officials seemed to believe that if they were paying the costs of the commissioner's office, then the commissioner ought to act as an industry spokesman. “Those holding this view want us to reach all our decisions in joint industry-division [government] committee meetings. In truly technical matters this may be OK. But in basic matters of public policy, such as mergers or branch office permits, it seems to us this would be totally inappropriate.”58
In essence, the debate went to the heart of a changing view of the nature of industry-based regulation. As Brown's staff recognized the political power of consumers, they pushed for a more arm's-length relationship between regulators and industry in the savings and loan business and elsewhere.59 To respond to this new paradigm, the industry went in search of experts of its own.
RESPONDING TO EXPERTS WITH EXPERTS
The California Savings and Loan League commissioned its own academic study led by noted UCLA real estate economists Leo Grebler and Eugene F. Brigham. Grebler was a well-known figure in the field of policy making for mortgage finance. A German émigré who came to the United States in 1937, he had worked for the FHLBB during the war and had served as chief of housing finance for the FHA in Washington before becoming associate director of and research professor at Columbia University's Institute for Urban Land Use and Housing Studies. In 1958, he left New York for UCLA.60 Brigham had served in the navy during the Korean War and had earned his PhD in finance at the University of California, Berkeley, before joining the faculty at UCLA. They were both serious students of urban economics.
Working quickly, Grebler and Brigham addressed what they believed was the fundamental weakness of the Shaw report: its narrow focus on only the savings and loan industry rather than the performance of the industry within the larger markets for savings and mortgage loans. As the authors pointed out, despite the best efforts of legislators, regulators, and industry lobbyists, financial services were not perfectly compartmentalized. Savers could choose among a variety of investment options. Home buyers could get loans from commercial banks and from mortgage brokers representing large insurance companies as well as from savings and loans. Shaw's narrow perspective on the industry, according to Grebler and Brigham, was “romantic” and out of touch with realities in the financial marketplace.61
In the managed economy of the early 1960s, financial institutions were “virtually creatures of society.” As Grebler and Brigham pointed out, they were heavily imbued with the public interest and therefore highly regulated. This regulation was necessary because “credit is the lifeblood of the modern economy.” But it could also be inefficient from a market point of view. “Resources may be misallocated, competition unduly restrained, credit costs unnecessarily increased, and inefficiencies perpetuated because of the ways in which financial intermediaries organize themselves and operate, or because of misdirected public policies or both.”62 These potential inefficiencies in regulation could be mitigated by smarter public policies, but they were also counterbalanced by the achievement of social goals embedded in the regulatory framework.
Despite the inherent inefficiencies of regulation, Grebler and Brigham concluded, the savings and mortgage markets in California were generally competitive, with a hint of oligopolistic behavior in some local areas. California thrifts were unquestionably “high-income, high-cost, and high-profit organizations,” especially when compared to their peers in other states, but these factors could be explained by the higher cost of capital and operations, especially advertising, in the Golden State rather than inefficiency. Moreover, the industry's rapid growth had demanded a higher degree of investment in new facilities—another factor explaining the industry's high costs.
Grebler and Brigham offered suggestions for improving competition. Reflecting the basic assumptions of the managed economy, they addressed their recommendations to management and government. “Neither can alone move the markets or the industry perceptively closer to optimal efficiency. Governmental authorities can do so by revising the rules of the game, but it is management that plays the game, and management has considerable leeway in playing it within the rules.”63 The authors also noted that any move to greater competition would place a greater burden on regulators to “minimize the hazards to safety” that would come as managers were pressured to relax credit standards and reserve ratios in order to maximize profits.64 In other words, deregulation would encourage greater risk taking. Greater risk taking might produce a market that was more efficient in the long term, but the social cost to depositors and home buyers might be higher.
The controversy sparked by these two economic studies commissioned by the state and the industry reflected a significant break in the relationship between regulator and regulated in the savings and loan industry. In the earlier postwar era, regulators like Milton Shaw had focused primarily on ensuring that savings and loans were prudently managed and that depositors were protected. Safety was their dominant concern. Markets were allocated among competitors on the basis of a relatively simple formula—twenty-five thousand unserved customers—because according to this paradigm, the industry performed an important public service.
The Shaw and Grebler-Brigham reports signaled that regulators in California, and later in Washington, now intended to emphasize competition and market efficiency. Competition was important to politicians, particularly Pat Brown, because it promised better prices and fairer treatment to consumers. It also removed the political liabilities stemming from scandals associated with the regulatory process when the government exercised a heavy hand in allocating markets among players in the industry. But as the competitive structure of the market became increasingly important, it diminished the fundamental basis on which the savings and loan industry had been created and then protected by government—to promote home ownership in the state and in the nation. This shift in philosophy would have enormous consequences for the savings and loan industry in California.
As the largest savings and loan in California and the nation in the mid-1960s, Home Savings was especially well positioned for a new and more competitive era in the industry. Although the Grebler and Brigham report supported the commissioner's view that there was little evidence that savings and loans above a certain threshold became more operationally efficient as they grew, Howard Ahmanson and Ken Childs undoubtedly chuckled when they read this conclusion.65 On vacation in the Middle East when the report was released, Ahmanson knew that with its extremely low operating costs and enormous capital reserves, Home Savings could afford to take risks that others couldn't. Soon the importance of this ability would become all too clear in an increasingly competitive market. But in the meantime, he wasn't worried about the future of Home Savings. For the moment, he was more preoccupied with his son.