James (Jim) Wright, Jr., became Speaker of the House of Representatives in 1987. I will examine the following puzzles: How did the two worst control frauds recruit him as an ally? Why did he remain loyal to them even after it became clear that doing so would have disastrous consequences for his constituents, the nation, and his party? Why did he, after striving for decades to become Speaker, continue to support the control frauds, even though doing so cost him his life’s ambition and his reputation? How did three control frauds and a real estate developer, each of whom voted for Ronald Reagan in 1980, get Wright, a populist Democrat, to champion wealthy GOP frauds despite the warnings of fellow Democrats?
Wright’s actions on behalf of the control frauds had enormous direct consequences: they were decisive in forcing him to resign in disgrace from the House, and because they delayed the closure of dozens of (mostly Texas) control frauds, they led to billions of dollars in additional costs to the taxpayers.
The indirect consequences were even greater. The Speaker’s support for the control frauds helped elect George Bush to the presidency in 1988. The clumsy interventions of members of Congress on behalf of the frauds obscured the Reagan-Bush administration’s contributions to the control frauds’ success and the creation of the debacle. Wright’s actions proved critical in causing Gray’s successor to appease Charles Keating. That, in turn, led to the worst failure of a financial institution in U.S. history, to the S&L debacle becoming a political scandal, to the resignation in disgrace of Gray’s successor, to the termination of the Bank Board, and to an ethics investigation of the Keating Five by a reluctant Senate. The Speaker’s intervention was a “hinge event” that changed a wide range of policies.
Wright’s actions fit the classic definition of tragedy. He was not an intrinsically evil man or a fool. He did not know initially that the people he was aiding were control frauds. His tragic flaws were ambition and hubris. His driving ambition was to become Speaker of the House, and he had to be a champion fund-raiser in order to achieve it. Wright’s pride and domineering personality led to him to surround himself with yes-men and to disdain warnings.
Studying how the frauds enlisted him to their cause is vital. First, they did it relatively easily. The political system remains vulnerable to similar enlistments, and elected officials should study the case of Jim Wright to learn how to avoid subornation by future control frauds. Second, Wright’s actions—and the responses by his colleagues, the Reagan administration, and the regulators—are important to the development of a coherent theory of how elected officials and regulators behave. Scholars use public-choice theory to devise a “just so” story that purports to explain government officials’ actions after the fact, but public-choice theory could not have predicted the behavior described here. A theory that relies on ad hoc and contradictory assumptions about behavior is not useful. Studying how government officials act during hinge events is important if scholars are to develop tenable theories.
Since John Barry had the immense good fortune to accompany Wright for months and to all manner of meetings for a behind-the-scenes book on the Speaker, our ability to understand Wright’s actions is made much easier. Barry wrote a lengthy book, The Ambition and the Power (1989), filled with anecdotes. We are even more fortunate because Barry became a partisan defender of the Speaker. As Barry emphasizes, the Speaker was comfortable only with yes-men. If Barry had not come to identify so completely with him, the Speaker never would have been so open. Barry’s book provides the Speaker’s contemporaneous defense of his actions on behalf of the control frauds.1
The House ethics investigation of the Speaker and the Senate ethics investigation of the Keating Five also permit a rich study of the Speaker’s actions on behalf of the Texas control frauds and his later aid to Keating. The Senate investigation immunized Keating’s chief political fixer, Jim Grogan, who set up Keating’s 1988 meeting with Senator Glenn and Speaker Wright and attended the decisive meeting later that day with Bank Board chairman Wall at which Keating, by playing the Speaker card, induced Wall to appease him. Grogan’s testimony about the Speaker is unusually credible because he was, clearly, wholly sympathetic to the Speaker and Keating, yet his testimony damned both.
I participated in the critical 1987 meeting with Speaker Wright and attempted to cope with his interventions on behalf of the Texas control frauds in 1986 and 1987. This meant that I dealt directly with all of the executive-branch and legislative officials involved. I led the Bank Board’s eventual criticism of the Speaker. This adds to the richness of the case study but adds a risk of bias.
The first irony is that it was a very clever Republican political ploy that made it easy for the Texas control frauds to enlist Jim Wright in their cause. The second irony is that the issues involved had nothing to do with S&Ls. In 1984 the Republicans gained control of the Senate. President Reagan was enormously popular. The Republicans had been in the minority in the House for the bulk of the last fifty years. Being the minority power in the House is inherently unsatisfying, but the Republicans felt that the Democrats had gone out of their way to make their lives unpleasant. The Republicans began to believe that a historic realignment was taking shape, one that could restore them to majority control of the House. They were eager to hasten the process.
In 1985 Jim Wright was House majority leader and Thomas “Tip” O’Neill was Speaker. O’Neill was in ill health, and it was clear that he would soon retire. The Speaker can be the second-most powerful elected official in the United States because House rules place far more power in the Speaker’s hands than the Senate rules vest in the Senate majority leader. Jim Wright would soon be Speaker, and his ambition to be a powerful Speaker was widely known.
The president appointed Representative Sam Hall, who represented a district around 100 miles east of Wright’s, to the federal judiciary. The congressman was a Democrat, so appointing him to the judiciary removed the advantage of incumbency that the Democrats would have otherwise had in that district. When a vacancy occurs in the House, there is a special election to choose a successor. Republicans planned to humiliate Majority Leader Wright in this special election. If he could not get a Democrat elected in his own backyard, he would not be a credible Speaker. The Republicans hoped to deny him the speakership and publicize the realignment of the country along Republican lines (Jackson 1988, 265; O’Shea 1991, 167–169).
Texas was fertile political ground for the Republicans. Former governor John Connally had switched parties to become a Republican, and the state was becoming more conservative while the Democratic Party was becoming more liberal. The Republican Party and its supporters had far richer coffers than the Democrats, and poured large sums into the special election. In a special election, candidates have less time to develop name recognition with the voters, which maximizes the importance of existing name recognition and expensive political advertising on television (as Governor Schwarzenegger’s huge victory proves). The Republican candidate was a well-known former collegiate football hero.
The Democrats sought with equal fervor to elect their candidate, Jim Chapman (Jackson 1988, 264–267). Representative Tony Coelho, chairman of the Democratic Congressional Campaign Committee (DCCC), urgently raised funds for Chapman. As Jim O’Shea, the journalist who wrote a book about Vernon Savings, explained, the Chapman election created the “ideal opportunity to curry favor” (1991, 167–169). Thomas Gaubert seized the opportunity even though he had voted for Reagan in 1980 (Jackson 1988, 263). He was the principal owner of a Texas S&L named Independent American. He had looted the S&L so badly that it was deeply insolvent, and the Bank Board had removed him from control through a consent agreement. The law permitted the DCCC to make only a small contribution to Chapman. Gaubert created a single-candidate political action committee (PAC) to fund Chapman’s campaign.
I decided to make a difference. I formed the PAC, I raised the money. I raised every dime that went into the PAC. I called everybody I knew. (Washington Post, May 5, 1988)
Within three months, Gaubert’s PAC raised $100,920. He explained the pitch he used to raise funds:
I don’t know why you’re not involved in their [politician’s] business; they’re involved in our [expletive] business every day…. The donations give you access…. They give you a chance to have a forum when you have a problem. (ibid.)
The S&L insiders who made these PAC contributions were an infamous collection of the worst Texas S&L control frauds, including Don Dixon of Vernon Savings (a Republican), John Harrell of Commodore Savings, and Ed McBirney of Sunbelt Savings (ibid.; O’Shea 1991, 167–169). In his even more graphic pitch to these criminal S&L owners, Gaubert cited his experiences with Bank Board supervision:
Look what the SOB is doing to me and you’re going to be next. If we don’t get the Nazi [expletive] bastards out of here they’re going to destroy the whole industry. (Washington Post, May 5, 1988)
The “SOB,” of course, was Gray. Worse, these S&Ls frequently made illegal campaign contributions by directing their employees to make contributions and then reimbursing them the funds (Jackson 1988, 274–275; O’Shea 1991, 203–207). The same S&Ls gave about $200,000 to the DCCC from early 1985 to mid-1986 (Washington Post, May 5, 1988). Don Dixon explained, “It was the responsibility of Vernon Savings to grease the wheels of political America” (O’Shea 1991, 206). In fact, Gaubert’s entire PAC was probably illegal because it gave far more money to Chapman than permitted, unless it was wholly independent of the DCCC, which it was not (Jackson 1988, 266). Gaubert’s ability to convince so many S&Ls to contribute to his PAC is particularly impressive given that S&L regulation was not at issue in the special election.
Chapman very narrowly won the election. Wright became the Speaker, and Coelho became the House Democratic Whip thanks to his fund-raising successes. Gaubert, now a hero, became close to both Wright and Coelho. Gaubert and the control frauds had shown great sophistication in their strategy and tactics. He had found a situation that was absolutely critical to the party and to Coelho and Wright personally. He came in at their hour of greatest need and he delivered.
The scariest part of this recruitment was that the control frauds did it for about $100,000, a pittance. The insolvency of Independent American under Gaubert grew at the rate of about $1 million every working day, so it took Gaubert only a few minutes to lose a sum equivalent to the $5,000 that Independent American provided to that $100,000 contribution. My standard joke was that the frauds’ highest return on investment always came from their political contributions.
In addition to helping two prominent and rising politicians at the time of their greatest need, Gaubert’s contributions had four other important effects. The first one is so basic that we tend to forget it. To Jim Wright, these were not control frauds, but legitimate businessmen. The S&Ls and their owners had apparent legitimacy: control fraud is so effective because it hides behind a false front. The contributions aided the Democratic Party, not just individual officials, so the party was now indebted to the Texas control frauds.
The frauds asked nothing in return for their contributions; this is why it was useful that S&L regulation was not at issue in the election. This made it appear that the contributors belonged to that ideal group, those who support politicians financially because they believe in their policies.
The fourth characteristic was that there were no rival contributions to offset the political debt owed to Gaubert and the control frauds. Political scientists have theorized that political contributions are less influential than the public suspects because they often offset one another. If both the trade association representing the big banks and the rival association representing the small banks contribute to a politician, neither has decisive leverage on issues in which the two groups have opposing interests. The Bank Board, of course, could not make political contributions. The control frauds maximized their political leverage, therefore, on issues in which they opposed the Bank Board, and they opposed the Gray Bank Board on everything.
Gaubert’s clever (albeit illegal) tactics defeated the clever Republican ploy designed to prevent Jim Wright from becoming Speaker. Wright and Coelho came out of the special election with increased power and reputations, poised to become the top leaders of the House. Gaubert’s confederation of control frauds made it possible. What elected official would not be intensely grateful in such circumstances?
Wright and the Democratic Party rewarded Gaubert by appointing him finance chairman of the DCCC; his ambition was to become chairman of the Democratic National Committee (Jackson 1988, 263). Successful presidential candidates traditionally appoint the party chair to the cabinet or a plum ambassadorial post.
The Bank Board had forced Gaubert out of day-to-day control of Independent American in late 1984. By mid-1985, it was seeking a “removal and prohibition” order to keep him from ever reentering the industry. He knew that the Dallas fraud task force was planning to indict him. The S&L he owned was deeply insolvent; its new management, appointed by the FHLB-Dallas, was preparing a huge lawsuit against him. He realized that his wealth and his ambitions for higher political office were doomed unless the Bank Board released him from the removal-and-prohibition order and he regained control of Independent American. Gaubert had ample incentive to cultivate political support during the 1985 special election (U.S. House Conduct Committee 1989, 241).
Gaubert was cultivating fertile ground that had already been furrowed. Gray’s proposed rules on growth and direct investments in 1984 had galvanized the control frauds in Texas and California. In 1984 Durward Curlee, a former senior Texas League official, formed a group, comprising the worst Texas S&Ls, to oppose reregulation (O’Shea 1991, 102, 165–167). The group met monthly to plot its strategy. Its primary focus was on lobbying the Texas congressional delegation. The Texas delegation was numerous and disproportionately powerful. Senators Phil Gramm (Republican) and Lloyd Bensten and Representative Jim Wright (Democrats) were its leaders. In 1986 Senator Gramm recommended that Curlee be named to the Bank Board (National Thrift News, May 26, 1986). He would have been as disastrous an appointment as Lee Henkel. The fact that the administration appointed Keating’s choice instead of a prominent Republican senator’s candidate indicates how extraordinary Keating’s influence was with the White House.
By 1986 the control frauds were desperate to remove Gray and reverse his initiatives. Texas and California control frauds were the most desperate. A series of hammer blows fell on them. The growth rule was beginning to bite. Deprived of growth, the Ponzis would die.
The Bank Board dramatically increased its human resources, particularly in Texas. The FHLB-Dallas hired more than 100 new examiners, and the Bank Board temporarily reassigned 250 examiners from other districts to Texas.
The Bank Board’s leadership was greatly improved. Adding Joe Selby in Dallas and Mike Patriarca in San Francisco immediately injected vigor into the agency. The FHLBSF had already been a leader in closing problem S&Ls under the leadership of its president James Cirona and its vigorous supervisor, Charles Deardorff; now it targeted the control frauds and took over record numbers of them. Selby faced a far greater crisis than Patriarca, so it took the FHLB-Dallas much longer to begin removing its control frauds.
Taking over the control frauds, however, required the FSLIC to spend its critically limited funds. By late 1986, the FSLIC had very little money left.
In 1986 the Bank Board and the administration proposed to recapitalize the FSLIC (i.e., give it a loan so it would have more cash to close the control frauds). The control frauds understood that the FSLIC “recap” would provide the funds to close them down. As Taggart, the former CDSL commissioner, explained in his August 4, 1986, letter urging Donald Regan to fire Gray:
[Gray’s actions] are likely to have a very adverse impact on the ability of our Party to raise needed campaign funds in the upcoming elections. Many who have been very supportive of the Administration are involved with savings and loan associations which are being closed by the FHLBB….
It is felt by many in the industry that the 250 extra federal examiners on temporary duty in Texas are poised awaiting passage of the Recapitalization Bill…. If approved, sufficient funds will then be available to the FSLIC to … close down associations…. It is then anticipated that a substantial number of these “loaned” examiners will be transferred to California…. [T]hose who are typically targeted for removal or takeover are sole shareholder associations … [which] are highly profitable and which have experienced substantial growth over the past three to five years. (U.S. House Banking Committee 1989, 3:630, 634)
The Bank Board was getting far more stringent, i.e., by eliminating most of the creative regulatory accounting principles. The regulators were also receiving additional powers. The classification-of-assets rule became effective January 1, 1986. Upon Selby’s arrival in May 1986 through the remainder of that year, the FHLB-Dallas issued over 100 supervisory actions (U.S. House Conduct Committee 1989, 256). Enforcement actions, liability suits against directors and officers, and criminal investigations were all expanding rapidly.
Texas commercial real estate was in massive oversupply due to several things: the 1981 Tax Act, perverse (e.g., fraudulent) incentives for continuing to make ADC loans in the face of a glut, and the crash of oil prices. Passage of the 1986 Tax Reform Act and the crack down on the Texas S&L control frauds punctured the Texas real estate bubble.
The final straw came when the FHLB-Dallas put the first massive Texas control fraud, Western Savings in Gatesville, into the Management Consignment Program (MCP). It was a $2 billion S&L riddled with fraud, and it eventually cost the taxpayers over $1 billion. It was clear that the new Texas MCP managers, as their counterparts had done with failed California S&Ls, would expose massive losses and pervasive fraud once they took control and removed the insiders. It was equally certain that a wave of criminal referrals and lawsuits would follow. The Texas control frauds had reason to be worried: Dallas, uniquely, had a special financial-fraud task force of 100 professionals created to respond to the wave of frauds.
Texas had more control frauds than any other state. If the FSLIC recap passed, Gray and Selby would destroy the livelihoods and reputations of hundreds of control fraud insiders and defaulting borrowers. Thousands of noncriminal S&L executives also hated Gray. The S&L League reflected its membership’s overwhelming enmity for him. The industry hated reregulation. It was in a panic about stringent supervision by regulators recruited from the Office of the Comptroller of the Currency because of their demonstrated toughness. The industry had fought for over fifty years to prevent the grant of any meaningful discretion to examiners. The classification-of-assets rule now gave examiners substantial discretion. This is the context in which the administration introduced the FSLIC recap bill.
A BASTARDIZED PLAN EXPOSES THE BANK BOARD TO EXTORTION
The mechanics of the proposed recapitalization of the FSLIC are complex, and unnecessary for understanding the struggle over the bill. It is enough to know that the administration placed two absolute constraints on the plan and that those constraints were sure to cause severe problems. First, the Treasury Department would not kick in a penny to help the FSLIC. That was a bedrock administration demand—end of story. All the money had to come from the industry. Second, not a penny of the money spent could be “scored” for budgetary purposes as a federal expenditure; in other words, the whole plan had to be “off budget.”
The goals were, first, to prevent the S&L crisis from becoming an issue the Democrats could use in the 1988 presidential election, and, second, to give the FSLIC a modest increase in funds for closing more of the worst control frauds. The FSLIC recap brilliantly accomplished the first goal, but for wholly unforeseen reasons. The idea was to stave off the FSLIC’s collapse. Government accountants were in the process of (properly) declaring the FSLIC insolvent. A nationwide run was still a possibility if the public panicked, and that could have doomed George Bush’s electoral chances. No one foresaw that the control frauds would hand George Bush a priceless political gift by enlisting Speaker Wright to help kill the FSLIC recap.
The recap failed to achieve the second goal for equally unforeseen reasons. The control frauds and the league combined to prevent passage of the FSLIC recap bill during Gray’s tenure. Gray, therefore, never received any additional funds to close more control frauds. Gray’s successor, Danny Wall, chose not to use the modest amount of funds that the FSLIC eventually received under the plan to close the worst control frauds. In Chapter 8 I explore why Wall made this decision.
The plan was to take a few billion dollars from the industry (out of FHLB capital—the S&Ls owned the FHLBs) and leverage those funds through additional borrowings. The bill would create a new entity to borrow $15 billion by selling bonds. The total additional revenue would be $15 billion over the next five years. That would be on top of the FSLIC’s annual premium income of roughly $2.3 billion. The plan would repay the $15 billion debt over decades through investment earnings on the capital taken from the FHLBs (to help “defease” the debt) and from FSLIC insurance premiums that would go to the newly created bond authority instead of the FSLIC fund.
The plan had five obvious flaws. It did not provide remotely enough money for the FSLIC to close failed S&Ls. Second, it required the agency and the administration to cover up the true scope of the crisis: if the public knew how insolvent the industry and the FSLIC fund were, it would not buy the FSLIC recap bonds and the plan would collapse. The long-running cover-up of the crisis led the administration to design a plan that depended on deceiving investors. This was unprincipled and certain to fail unless the markets were badly inefficient. The administration officials designing the plan, however, were true believers in the efficient-markets hypothesis.
The third flaw was that this was a very expensive way for the federal government to borrow money. The treasury could have raised the funds at a much cheaper rate of interest, but that would have put the program on the budget. The plan, therefore, was a pure income transfer from taxpayers to the securities industry. The administration officials who designed the plan came from the securities industry.
The plan required the industry to pay an additional $15 billion over roughly twenty years. That figure, however, understated the effect of the recap on the healthy part of the industry. Over 600 S&Ls were insolvent on a market-value basis in 1986. The FSLIC did not receive any net increase in funds when an insolvent S&L paid it an insurance premium. It was a wash. Each dollar an insolvent S&L paid to the FSLIC increased FSLIC assets by a dollar and its (contingent) liabilities by a dollar. That meant that all the additional revenue provided to the FSLIC by the plan had to come from solvent S&Ls. Roughly 1,000 S&Ls were solvent but seriously undercapitalized. Increasing their insurance premiums was worse than a wash from the FSLIC’s perspective because it could cause them to fail and impose serious costs on the FSLIC. Typically, the remaining 1,000 S&Ls had barely adequate capital. The aspect of the plan that took capital from the FHLBs to help repay the bonds threatened to make their capital inadequate. The third flaw fed back into this flaw. Anything that raised the cost of borrowing the funds would be borne by the healthy members of the industry.
The administration knew that the plan had these four flaws. It did not spot the last, and largest, flaw. The plan maximized the odds that the high fliers and the traditional S&Ls would ally themselves to defeat the plan. The high fliers were sure to oppose the plan. The traditional S&Ls and the high fliers generally held one another in mutual contempt. This had undercut their ability to work together to defeat Gray’s reregulation. Traditional S&Ls knew that they would have to bear the cost of the plan, and the most capable CEOs knew the plan would not begin to cover the FSLIC’s insolvency. An enormous federal bailout of the FSLIC was inevitable, and whoever won the 1988 presidential election would probably have to propose it as one of his first initiatives. If the league could defeat, delay, or reduce the FSLIC recap, the taxpayers would bear the expense of bailing out the high fliers.
There is very little good one can say about such a plan except that it was absolutely the best (or the least bad) plan that Gray could get the administration to support, and without administration support the cause was hopeless. I was not involved in structuring the plan, but I could not have done any better given the administration’s constraints. Good public policy would have required an immediate infusion of tens of billions of dollars from the treasury.
What none of us at the Bank Board understood was how much the agency was exposing itself to extortion by seeking the FSLIC recap. One cannot blame this exposure entirely on the administration’s insistence on keeping the debacle off budget. Even if the administration had proposed to provide treasury funds to the FSLIC, Congress would have had to pass legislation authorizing the bailout, and the control frauds and their political patrons could have tried to hold that legislation hostage in order to extort the Bank Board to go easy on the frauds. However, we would have been better able to defeat such extortion had the administration supported an on-budget plan.
The strongest arguments in favor of recapitalizing the FSLIC were that the industry was in crisis, that the FSLIC fund was deeply insolvent, and that the longer the control frauds remained open, the larger the losses would be to the taxpayers. We could not make those arguments as long as the administration insisted on covering up the deep insolvency of the industry and the FSLIC fund.
It would have been far more politically dangerous for a legislator to hold FSLIC recapitalization hostage if the administration and the Bank Board had made plain that the crisis was overwhelming. If the administration had made public the depth of the crisis and the major contribution of the control frauds to it, perhaps no member of Congress would have allied himself with any possibly fraudulent S&L to block the FSLIC recapitalization. I do not believe that either the Speaker or the Keating Five would have acted as they did had the administration made public the true scope and causes of the crisis. Unfortunately, the administration was absolutely opposed to such an approach.
The FSLIC recap made sense only if the FSLIC was in desperate shape. It seems impossible now that anyone thought there was no real problem then. But that gives too much weight to hindsight. Congress deals every day with agency heads who exaggerate their problems to get bigger budgets approved. The league was claiming at every opportunity that there was no real problem that necessitated the FSLIC recap. Congress looks on agency claims of crisis with well-earned skepticism. The only way we could convince Congress that we were in a true crisis was to make it clear that the situation was absolutely desperate. That maximized the leverage of any powerful member of Congress who wished to exploit the leverage our desperation inevitably produced.
The FSLIC recap initially fared quite well in both houses. It was not initially considered a controversial bill; it had administration support; and it was not a partisan issue. The GAO, the auditing and consulting arm of Congress, strongly supported the bill.2 The bill received prompt consideration, favorable preliminary votes, and almost no opposition. The league was uncharacteristically slow to formulate a position on the FSLIC recap and mobilize its potent legion of lobbyists and contributors.
The chairman of the Senate Banking Committee, William Proxmire, wanted to make explicit the Bank Board’s statutory authority to restrict state-chartered S&Ls’ direct-investment powers. This would have removed Keating’s best argument against the direct-investment rule. Senator Alan Cranston, at Keating’s behest, put a freeze on the FSLIC recap to block Proxmire’s effort.3
WRIGHT PUTS A HOLD IN THE HOUSE
The House Banking Committee voted 47–1 in favor of the FSLIC recap. Its chairman, Fernand St Germain, placed the bill on the “suspension calendar” in response to Gray’s letter noting the need for the bill’s urgent passage. This procedure suspends the normal House rules to allow prompt consideration of noncontroversial measures. There was a public announcement that the full House would vote on the bill on September 29, 1986. Instead, Wright’s hold prevented the vote (U.S. House Conduct Committee 1989, 208).
The particular matter that decided the timing of Wright’s hold was an arcane dispute involving a large insolvent Texas real estate developer, Craig Hall. However, Hall’s particular dispute was only a small part of a much larger effort by the Texas control frauds to get Wright to use the FSLIC recap bill to extort concessions from Gray.
To get to Wright, the control frauds and their allies used two methods that were mutually reinforcing and added credibility to the claim, otherwise absurd on its face, that unduly tough regulation had caused the Texas S&L crisis. It would have been a snap to make the opposite case: the Bank Board’s laxity under Pratt was notorious. But a big lie can lead to big success.
The DCCC, which was run by Coelho and had Gaubert as finance chairman, was the first entry point for the control frauds to get to the Speaker. Coelho, who was clever, never called the regulators himself. He used Wright to do that dirty work. The control frauds would go to Coelho and get appointments with Wright. They could always get access to Coelho through Gaubert.
CRAIG HALL
Craig Hall was the wild card in Wright’s S&L intervention. He was atypical both in how he got to Wright and in who he was. He was a Reagan supporter, but had made a large contribution to the DCCC shortly before meeting with Wright (O’Shea 1991, 227). Barry emphasizes early in his book that a principal source of Wright’s power in the House came from his ability to help elect other Democrats. Fundraising, through Coelho and the DCCC, became the centerpiece of Wright’s ability to elect other Democrats. Barry (1989, 217) says that although Hall had hired Akin, Gump, the premier Democratic lobbying firm in the nation, he was unable to meet Wright until a nephew of an old friend of Wright’s arranged a meeting.
Hall was the only S&L borrower on whose behalf Wright personally intervened with the Bank Board. Hall was a very large S&L borrower—his loans from S&L’s such as Westwood Savings in California totaled roughly $1 billion—and a well-regarded developer of large residential projects. By early 1986 he was deeply insolvent and did not have the cash to make the interest payments on his loans. When he defaulted, he attempted to arrange a “loan workout.”4 Hall’s loans and similar ADC loans caused Westwood Savings, a fraudulent S&L, to fail. The Bank Board placed it in the MCP program. Westwood’s new management, after much review and spirited debate, ultimately decided that restructuring Hall’s debt would make Westwood worse off. Its “special representative,” Scott Schultz, was an FHLBSF employee who communicated the decision to Hall.
Westwood rejected Hall’s proposal and sued him to collect the debt. Hall went to Wright. Wright and other members of Congress objected to Gray. (Ominously, Danny Wall, who would be Gray’s successor, wrote one of the hostile letters on behalf of his boss, Senator Jake Garn). Wright’s efforts on behalf of Hall, however, were unique. He made repeated efforts to have Gray force Westwood to restructure the debt. The FHLBSF and I fought a tenacious rearguard action against this. Shannon Fairbanks, Gray’s chief of staff, pushed for the agency to cave in to Wright. She argued that the FSLIC recap was the agency’s highest priority and that Wright could kill its passage. I countered that if we gave in, we would only encourage further extortion. Gray wavered; he plainly hoped that someone would find an arguably principled basis for giving Wright what he wanted. Wright made the point moot by putting a hold on the FSLIC recap bill. Gray felt he had no choice. He gave in and Wright removed his hold.5
GEORGE MALLICK
The second access route the control frauds had to Wright was through George Mallick. Almost no one has heard about him, but he had a dramatic effect on the outcome of the 1988 presidential election and the downfall of Speaker Wright.
Mallick’s importance grew from a paradox about Jim Wright. As Barry (1989, 234) reports: “‘Jim’s the hardest man to help I know of.’ Bob Strauss sighed.” Strauss was a fellow Texan, a former head of the Democratic National Committee, and an old colleague on friendly terms with Wright. He sighed because he had tried again, unsuccessfully, to warn Wright that Mallick was involving him in scandal. Jim Wright did not accept help when it came in the form of good, but critical, advice. He did not accept it even when it came from individuals who were not seeking any personal gain.
However, for those who were trying to help themselves, Wright was one of the easiest men to harm precisely because he accepted certain kinds of help so indiscriminately. Barry (1989, 93) reveals that Wright enjoyed even the most unctuous flattery. He also appreciated tangible help in the form of money and votes, and he did not investigate why his patrons were providing him tangible aid, even when a patron was obviously seeking personal gain from his ties to Wright. George Mallick wanted to help George Mallick, and he realized that the best way to do so was to help Jim Wright.
Barry explains that when Wright divorced his first wife, who was much loved in Fort Worth, and married a secretary, he was ostracized by the elites in that conservative, religious town. Wright still had to support his former wife and children, and his new wife had expensive tastes, so Wright’s financial problems grew.
George Mallick seemed the answer to Wright’s woes. He provided income by hiring Wright’s new wife; he reduced their expenses by providing them with free housing and cars; and he welcomed the new Mrs. Wright as a friend in the midst of her social isolation (Barry 1989, 224–230). He flattered Jim Wright shamelessly. Like Gaubert, Mallick had found a way to help Wright in one of his hours of greatest need. Wright understandably displayed great loyalty to both men.
Wright’s association with George Mallick eventually forced him to resign in disgrace. Most of the problems related to Mallick’s role as business partner and employer of the Speaker’s wife, but one of Mallick’s critical problems involved S&Ls.
After Wright successfully extorted Gray on behalf of Craig Hall, he asked Mallick to set up a meeting with Texas critics of the Bank Board. Barry (1989, 219) describes the result.
They expected a lunch with ten or fifteen people. [On October 21, 1986,] one hundred and fifty thrift executives and builders showed up at the Ridgelea [sic] Country Club in Fort Worth.
After the meeting, Herman Smith, former president of the National Association of Homebuilders, warned Wright’s [best] friend Craig Raupe, “I looked around and saw some good, reliable businessmen. I also saw some crooks.” But Raupe did not give Wright that message.6
One can understand why such a meeting would have convinced Wright of Gray and Selby’s perfidy. First, since so many people attended a meeting that he had expected to be small, they must have felt that the Bank Board’s actions were an important matter. They reinforced this point by saying that Selby and Gray would put most of them out of business if Congress passed the FSLIC recap. They all said the same thing: everyone who spoke told a horror story about the regulators, and most of them used the “nazi” comparison. Surely they couldn’t all be lying. In addition, many of those who spoke up were substantial contributors to the Democratic Party and claimed that the Bank Board was targeting them because they were contributors.
Wright had no reason to believe the Bank Board. His intervention on behalf of Hall had convinced him that fools ran the Bank Board and that by getting involved he had prevented harm not simply to his constituents but to the FSLIC as well. Soon after Ridglea, Wright received information that led him to have a far more negative view of the Bank Board. The information seemed to confirm charges that the Bank Board was a bunch of nazis who were out to get Democrats.
Federal investigators were offering to go easy on criminals if they could supply damaging information about anyone on a list with the names of four hundred Texas businessmen. Most were involved in the thrift industry, and many were Democratic contributors…. That could not be a legitimate criminal investigation; it had to be a fishing expedition. In fact, it had to be a witch hunt. Legitimate investigations first found a crime; then they looked for criminals. This investigation seemed to be starting with a list of people, trying to attach a crime to them. It was an outrageous abuse of power. (Barry 1989, 220)
Barry became so close to Wright that it is often not clear from the text which of these conclusions, e.g., “It was an outrageous abuse of power,” are Wright’s and which are Barry’s. In late 1986 Wright could have understandably believed the claims of prosecutorial abuse because he received all of his information from the control frauds and their allies. Such beliefs were nonsensical in 1989, when Barry completed his book.
Note the first sentence: “[prosecutors] were offering to go easy on criminals if they could supply damaging information about … Texas businessmen” (emphasis added). No, the prosecutors were offering criminal Texas businessmen reduced sentences if they had information that would help convict other criminal Texas businessmen. That’s how prosecutions of big cases work. The prosecutors were investigating dozens of criminal referrals prepared by the FHLB-Dallas identifying S&L control frauds. Those referrals identified the key participants in the daisy chain (as well as other frauds), and there were well over 400 participants. It was the frauds that were outrageous; the effort to stop their crimes and convict the guilty was praiseworthy. The Dallas Fraud Task Force produced well over 400 criminal convictions arising from the Texas control frauds. It remains the most successful white-collar prosecution effort in world history.
If you start with Wright’s proposition that the regulators were acting like nazis, it is no stretch to assume that they were targeting Democratic contributors. In fact, it makes the nazi story less looney. Still, there were five obvious problems with the nazi theory even in 1986. First, remember that Taggart made precisely the opposite claim in 1986. Taggart told Don Regan that Gray was targeting Republican contributors. Don Regan was trying to drive Gray from office because he felt that Gray was not acting like a good Reagan Republican. Gray was the least likely person in the Reagan administration to be leading a partisan attack on Democrats.
Second, the staffer taking the lead in reregulation, pushing the decision that the FSLIC receivers should sell their Texas properties and supporting the change to far more vigorous supervision, was a Democrat who had never voted for a Republican. It was unlikely that I would lead a partisan attack on Democratic contributors.
Third, why would the Bank Board want to act like nazis? Closing S&Ls, particularly control frauds, is unpleasant work for regulators. They sue you for scores of millions of dollars in your individual capacity; they hire private investigators to try to find dirt on you; and they threaten you. Regulators are not famously masochistic; what was in it for us to act like nazis?
Fourth, for much of its history the Bank Board was notorious for being a shill for the industry. What elixir had transformed us from shills into nazis? The S&L industry was famous for its support for the Democratic Party and the strength of its trade association. Any Bank Board chairman who attempted to use the agency to punish Democrats would be walking into a buzz saw of his own creation.
Fifth, in 1986 the Bank Board was notable for how few Texas S&Ls it had closed. It was no fluke that Westwood Savings, a California S&L, was the only one of the thirty S&Ls that had made substantial loans to Craig Hall that had been taken over by the Bank Board in 1986. A disproportionate number of California S&Ls had been closed; and Gray was a Californian. Further, as Taggart stressed, the Bank Board closed many California control frauds run by Republicans. Barry (1989, 217) asserts that California S&Ls “pummeled” federal legislators for forbearance in 1986 because of sharp falls in California property values. In fact, California real estate values surged in 1986 and for several years afterwards.7
Representative Charles Pashayan (Republican) was the only legislator from California whom I recall “pummel[ing]” the Bank Board in 1986. He complained bitterly about the closure of North America Savings, a California control fraud. Pashayan was also a close ally of Keating. On July 31, 1986, Keating sent a letter to then-congressman John McCain calling Gray a “Mad Dog” and warning that the Republicans would lose control of the Senate because of his regulatory and enforcement actions (U.S. Senate Committee 1990–1991a, 1:593). The enclosure that was supposed to prove Gray’s madness was a stringent cease and desist order preventing further fraud at North America Savings. The control frauds supported one another. Keating’s letter was a follow-up to a July 1, 1986, letter to McCain in which he described the Bank Board as “Nazi” and made the same prediction that Gray’s reregulation would cost Republicans control of the Senate.
Pashayan was part of a group of sixteen Republican congressmen (including Dick Cheney, Newt Gingrich, and Robert Dornan) who pressured the Bank Board to give Keating privileged Bank Board information in order to help him block the direct-investment rule (Mayer 1990, 238–239; Williamson 1990). The FHLBSF ignored his complaints and led the way in closing the control frauds. Pashayan was a member of the House Ethics Committee that investigated Speaker Wright. He detested Gray. (He even took me aside privately after I testified in the House ethics investigation of Wright to tell me how “vindictive” Gray was. He could not, however, provide any examples.) Barry (1989, 702) quotes with approval Pashayan’s personal distaste for Gray. Barry does not explain why Gray’s decision to close a notorious California control fraud in the face of threatened political retaliation by a fellow Republican should be viewed as anything other than praiseworthy.
But, if one simply accepted the premise that Gray was a raging Republican out to destroy Democratic contributors, it could explain why the agency staffers acted like nazis. Nixon had an “enemies list” and used government agencies like the IRS to attack Democrats (he justified this criminal conduct by claiming that Democratic predecessors had engaged in similar abuses.) If the regulators were abusive enough to act like nazis (which Wright assumed to be true), then it was a small step to assume that they would be selective in that abuse and target their political opponents.
Wright did not have to ignore the Republicans’ hatred of the heretic Gray and their claims that he was shutting down Republican contributors, because he never learned of those facts. No one was there to point out inconvenient facts to him. Wright’s (and Barry’s) reaction to the 400 names on the subpoena shows how easily he assumed that damning “evidence” was true. “Many” of them were Democrats. And many were Republicans. And some were independents.
Most revealingly, many of the people on the list contributed to both parties. Indeed, real estate developers are infamous as political contributors. Many of them strike it big by getting a zoning change from the local commission or obtaining a license to develop a facility from a state agency. Real estate developers commonly donate to both parties.
In early 1987, Texas S&L insiders held a Republican fund-raiser at which Treasury Secretary Baker was the featured speaker. Baker sat next to Don Dixon of Vernon Savings. Dixon had also contributed to the DCCC. In 1987 he was the worst known control fraud in the nation; he was on the prosecutors’ list of 400 names. When Wright saw his name on that list he thought “Democratic contributor.” Similarly, Craig Hall contributed to the Republicans and the DCCC (O’Shea 1991, 227). Wright never considered that control frauds have compelling incentives to make contributions to powerful politicians of either party who might intervene on their behalf.
Barry told me about Wright’s reaction to the subpoena with the 400 names. Wright promptly called a meeting of top House supporters. They were tasked with immediately making a series of phone calls and reporting back to the Speaker. Representative Robert Eckhardt (Texas), for example, phoned FBI director William H. “Judge” Webster to find out who had authorized the subpoena and to convey Wright’s severe displeasure with the investigation. Representative Douglas Barnard (Georgia) was assigned to call the Bank Board. Dick Peterson, his top aide, called. Dick was extremely nervous about making the call. He was supposed to find out whether we had any role in creating the list of names. Curtis Prins, aide to Representative Frank Annunzio (Illinois), also called us, and threatened that if the Speaker discovered that the Bank Board had had anything to do with generating the list, there would be retribution. Even Barry was alarmed. He told me that his immediate thought was that “Somebody better protect the Speaker of the House on this because I like the guy” (emphasis added). I was so startled by Barry’s tale that I grabbed a pad of paper and wrote that sentence down. Barry’s concern was that the Speaker needed to be protected against obstruction-of-justice charges. Prins’s attempt to intimidate the Bank Board from assisting the Justice Department’s investigation of the Texas control frauds could have been construed as obstruction of justice.
Barry concluded that the Ridglea meeting had convinced Wright that the Bank Board, particularly Gray and Selby, were out-of-control nazis who were prevented from arbitrarily shutting down scores of Texas S&Ls solely by the FSLIC’s lack of cash. Two things, therefore, became essential. The FSLIC recap had to be blocked, and forbearance provisions had to be added to the bill to curtail drastically the Bank Board’s power to supervise and close S&Ls (Barry 1989, 219–220).
Wright then involved Mallick in an even more formal manner by appointing him his agent to investigate the Texas S&L situation.
Wright had asked Mallick to look into the savings and loan thing for him, had given him that letter of introduction in effect identifying Mallick as his agent. Mallick’s extensive real estate holdings gave him at least the appearance of a conflict of interest, but that appearance did not deter Wright.
“That letter was a sop to Mallick’s ego,” another man close to Wright said. “He waved that letter all over the Southwest and in New York. It caused some problems with Bob Strauss.” (Barry 1989, 233)
The Mallick family had a real conflict of interest, not simply an apparent one. At the time of George Mallick’s investigation on behalf of the Speaker, they were not-very-creditworthy borrowers from Texas S&Ls and banks. Mallick’s son Michael was soon to default on a $1 million loan (cosigned, i.e., guaranteed, by George), and the S&L involved, Inter-west Savings, was about to fail (U.S. House Conduct Committee 1989, 183). One of the things George Mallick proposed in his written report to Wright was a moratorium on foreclosures by S&Ls (ibid., 184). This would have been of immense direct personal benefit to the Mallicks.
The fact that Wright’s letter upset Bob Strauss was important. It set in motion two unsuccessful efforts to convince the Speaker that the control frauds were using him and that his actions would harm him, the Democratic Party, and the nation. The fact that Wright took his guidance from Mallick rather than Bob Strauss, the grand old man of the Democratic Party, demonstrates how closely he bonded with Mallick.
It was of enormous value to the control frauds that Mallick served as their conduit to Wright. Mallick was many things to Jim and Betty Wright: their best friend, the financial partner who had saved them from humiliating ruin and returned them to security, her employer, and the provider of their dwelling and car. He was an expert on financial and real estate matters, the man the Wrights’ trusted to handle their own investments (U.S. House Conduct Committee, 1989).
Mallick was the control frauds’ ace in the hole. It was easy to recruit him. If the FSLIC recap bill became law, the Bank Board would appoint a receiver for the insolvent S&L that had made the large loan to his son. His son could not repay the loan, so the receiver would sue George, who had guaranteed it. He was facing imminent financial ruin. The Fort Worth elites who had always despised him would humiliate him if that happened. He would no longer be able to subsidize the Wrights, and they might find it politically embarrassing to associate with him if he were bankrupt. Mallick saw himself as an innocent victim. He and the control frauds had common interests. Wright got his advice on S&Ls exclusively from the control frauds and Mallick. It is no surprise that he believed that they were the victims, and Gray and Selby the villains.
The FSLIC recap was dead in 1986 after the Ridglea meeting. There was no way Wright would allow its passage. Things broke well for him. Unrelated technical matters also held up the recap: the partisan squabble over nonbank banks, the Congressional Budget Office’s scoring of the Financing Corporation (FICO) bonds (the bonds to finance the FSLIC recap) for budgetary purposes under the Gramm-Rudman Act, and “exit” fees. (None of the arcane details behind this jargon are necessary to my tale.) The delays by Cranston, Pryor, and Wright meant there was no time to sort things out, particularly given the rush to recess during an election year. (The House began to sprout “Free the 99th Congress!” buttons as the session dragged.) The House and Senate could not go to a conference committee, reconcile the House and Senate bills, and vote out a final bill in the brief time remaining after Wright removed his hold on the bill. The FSLIC recap died with the end of the 1986 term; Wright did not need to block it again. Indeed, once it was clear that the bill would not even make it to a conference committee, he was clever enough to vote for it in the House. The Bank Board’s highest priority in 1987 would be passage of the reintroduced bill.
Predictably, after Wright’s willingness to extort Gray, and his success in doing so, “S&L executives all over Texas flooded his office with complaints” (Barry 1989, 219). This helped lead to the Ridglea meeting and, equally predictably, that meeting led to still more complaints. Wright believed that the frequency, vigor, and uniformity of the new complaints demonstrated the validity of the charges. He also believed that the case of Craig Hall proved that the complaints were well founded and that his intervention had helped everyone concerned. This emboldened Wright to intervene repeatedly on behalf of some of the worst control frauds in the nation in late 1986 and early 1987.
There were a series of meetings and phone calls between Wright and Gray involving several different control frauds. I will limit my discussion to the three efforts that proved decisive for the FSLIC recap and Wright’s career. The other matters fit the same pattern: Wright pushed and Gray caved.
I have explained how Gaubert became a close ally of Wright and Coelho. Gaubert was active behind the scenes in the Hall matter. Congressional contacts told Gray that the one thing he had to do before meeting with Wright about Hall was to find out everything he could about Gaubert (U.S. House Conduct Committee, 1989).
The Speaker pressured Gray to release Gaubert from the removal-and-prohibition agreement he had consented to, which would allow him to resume control of Independent Savings. The goal was to put one of the worst control frauds in the nation back in charge of an S&L that he had looted and made massively insolvent. Gray knew he couldn’t agree to that. He sought an opportunity to explain to Wright why this was a terrible idea. Wright refused to be briefed (U.S. House Conduct Committee 1989, 245). Gray decided instead to arrange an independent review that would convince Wright that the Bank Board had acted properly. This occurred over Rosemary Stewart’s and my vigorous objections. She objected to any investigation of her office, and I continued to argue that giving in to Wright’s extortion would encourage greater extortion. Gray held off appointing a receiver for Independent American because of Wright’s intervention (ibid., 248–249).
From a list of lawyers proposed by Gaubert’s lawyers, we chose Aubrey Harwell to conduct the independent investigation. Harwell concluded that Gaubert was a criminal who had defrauded and looted the S&Ls he controlled. (He told me this in person.) His secondary conclusion was that our Office of Enforcement (OE) had not acted vigorously enough in its investigation of Gaubert and had missed areas of culpability (U.S. House Conduct Committee 1989, 250). He was critical of the Bank Board for two reasons. He thought it had been insane of the Bank Board to approve Gaubert’s earlier acquisition of troubled S&Ls. Amen to that! He also thought that the OE should have told Gaubert that it was contemplating making criminal referrals about him. Harwell was wrong about that. Criminal referrals are highly confidential, and the Justice Department advises agencies not to reveal such matters to suspects. Otherwise, incriminating documents disappear.
Harwell’s report is a detailed indictment of Gaubert’s looting and a rejection of his claims of Bank Board perfidy (U.S. House Conduct Committee 1989, 250; Mayer 1990, 237; Jackson 1988, 279). Wright, however, continued to intervene on Gaubert’s behalf even after the Bank Board gave him Harwell’s report.
Martin Mayer (1990, 236) was livid about Barry’s mischaracterization of the Harwell report:
One notes that in his astonishing whitewash of Jim Wright, John M. Barry deals with the Gaubert matter in half a paragraph.
Mayer is slightly off on quantity, but Barry does not provide the reader with any of the uncontested facts about what Gaubert did wrong at an Iowa S&L.
Brooks Jackson’s Honest Graft summarizes the findings of the Harwell report (1988, 267–269). I can provide the essence of the story in a paragraph. Gaubert purchased some real estate. Three months later he provided an appraisal report claiming that the property was worth eighteen times what he had paid for it. He approached Capitol Savings, an insolvent Iowa S&L. He had the S&L lend money to entities he controlled in order to have them to buy the real estate from him at this absurdly inflated value. He did not inform the S&L’s board of directors that he controlled the entities. The entities he controlled defaulted on their enormous debts. Roughly ten days after the loans closed, Gaubert “loaned” the Capitol Savings officer who approved the deal $150,000. But the “borrower” did not sign a note (“IOU”) and, as far as anyone could tell, never repaid any part of the loan.
A jury acquitted Gaubert even though the trial established these facts. That is a testament to the difficulty of securing a white-collar conviction for a complicated financial fraud. The obvious question, which Barry never asks, is why Wright continued to intervene on Gaubert’s behalf after learning these facts. Whether or not a jury considered them criminal, they were certainly dishonest and dishonorable. Why would Wright continue to consort with Gaubert after he knew the man’s character? Why would he intervene to try to return him to control of an S&L with billions of dollars of assets insured by the FSLIC?
The Justice Department eventually convicted Gaubert of other felonies. Despite these convictions, Wright defended him in his 1993 presentation to the National Commission on Financial Institution Reform, Recovery and Enforcement. He claimed that the government had a vendetta against Gaubert (NCFIRRE 1993d, 16–19).
At the time Wright intervened on behalf of Don Dixon, the Bank Board believed that he ran the worst control fraud in the nation, Vernon Savings, known to its regulators as “Vermin.” This was the S&L, described in Chapter 2, that provided prostitutes to Texas S&L commissioner Bowman. Eventually, Charles Keating of Lincoln Savings managed to nip him at the wire for the not-so-coveted title of worst of the control frauds.
Dixon personified greed, immorality, incompetence, and audacity. Vernon is also the S&L, as I discussed in my explanation of ADC Ponzis, that made ADC loans with a six-month maturity so that it could maximize income from refinancing. This goosed Vernon’s income stream so mightily that it reported itself to be the most profitable S&L in America. Its (fictitious) earnings were twice the (fictitious) earnings of the second-most profitable S&L (O’Shea 1991, 124). I noted that 96 percent of its ADC loans defaulted. Lest you think it was a victim of the Texas real estate recession, more than 90 percent of the ADC loans it made outside Texas also defaulted. Vernon was an important contributor to the Texas real-estate glut.
Recall that Dixon got control of Vernon Savings without putting up a penny of his own money. The felon Herman K. Beebe and the prior owner of Vernon Savings, who was conned by Dixon, funded the entire purchase.
Dixon did not limit his pimping to Bowman. He inherited a conservative board of elderly directors, many of them leaders in their very strict Baptist church. Not a problem! One of his first acts after the acquisition was to invite the board of directors along on an overnight trip. He tactfully told the female member of the board she wouldn’t be comfortable on the boys’ night out. Dixon flew the board members to California on a private jet with an open bar, took them and eight prostitutes on a romantic cruise in a very spiffy sailboat to an equally romantic island restaurant off San Diego, and brought them back to a fabulous beach house (O’Shea 1991, 68–70). He never had to worry about the board exercising any independent judgment after this soiree.
Vernon is a very small town (population 12,500) in northwest Texas, near the Oklahoma border. God did not bless Vernon with either great natural beauty or a temperate clime. Dixon had grown up in Vernon, but had then moved and seen other parts of the United States. He liked the beach, so he had Vernon Savings buy spectacular, multimillion-dollar homes on the beach in Southern California, and then spend tens of thousands of dollars keeping the homes in fresh flowers. One does not live a full life by beach alone, so Dixon also had Vernon buy a chalet, near former President Ford, at one of the nation’s top ski resorts in Colorado. Naturally, one wishes to be able to enjoy such amenities without plebeian concerns such as baggage screening, restrictive flight schedules, or possibly having to sit next to a screaming child. Thus was born Vernon’s air force. Once one has a fleet of private jets, one discovers that they have little to do most of the time. The answer is to provide them, often (illegally) without charge, to politicians. Wright was one of those who flew Air Vermin.
But what’s an air force without a navy? Vernon is very far from any real body of water. Dixon made up for this drawback by having Vernon buy the sister ship of the presidential yacht, The Sequoia. (Dixon named the yacht, aptly, the High Spirits.) It couldn’t be berthed anywhere near Vernon, Texas, so it was docked in the Potomac River near Washington, D.C. It served as a floating lobbying platform. Yes, the prostitutes showed up here as well. The DCCC held many fundraisers on the yacht without paying any of the costs. This was illegal, and the DCCC, to its humiliation, later had to pay tens of thousands of dollars to Vernon’s receiver. Wright met Dixon at one of these shipboard parties (U.S. House Conduct Committee 1989, 264). The Republicans had their own parties on the yacht.
Once Dixon had sampled that which was sweetest in America, he began to dream of Europe. He made two grand forays. He wasn’t Catholic, but he wanted to be part of high society, so he arranged a private audience with the pope. He befriended Bishop Maher of San Diego by becoming the largest donor to the (Catholic) University of San Diego (U.S. House Conduct Committee 1989, 150). The school put him on its board. Unfortunately, the donation was in the form of stock in Vernon’s holding company, which was soon to become worthless (but which provided Dixon with a valuable tax deduction). Dixon also provided Maher and an aide with a fantastic all-expense-paid trip to Europe. They flew over on Vernon’s air force. The bishop arranged the private audience with the pope. Vernon Savings donated an expensive painting to the pope, an Olaf Wieghorst original (ibid., 157). Vernon paid for everything.
Dixon arranged an even grander tour of Europe. He had Philippe Junot, Princess Caroline’s former husband, on Vernon’s payroll at huge expense for no real work. Philippe arranged a two-week tour of multiple-star restaurants in France. Dixon took friends along; one of them kept a diary of the tour, which she entitled Gastronomique Fantastique! (U.S. House Conduct Committee 1989, 63–66). Vernon, which is to say the taxpayers, paid for everything.
Vernon was in deep trouble with both the Bank Board and state regulators well before Wright began to intervene on Dixon’s behalf. By September 1986, Texas had placed Vernon under state supervisory control (U.S. House Conduct Committee 1989, 261). Vernon consented to the appointment of the state supervisor. Note that Bowman was still commissioner and that he approved this action despite the obvious risk that Dixon would reveal that he had provided Bowman with prostitutes. Bowman was a complicated individual who often tried to do the right thing.
In December 1986, Dixon contacted Coelho, who referred the request to Wright. Dixon told Wright that the Bank Board was about to take over “his” S&L. He said that he needed only one additional day to complete a sale of the S&L that would allow him to save “his” investment. Wright called Gray to get his assurance that the Bank Board would not close Vernon Savings that week. Gray knew that there was no takeover planned because only the Bank Board members could approve a takeover, and they had not even scheduled one for Vernon. He explained this to Wright and said he would call the president of the FHLB-Dallas, Roy Green, and see if some other action was about to be taken. Gray called Green and found out that the FHLB-Dallas was about to present a “consent to merger” resolution to Vernon Savings’ board of directors.
Gray and Green then tried to call Wright back to explain what the Bank Board planned. Wright had left the office, so Gray and Green asked to talk to his staff. Wright’s staff, however, was moving from the Majority Leader’s offices to the Speaker’s offices that day, which caused a great deal of disruption. Gray and Green waited on hold for two hours to explain the matter. Wright’s principal aide, John Mack, was then able to take their call. They explained, and thought all was well. Soon, however, Mack called Gray back. He was very angry and said that someone he did not identify (doubtless Dixon) informed him that a “consent to merger” resolution was equivalent to a takeover. Gray explained why this was not so, but Mack did not seem mollified (U.S. House Conduct Committee 1989, 264–267).
The single most disgusting action Wright took was to try to force Gray to fire Joe Selby as the lead supervisor for the Dallas district. Wright denied that he did so. I will explain why I do not believe his denial is credible. Wright was not the only politician to try to get Selby fired. Danny Wall, then Senator Garn’s top aide and soon to be Gray’s successor, told Gray he should get rid of Selby. Wall found a way to force Selby out once he became Bank Board chairman.
According to Gray’s testimony, Wright told him that
Selby had established a ring of homosexual lawyers in Texas … and in order for people to deal with Federal Home Loan Bank [of Dallas] supervision people, they would have to deal with this ring of homosexual lawyers….
[H]e said to me, “Isn’t there anything you can do to get rid of Selby or ask him to leave or something.” (U.S. House Conduct Committee 1989, 256–257)
Wright denied that he had ever mentioned his belief that Selby was a homosexual or that he had asked Gray to get rid of him. But the Speaker did just what Gray testified he did. Gray was apoplectic about it and told at least three of his senior aides immediately, including me. The story is so insane that no one could have made it up. (Moreover, Gray is a fundamentally honest person.) Barry (1989, 220) confirms Gray’s testimony by providing the details of the rumors the Speaker heard and believed. In conversation with me, Barry tried to justify the Speaker’s effort to get Selby fired. He premised his (rather inept and offensive) defense on the Speaker’s belief that the rumors were true.
Wright heard other, even more outrageous rumors. Texas S&L executives were saying that Selby, the regulator, was at the center of a ring of sadistic homosexuals who liked to see men squirm. Thrift executives spoke of him with real hatred. After he forced owners of one thrift to sign over control, he reportedly laughed in their faces and said, “Now you can call Jim Wright.” A seventy-year-old director, who had founded the thrift originally, replied, “Fuck you, you goddamn queer”.
John Neibel, dean of the University of Houston Law Center, supposedly suggested firing him. There were even rumors that Selby was refusing to deal with thrift executives unless they hired homosexual lawyers, who were giving themselves immediate six-figure bonuses. They were bizarre, outrageous charges. They couldn’t be true. Could they?
Wright called Gray and relayed some complaints about Selby. (Barry 1989, 220)
Barry confirmed to me that Wright did believe these rumors. The last bizarre, outrageous charge is the one Gray told us about immediately after talking to Wright. None of us, including Gray, had ever heard this smear before. Gray heard it from Wright. That means the Speaker’s denial that he mentioned to Gray his belief that Selby was a homosexual was false. The rumors are in fact bizarre and outrageous. Nevertheless, Wright believed them. Barry’s account cleared up a minor mystery. I could never figure out why Wright used the word “sadistic” to describe FHLB-Dallas supervision. That word seemed over the top even for Wright. Plainly, he believed the homophobic smear that gays are literally sadistic and get aroused by making straight men squirm. Only severe antipathy can explain this willingness to believe absurd smears: we believe the worst about those we hate. There are two evident sources of that personal malice. The most obvious source is virulent homophobia. Wright also believed that Selby was a nazi. These factors were mutually reinforcing.
There is every reason to believe that Gray was also telling the truth when he testified that Wright went on to request that he fire Selby. Wright was not shy about using his clout to try to get officials fired. He and his aides asked Danny Wall and his aides several times to fire me.
Gray refused to fire Selby. This was the first time he said no to Wright. Gray had personally recruited Selby. Selby was the top financial regulator in America. The control frauds were determined to get Selby fired because he was so competent. Selby and Gray were the two people doing the most to protect Texans from injury. The control frauds were steadily deepening the glut of Texas residential and commercial real estate and forcing Texas into an ever-deeper real estate recession. Scores of thousands of Texans were losing their houses as home prices plum meted. It was essential that the Bank Board bring the control frauds under control as soon as possible and replace their managers with honest people. Wright was again trying to force Gray to take actions that would harm Wright’s constituents in order to aid DCCC contributors. Sadly, Wall did deliver Selby’s head on a pike to Wright, which seriously increased losses in Texas.
Barry’s effort to defend Wright’s effort to get Selby fired and Barry’s uncritical dissemination of rumors are illustrative of his book about Wright. I particularly like the innuendo that gays are naturally sadistic and like to make (straight) men squirm. Barry could, and should, have answered his own question:
They were bizarre, outrageous charges. They couldn’t be true. Could they?
All it would have taken was one word: “no.” None of it was true (U.S. House Conduct Committee 1989, 257). But because the Speaker believed vicious, baseless smears spread by the control frauds, the nation lost its most valuable field supervisor at precisely the moment he was most vital. Texans, and all U.S. taxpayers, suffered billions of dollars of losses because Wright and Wall forced Selby from office.