The House Banking Committee leadership … promised the Administration and the Bank Board that FSLIC recapitalization would receive top priority in the new [100th] Congress. On January 6, 1987 [chairman St Germain and ranking minority member Wylie] reintroduced the recapitalizaton bill in substantially the form proposed by the Administration in the previous Congress. The goal was to bring the bill to the floor by March. (U.S. House Conduct Committee 1989, 209)
When a bill has bipartisan support and the industry affected by the bill is in crisis and the committee chair, ranking minority member, and administration all support the bill, it usually moves fast. The FSLIC recap, however, was DOA (dead on arrival) in January 1987. First, the newly elected Speaker of the House, Jim Wright, was determined to hold the bill hostage until he received Gray’s unconditional surrender. Second, the S&L League had now decided that blocking the bill and then perverting it into a measure that would gut the Bank Board’s supervisory powers was its sole priority.
I have represented trade associations. All trade associations face the question of how to maintain solidarity. Although the league’s solidarity made it a far more effective lobbying force than the fractious and divided banking industry, its solidarity came at a severe cost in 1987. The league faced its worst dilemma: appease the control frauds and alienate the honest owners, or vice versa. Roughly 5 percent of the industry was still in the hands of control frauds; roughly 30 percent of the industry was insolvent. Texas, Arkansas, Arizona, and Louisiana were suffering from severe real estate recessions that were being aggravated by the control frauds’ lending in the teeth of the glut. It was greatly in the interests of the honest S&Ls that the Bank Board close the control frauds as quickly as possible.
A split potentially so divisive can fracture a trade association; a trade association that seeks to optimize solidarity has to adopt positions acceptable to the lowest common denominator among its membership. (This was ironic; the league constantly, albeit inaccurately, criticized Gray for regulating to the lowest common denominator.) When your membership includes scores of control frauds, that denominator is set at an unseemly level.
One of the things that made it easier for the league to achieve consensus was that the blocs within the industry had different priorities. This meant that one bloc could help the other get what it primarily wanted in return for support in obtaining its own priority. The league had a creative insight. The recap bill as proposed by the Bank Board and the administration had only one dimension: how much money the FSLIC would raise. The league recast the bill and added a second dimension: how much money and what kind of forbearance. The healthier S&Ls’ priority was to reduce the amount of money they would have to pay. Forbearance was the highest priority of all insolvent or nearly insolvent S&Ls. Forbearance had a second advantage. The league claimed that it was the silver bullet that could painlessly restore solvency to the S&Ls and the FSLIC. Time heals all wounds.
Indeed, the only rift that opened among the league’s members is that Texas S&Ls sometimes told us at the Bank Board (in private) that they would be happy to support a $15 billion FSLIC recap as long as the money was used to subsidize Texas S&Ls and the existing managers were left in place. Texas S&Ls wanted to have the rest of the nation subsidize them. Speaker Wright and Treasury Secretary Baker, two prominent Texans, supported this grand design.
The league was willing to hold its nose and ally itself with the control frauds because the full $15 billion FSLIC recap bill had come so close to passing in 1986. The bill would have become law but for Charles Keating, Craig Hall, Thomas Gaubert, Don Dixon, and their political allies (Senator Alan Cranston and Jim Wright). The league and the control frauds could rout the opposition if they combined their political power. The CEO of one of the best S&Ls in the country described the deal to me as “a Faustian bargain” (i.e., a deal with the devil).
On January 21 and 22, 1987, a House banking subcommittee held hearings on the FSLIC recap. The industry announced its opposition to any material recapitalization of the FSLIC and its support for forbearance. The other shoe soon dropped. Speaker Wright signaled his support for the leader of the Texas control frauds, Tom Gaubert, and the most notorious control fraud in the nation, Don Dixon. Wright used Representative Douglas Barnard as his surrogate.
After their testimony, league officials met the Speaker for lunch. Walter W. “Bo” McAllister III, director of the Texas Savings and Loan League, asked the Speaker to put a hold on the FSLIC recap until the administration added forbearance provisions acceptable to the Texas League to the bill. O’Shea (1991, 236) reports:
McAllister later wrote in the Texas League’s magazine, “We encouraged him to take this action and that is exactly what happened.”
That same group of league officials met with Gray at the Bank Board to promote both forbearance and greatly reduced funding for the FSLIC. I was there. Gray had appointed me point man for the FSLIC recap about a week before this meeting. (Gray had appointed me deputy director of the FSLIC because the Hill responds well to titles and poorly to lawyers.) I’ve never forgotten two comments that league representatives made. The executive director, Bill O’Connell, responded to my statements about the depth of the crisis the FSLIC faced and the additional losses that the requested forbearance would cause with the kindly look one gives to an overenthusiastic youth. He assured me that he had heard the same warnings many times during his career, and it had always turned out that the agency grossly exaggerated the crisis. I asked Bo which Texas S&Ls the Bank Board had closed improperly. He said there weren’t any—so much for the “nazi” theory. In one of those small-world events, Bo’s San Antonio Savings Association (SASA) ended up managing Vernon after the Bank Board finally took it over. The SASA officials involved were appalled at the extent of the control fraud and could not understand how the regulators had failed to shut it down far earlier.
On the second day of the hearings, January 22, 1987, a very unusual act occurred at an open hearing of the House Banking Committee. Representative Barnard asked Gray about the Bank Board’s treatment of two still-open Texas S&Ls—Tom Gaubert’s Independent American and Don Dixon’s Vernon Savings (U.S. House Conduct Committee 1989, 251). This had never happened in my experience. Publicly releasing confidential information about insolvent and fraudulent S&Ls could spark a run. Members of Congress feared that the media would blame them were a run to occur after they forced public disclosures; as a result, they do not ask such questions. Barnard asked the questions because Wright’s staff requested it (U.S. House Conduct Committee 1989, 251–252). (Barry emphasizes throughout his book that Wright’s staff never freelanced.) Tom Gaubert had drafted the question.
The reason Wright and Gaubert directed Barnard to ask Gray about both S&Ls was to add to the pressure on Gray and to signal the Speaker’s continuing unhappiness with Gray’s failure to do more for Gaubert and Dixon.
Gaubert later sued Gray and me for hundreds of millions of dollars in our individual capacities on the grounds that we had answered the questions that Gaubert had caused Barnard to ask us. Remember the old joke about the definition of “chutzpah”? A son kills his mom and dad and begs mercy from the judge because he’s an orphan. Gaubert’s actions provided an equally illustrative definition of the word.
Barnard’s doing the bidding of Gaubert mystified us. He was from the banking industry and had been a banking regulator. He was the last person in the world you would expect to ask such a question in open session. It was obvious that he was asking the question at the behest of one or both of the control frauds that Speaker Wright had gone to bat for. Gray immediately arranged a luncheon meeting with Barnard and his principal aide, Dick Peterson, for the next day. Gray, Mary Ellen Taylor (his top legislative aide, who was a former colleague of Peterson’s and friend of both Peterson’s and Barnard’s), and I attended. My staff prepared short memoranda on Vernon Savings and Independent American.
I first became aware of the existence and role of the George Mallick at this meeting. Barnard was so worried that he spoke openly of his fears. This was quite unusual because he was speaking largely of his fears for his party (the Democrats), and Gray and Taylor were both Republicans. He told us that he had asked the questions at the request of Wright’s staff. He explained how concerned he was that unscrupulous people were using Wright in ways that would destroy his reputation and harm the party. He told us that Bob Strauss shared his concern.
Barnard was also concerned for the House. Barnard had a great deal of seniority and chaired important committees; he knew how to run congressional investigations. He thought it was terrible for Congress that Wright had given Mallick a letter on the Speaker’s stationery saying that Mallick was acting on the Speaker’s behalf in investigating the S&L crisis. Barnard was hearing that Mallick was running all over the place flaunting the letter as a demonstration of his importance, power, and close ties to the Speaker. Barnard believed that Mallick was one of the people using the Speaker and perhaps involving him in scandal.
As a Democrat, I saw the same danger that Barnard did. The Democratic Party’s best issue in the upcoming election was “the sleaze factor.” A number of President Reagan’s top aides had gotten into hot water for alleged ethics violations. The obvious way for the Republican Party to neutralize the issue was to publicize Wright’s extortion of Gray on behalf of Texas control frauds. Gray explained in some detail each of Wright’s acts on behalf of the control frauds. Barnard and his aide grew morose.
That’s when I began my discussion of the facts about Vernon Savings and Independent American. As I got going, Barnard and his aide blanched. They had feared that the two S&Ls would prove unsavory, but I was explaining that they were outright criminal and that Vernon was the worst S&L in the country. They had come to the meeting with ample fears; they left it realizing that the true horror exceeded their ability to imagine.
I briefed them from two- and three-page memoranda on Independent American and Vernon. My staff, Ruth Amberg and Mike Solomon, had scrambled to prepare them overnight immediately after we returned from the hearing. Barnard requested copies of the memoranda before our restaurant meeting broke up, saying he wanted to warn the Speaker immediately. I gave them the copies I used in briefing them. Barnard said he would use them to warn the Speaker of the need to cut all ties with Thomas Gaubert and Don Dixon and to point out how Mallick was involving him in a potential scandal. We sent much more extensive memoranda to Barnard on February 27 detailing the nature of both control frauds. Those memoranda were the formal answer to Barnard’s request for a response at the open hearing.
Wright relentlessly kept up the pressure on the House Banking Committee in favor of the control frauds. He would not simply hold the FSLIC recap hostage; he would try to embarrass the Bank Board.
On January 29, Wright held a luncheon with Fernand St Germain and several other congressmen to discuss complaints about the Bank Board. According to St Germain, the Texas delegation complained of the Bank Board’s “high-handedness.” As a result of the luncheon, St Germain agreed to hold subcommittee hearings regarding the allegations (U.S. House Conduct Committee 1989, 210).
The control frauds were well on their way to perverting the FSLIC recap bill, transmogrifying it from a means to help the FSLIC close more control frauds into a means of gutting the FSLIC’s power to stop them. Congress would now investigate the regulators, not the control frauds, and it would do so at the behest of the control frauds.
Remoras use suckers to attach themselves to large rays and sharks. When the big fish feed, the remoras feast, too. Senior Texas state officials, primarily Democrats, smelled blood in the water and joined the feeding frenzy. The party’s successful candidate for governor, Mark White, and the attorney general, Jim Mattox, had long received large political contributions from the Texas control frauds. A ten-gallon hat was often passed around the room and came back stuffed with large bills (O’Shea 1991, 32–33). Mattox received a $200,000 gift that resulted from a fraudulent “land flip” by the man who led the pathbreaking Texas control fraud, Empire Savings in Mesquite, Texas (Mayer 1990, 239). Mattox announced in March 1987 that he was beginning a criminal investigation of the Bank Board. He also threatened to bring suit “to stop use of federal regulatory procedures that discriminated against the State’s savings and loan associations” (ibid.; Day 1993, 245). Roughly a week after announcing that he would begin such an investigation, and without the aid of any investigation, he announced that the Bank Board was guilty.
Though I did not realize it at the time, Bob Strauss set up the February 10, 1987, meeting at which the Bank Board sought to make peace with the Speaker. Strauss feared that George Mallick and unscrupulous S&L leaders were leading the Speaker into scandal and ruining one of the party’s best issues for the 1988 presidential elections.
We sent a fairly large delegation to try to make peace with the Speaker. The president of the FHLB-Dallas, Roy Green, along with Joe Selby and Walter Faulk, came up from Texas. Faulk was a well-respected supervisor who looked and sounded like a “down home” Texan: weather-beaten, tall, and laconic. As the point man on the FSLIC recap, I attended along with Bill Robertson, the top headquarters supervisor. The purpose of the meeting was to convince the Speaker to stop blocking passage of the FSLIC recap and to support a $15 billion plan without the forbearance provisions designed to gut the Bank Board’s supervisory powers.
We prepared carefully for the meeting. Faulk would take the lead and our emphasis would be on the role of the high fliers in exacerbating the Texas real-estate recession. He would show how Gaubert and Dixon had looted Independent American and Vernon Savings. Selby would take a backseat role; his presence was necessary to show that Gray and Green backed him despite Wright’s antipathy and that he was a top professional, not a nazi. Once Faulk had prepared the way, I would pitch the need for the recap to help the honest Texas S&Ls whose deposit costs were forced upwards by the control frauds. I would explain how the control frauds exacerbated the real-estate glut and deepened the real-estate recession. Bill Robertson would provide a national context, explaining how control frauds in other states caused the same kind of problems and how the Bank Board under Gray had shut down far more S&Ls in California than in Texas.
Unfortunately, as the military saying goes, no plan ever survives contact with the enemy. The Speaker was not there to make peace. Despite our efforts to “backdoor” a warning to him—through Barnard and Strauss—to stop aiding the Mallicks, Gauberts, and Dixons of the world, Wright thought of us as the enemy. We were carrying our truce flag and walking dumb and blind into what the military calls a kill sack.
We knew we were in trouble as soon as we entered the Speaker’s outer offices, for George and Michael Mallick were there, obviously to attend the meeting. This destroyed our plans. We could not discuss confidential information about particular S&Ls with private individuals in the room. There was no way we could convince the Speaker to kick George Mallick—his best friend, business partner, and employer of his wife—out of the meeting. Barry also attended the meeting, making our inability to discuss confidential information total.
The Speaker also had a large group of people at the meeting. In addition to the Mallicks, his top aide, John Mack, was there. Barry has rightly emphasized how Wright was the most intimidating politician in America. Mack added greatly to that terror. He was the Speaker’s hard man. Mack was brutal even by the standards of someone who is supposed to play the heavy. He once tried to rape a woman, a stranger to him. She resisted, and he smashed repeatedly at her with a hammer, then “slashed her throat with a knife” (Barry 1989, 734).1 Mack stuffed her in the trunk of a car, drove it around a while, and eventually fled on foot. Miraculously, she was able to get the attention of a passerby, and emergency care saved her life. Mack went to prison, and Wright helped get him released early by offering him a job. Wright did this because a daughter of his was then married to Mack’s brother. Mack worked his way up Wright’s staff to become his most powerful aide. The Godfather had Luca Brasi, Wright had Mack. No one wanted to cross Mack.
I made the mistake of being the last of our group to enter the Speaker’s inner office for the meeting. The open seat that remained was, just as in elementary school, directly in front of the teacher’s, er, Speaker’s desk. Seated next to me was Bill Robertson. Roy Green, Joe Selby, and Walter Faulk sat to the Speaker’s far right.
The fact that the Mallicks were there meant that our effort to convince the Speaker by backdooring information to him about Don Dixon and Tom Gaubert had failed. It also meant that Barnard and Strauss had failed, even with the benefit of our briefings, to convince the Speaker that George Mallick was leading him and the Democratic Party into scandal. If Strauss couldn’t convince him to stop aiding the worst S&L, Vernon Savings, then there was no chance that we would succeed. Indeed, Wright was signaling the closeness of his ties to Mallick and that Strauss’s concerns about Mallick would avail us not a bit. We knew our mission to make peace with the Speaker would probably fail.
What we did not know is that we would not simply fail to make peace, but that Wright had agreed to the meeting in order to attack Gray personally and to put more pressure on the Bank Board to aid the Texas control frauds. Our ignorance was understandable. From our perspective, we had already made outrageous concessions to Wright. We could not know that from his perspective only our unconditional surrender was acceptable. Moreover, we had no way of knowing that Wright was acting under a glaring factual error deliberately sown by Don Dixon and that he believed Gray had lied to him in a prior conversation.
Roy Green began the meeting for us, talking about the depths of the Texas S&L crisis. Wright moved this theme quite skillfully into a suggestion that forbearance was the only possible answer. Wright expressed the view that the Bank Board was closing Texas S&Ls “willy-nilly” (Barry 1989, 235).
Selby made an attempt to clear the air. Wright had stated that Texas S&L owners feared Selby. Selby told the Speaker, “We just want to show you we don’t have horns.” It was a friendly, joking remark by one Texan to another. Barry (1989, 235) gives the Speaker’s reaction:
Wright eyed him, wondering whether Selby’s comment was unintended irony or a deliberate provocation.
Wright’s reaction to Selby’s comment was visibly hostile. Given that Selby had done nothing in the meeting to prompt any hostility, it was clear that Wright was hostile to Selby before he ever met him. We expected that hostility, given Wright’s efforts to get him fired, but it was still disheartening that Wright wouldn’t even give Joe a chance to make peace. It was obvious that Selby was engaging in intended irony. The control frauds were telling the Speaker that Selby was the devil incarnate; Selby came to speak directly to the Speaker and show that he was neither a demon nor a nazi.
The idea that we were meeting with the Speaker to provoke him was so bizarre that we did not understand until months later that the Speaker and his staff were laboring under this misconception. We were there to make peace, not war. We had no clue to the extent of Wright’s paranoia. Why anyone would think that we would want to provoke the most powerful and vindictive member of Congress—who would surely respond by blocking our desperately needed legislation and destroying our careers and reputations—was and is beyond me.
Wright then moved the discussion from the general topic of Texas S&Ls to the specific S&Ls he was intervening on behalf of. He wanted to make clear that Gray’s concessions were “extremely unsatisfactory.” (I am quoting here from my testimony to the House ethics committee.)
I have gotten involved in three things, and the first one [i.e., Craig Hall] was handled very satisfactorily, worked out very well…. That worked out real good. I talked to the Chairman and we were able to work all that out…. But the other two have been extremely unsatisfactory. (U.S. House Conduct Committee 1989, 253; emphasis in original)
Wright made the same point in his testimony before the House Ethics Committee.
So … with regard to Tom Gaubert [,] I asked an audience. That didn’t turn out as well as the first one [i.e., the Craig Hall intervention]. (U.S. House Conduct Committee 1989, 252; emphasis and bracketed materials in original)
All of us from the regulatory ranks knew exactly what Wright meant when he referred to the “three things,” and his use of the phrase indicated that he was confident we would understand exactly what he was saying. The first one, which worked so well, was Craig Hall. Note that Gray capitulated unconditionally on the Hall matter, removing Scott Schultz’s authority over the troubled-debt restructuring (TDR) and causing his replacement to agree to Hall’s proposed terms.
The second and third things Wright was seeking to get favorable action from Gray about were Don Dixon and Tom Gaubert. Remember, Gaubert, acting through Wright, had caused Representative Barnard to fire a shot across our bow over the treatment of Vernon and Independent American about two weeks before the meeting with the Speaker. Consider also that Gaubert chose to have Wright ask not simply about “his” S&L, Independent American, but also about Vernon. Plainly, Gaubert felt that combining the political weight of the two control frauds was useful to their common cause of intimidating Gray.
As I will explain, the discussion about Don Dixon led to Wright becoming enraged and effectively ending the meeting before any further discussion of Gaubert. Wright, however, had conveyed his central message in the paragraph quoted above: Gray had not done nearly enough for Gaubert and Dixon, and Wright would maintain the hold on the FSLIC recap until he got the same kind of concessions “that worked out real well” in the case of Craig Hall. Peace could only come through unconditional surrender to the control frauds. Barry told me years later that he had not understood either the substance of this meeting or its importance.
After the comment about the three things he had become involved in, Wright turned to complaining about how unfairly the Bank Board had treated Don Dixon. This was pretty amazing stuff; Wright was still going to bat for the most notorious control fraud. It grew more surreal when Wright said that all Dixon wanted from the Bank Board was one week to try to protect “his investment” in Vernon Savings from loss by arranging for a buyer that would recapitalize Vernon Savings at no cost to the FSLIC. With the Mallicks and Barry in the room, we could not reiterate what we had already explained to Barnard and what we had put in the memoranda we had given him for backdoor delivery to Wright. Dixon did not have a penny of his own money invested in Vernon Savings.
Wright’s entire focus was on Dixon, not the taxpayers who eventually paid about $1 billion to cover the expense of Dixon’s control fraud. At no time during the meeting did Wright express any concern for possible losses to the FSLIC or the taxpayers. There was no way that any legitimate buyer was going to purchase a massively insolvent S&L without FSLIC assistance. The proposed purchase arranged by Dixon was a complete scam involving accounting fraud and worthless notes. In any event, the Bank Board had already given Dixon years, not days, to arrange a true sale.
We explained that Dixon had been given ample time to arrange a sale and that no sale would occur because Vernon Savings was publicly reporting that it was insolvent by over $500 million. This only upset Wright more. It served as the catalyst (or pretext) for his personal attack on Gray. Barry (1989, 221–222) describes the key conversation (which took place around Christmas 1986, as I described in the last chapter) between Gray and Wright, the one that led Wright to believe that Gray had lied to him, this way:
Gray told him that closing an S&L required his approval, and he knew nothing about it. So whatever was happening, regulators couldn’t be closing the S&L. Dixon would have his week….
Soon after the call to Gray, Wright learned that the regulators had in fact put Dixon out of business that day. Not technically—Vernon S&L stayed open for another four months before regulators closed it. But Dixon had signed away all say in the business, had lost all ownership rights, and a regulator was physically at Vernon all day every day, making all decisions. Dixon was out.
At best, Wright thought, Gray was incompetent and did not know what was happening in his own agency. At worst, Gray had lied to him. The only thing you have in politics is your word. Without that you have nothing. Wright was absolutely furious.
He did not even know he had stepped into quicksand. (emphasis in original)
This is essentially the same story that Wright now told at the February 10 hearing. It is hard to know how much of this story Wright believed. Mack’s testimony before the House Ethics Committee on this matter was important because Gray and Green talked with him about the matter. His testimony was clearly erroneous. He claimed that Gray told him the Bank Board was about to close Vernon Savings, but stopped in response to Wright’s call (U.S. House Conduct Committee 1989, 266–267). Mack was, next to Barry and George Mair (who had not yet entered the picture), Wright’s most intense defender, and Mack’s testimony was very bad for the Speaker’s ethics defense. This suggests to me that Mack was genuinely befuddled on this point, not intentionally lying. S&Ls can be closed only with an enormous amount of preparation; it is an objective fact that Vernon Savings was not about to be closed by the Bank Board in December 1986, and it is equally certain that Gray and Green knew this and would not have told Mack that Vernon was about to be closed. The Bank Board had not even scheduled Vernon for some future closure.
Wright’s staff was extraordinarily weak, as Barry admits. Worse, before they testified before the House Ethics Committee, they made no effort to investigate Dixon’s or Gaubert’s claims (U.S. House Conduct Committee 1989, 264). Dixon apparently took advantage of their ineptitude, laziness, and ignorance of finance and regulation to convince Wright and his aides that Gray was lying to him when he said Vernon Savings was not about to be closed in December 1986. Gray’s veracity on this point was clear by February 10: six weeks had gone by since the Christmas phone calls, and the Bank Board had not closed Vernon Savings. (And, no surprise, no remotely legitimate buyer had shown up.) Dixon now twisted the story to claim that Gray’s statement was only “technically” true.
One can figure out from reading Barry’s defense of Wright what Dixon’s tale must have been. What was imminent by Christmas 1986 was a routine action by the field when an S&L is hopelessly insolvent. The field seeks a “consent to merger” resolution. Hundreds of S&Ls had adopted such resolutions. Here is the key passage again from Barry (1989, 221–222):
Wright learned that the regulators had in fact put Dixon out of business that day. Not technically—Vernon S&L stayed open for another four months before regulators closed it. But Dixon had signed away all say in the business, had lost all ownership rights, and a regulator was physically at Vernon all day every day, making all decisions. Dixon was out.
This mishmash of lies and half-truths had to come from Dixon; Wright’s staff wouldn’t have understood enough to cook up such a stew on their own. Dixon had not “lost all ownership rights.” He still was the dominant shareholder. If he or the FSLIC could sell the S&L at a profit (as he claimed), he would reap that profit. A regulator had long been in charge and physically at Vernon Savings: a Texas state regulator appointed in September 1986 (U.S. House Conduct Committee 1989, 261). The consent-to-merger resolution did not change that. Similarly, the state of Texas had previously obtained its own consent-to-merger resolution from Vernon Savings. The Bank Board did not “in fact” put Dixon “out of business that day.”
The Phelan report (U.S. House Conduct Committee 1989, 268) has the facts.
It is clear that Wright was willing to intervene on Dixon’s behalf without performing even a rudimentary investigation of Dixon’s dispute with the Bank Board or the legitimacy of his request…. Wright thereafter became wed to a mistaken version of the facts. He believed that Gray had promised that the Bank Board was not going to “close down” Vernon, but that it did so anyway. He further believed that the Bank Board had taken away Dixon’s ability to arrange for a purchaser of Vernon when such was not the case. Gray was correct when he told Wright and Mack that the consent-to-merger agreement neither closed Vernon nor affected its ability to be sold.
Wright lashed out at Gray at the February 10 meeting. The Phelan report (U.S. House Conduct Committee 1989, 271) quotes my testimony about what Wright said:
When I talk to the head of a federal agency and he tells me something, you know, I believe him. And I asked Gray when they were going to shut down Vernon Savings & Loan and he personally assured me that they were not going to do that, and then I discover that you did just exactly that, and the very [same] day.
He called Gray’s “misrepresentation” “outrageous.”
At this point the full extent of the institutional disaster became clear to me. Our original hope for the meeting had been to bring the Speaker a peace treaty and begin converting him into a supporter of the FSLIC recap. Scratch that plan. As a fallback, we would follow up on Barnard and Strauss’s backdoor approach and convince Wright to have nothing more to do with Dixon and Gaubert. The meeting was producing a failure beyond our worst fears. Wright was becoming more vigorous in his defense of Dixon and Gaubert.
But Wright’s vitriolic attack on Gray was the worst news of all, and completely unanticipated. If Wright really believed that Gray had lied to him we were dead—period. No one listens to someone he thinks is a liar. We could not leave Wright’s office without trying to make him understand that Gray had told him the truth and not misled him through subterfuge.
But now I began to realize that I faced a personal disaster. As I watched the Speaker rant about Gray’s perfidy, I noticed that Roy Green was reverting to an elementary school trick. When your fifth grade teacher is furious with the class, you try very hard to avoid eye contact, sit back in your chair, and do not move. You pray fervently that the teacher will call on someone else. Roy had to speak up. He had been in on the conference call with Mack and Gray that the Speaker claimed was the key act of misrepresentation. Roy was also the leader of our delegation. But Roy was clearly not going to defend Gray. I was going to have to speak up, and that risked redirecting Wright’s wrath my way.
I was not pleased. This was my first experience with a feeling I would later have many times. I knew that I was Wright’s best friend in the world at that moment. I wanted the Democratic Party to win in 1988. I knew that Wright was about to throw away the party’s best issue (the sleaze factor) and hand the Republicans a superb issue with which to bash the Speaker and the Democrats. I knew that I would advise and implore Gray to make public that the Speaker was holding the FSLIC recap hostage to extort favors for control frauds. I knew that if Gray agreed, I would likely lead the criticism of Wright’s actions. I had no desire to hurt Wright and every desire to help him.
I was also the perfect person to help the Speaker. I knew the issues and had no personal axe to grind. If he would only permit a confidential briefing without the Mallicks and Barry, we felt that we might succeed. Faulk and I could warn him off helping the control frauds and explain why honest Texas S&Ls would be the first victims of forbearance. It was obvious that his aides had neither the ability nor the guts to warn him that he was acting improperly. It was clear that the Mallicks were leading him into scandal. It was also clear that Wright was acting under a completely erroneous view of the facts because the frauds were lying to him.
But I also knew before I started that I had only a faint chance of success. I was Wright’s best friend precisely because I was the only one willing to tell him the truth and disagree with him when he was wrong. The facts were entirely on our side; the other side (Dixon) was the most notorious control fraud in the nation. But Wright could not see that. He looked at us and saw nazis. When he looked at me he also saw a kid. I am short and I was only thirty-five years old. If I was disagreeing with him and explaining that he had the facts reversed, I must be an impertinent liar. The impertinent part was a particular danger. I felt Wright was acting shamefully, and though I tried to hide that feeling, it may well have shown.
Wright was almost certain to look at me and see an enemy, not his best friend in the room. He saw Gray as an enemy and liar. Wright had staked out his position so stridently that it would be highly embarrassing for him to admit that he was wrong about the facts and had abused Gray without cause. I would be asking him to side with the Bank Board against his staff (Mack), his best friend and business partner (Mallick), and a DCCC contributor (Dixon). I knew enough about Wright to realize there was little chance he would admit to such an error, particularly in that setting.
I began my defense of Gray by encouraging Green to get involved. I said that unlike Green I had not been in on the phone call to Mack, but I had heard directly from Gray about the call and believed that Roy would confirm Gray’s recollection. I said that there must have been a misunderstanding because Gray had taken fairly extraordinary actions to communicate accurately and promptly about Vernon Savings. I explained how Gray not only had assured him that Vernon Savings was not about to be closed, but had also called Green promptly to find out whether any other actions were imminent. Green informed him that the FHLB-Dallas was about to request the consent-to-merger resolution. Green and Gray then stayed on hold for two hours trying to contact Wright to inform him about the resolution and its import. Wright had left the office and the support staff could not reach him; Green and Gray eventually reached Mack.
This is where things began to get very bad for me personally. Wright viewed this as an attack on him or his staff for leaving Gray and Green on hold for so long. I emphasized that I had been trying to explain how Gray took great efforts to communicate accurately and promptly with him because Gray perceived how important it was to maintain a good relationship with him. I told Wright that we understood the disruption caused by moving and were in no way criticizing him or his staff. Wright let me go on, but his body language signaled his barely contained rage.
I then explained why a consent-to-merger resolution was not a closure and left Dixon free to find a buyer. Indeed, the purpose of the resolution is to facilitate sales. At this point, Wright gave me one of those creepy smiles that Barry found so horrible. It was everything Barry said, and more: you had the feeling that a butcher was sizing you up to figure out which limb to hack off first.
Wright, still “smiling,” said that I was “prevaricating” and that my explanation that a consent-to-merger resolution was not a closure was “just words” and “a distinction without a difference” (U.S. House Conduct Committee 1989, 272). So far at the meeting, everything possible had gone wrong. In trying to convince the Speaker that Gray had not lied to him, I had succeeded only in convincing him that I, too, was a liar. My next attempt, admittedly a weak one, was at humor. As the Bible counsels, I was hoping that a gentle answer might turneth away wrath. I joked that I was a Midwesterner and that Midwesterners did not prevaricate.
Barry is again remarkably useful for giving an insight into the idiosyncratic way that Wright (and Barry) viewed us. Barry (1989, 235) missed the attempted joke entirely and manufactured a “snort,” but the key is the interpretation that he and Wright put on my response.
Suddenly, virtually calling Wright a liar, [Black] snorted, “I’m not from Washington. I’m not talking words.”
This sentence reveals a great deal about Barry and the Speaker. The Speaker had just called Gray a liar. Then he called me a liar. Both claims were clearly erroneous; both of us had told Wright the truth. But Barry doesn’t think it is worth mentioning that Wright called people liars (“prevaricating” and making “outrageous” “misrepresentations”). The big deal to him and the Speaker was that I had supposedly “virtually call[ed] Wright a liar.” How had I done this? By explaining to the Speaker that I hadn’t been lying to him in my prior answer! As Barry presents the scene, this is a Catch-22. I could either confess (falsely) that I had lied to Wright, or I could accuse him of lying by denying that I was lying.
But it is a false Catch-22. I did not accuse the Speaker, “virtually” or actually, of lying. I did not then, and do not now, think the Speaker was lying about the consent-to-merger resolution. I knew that the Speaker was getting his “facts” from Dixon, and I knew that Dixon was a liar. I was trying to explain that the Speaker’s view of the facts was erroneous and that Gray and I were telling the Speaker the truth about the consent-to-merger resolution.
I explained to the Speaker that the difference between a takeover and a consent-to-merger resolution was real, not just words. I tried again to explain why. Wright, having decided I was a liar, wasn’t listening, and he lost all control of his temper. He would interject; I would stop. He paused; I tried again; he erupted! “Goddamn it! Goddamn it! I listened to you; now you Goddamn listen to me, Goddamn it!” His screwed up his face with pure malice and leaned across the table at me. Barry (1989, 236) got the words and the interruptions wrong, but he got Wright’s voice right: “his words spat out in a tight, hissing, controlled rage.” In this context, “controlled rage” meant directed rage. Wright lost control and spewed out his rage. I was the target. The room went absolutely silent. No one spoke or moved for a full twenty seconds. That may not seem like much, but it was an excruciatingly long, uncomfortable time in this setting.
A desultory discussion resumed, but the meeting was over. Wright shook my hand on the way out and said, “Don’t worry,” but he fooled no one. Wright was firmly in Dixon and Gaubert’s camp and would continue to hold the FSLIC recap hostage unless we surrendered unconditionally.
Many politicians are famous for their swearing, but Wright was a lay preacher and, Barry (1989, 649) claims, “[Wright] used a four-letter word once every six months.” This suggests that Dixon’s and Gaubert’s causes were of great importance to him and that he was extraordinarily upset with Gray for not caving in sufficiently on their behalf and for “prevaricating.”
Although you will not find it in his book, Barry told me that our effort to explain to Wright that Gray had told him the truth was one of only two occasions during the many months he spent with Wright that anyone dared disagree with or try to correct the Speaker when he erred. (Barry told me that Wright also raged and screamed at the other poor fool.) Barry’s book shows that Wright’s staff, after the departure of Raupe, was composed entirely of yes-men. His inability to admit error, and the exclusion of anyone who dared point out his errors, caused his mistakes to persist and grow.
It was insane, of course, for Gray to take on Wright. He was already anathema to the industry. League officials were warning him that he would never be able to work in the industry again. The powers within the administration hated him. One of the reasons that Congress did not pass the FSLIC recap in 1986 was that the White House took no action to get the bill passed. George Gould, the treasury undersecretary who was the lead executive-branch official on the FSLIC recap, was solid and professional, but he had no power. The White House can reward and threaten the interests of members of Congress by promising or withholding support on other bills dear to the legislators’ hearts, but an undersecretary can only ask for a legislator’s support. The press was frequently bitterly derisive about Gray. The last thing Gray needed was another enemy, much less the most powerful and vindictive enemy one could make on Capitol Hill.
I explained to Gray how disastrous the meeting had been: the Speaker, who now viewed us as liars, believed we had not done enough for Dixon and Gaubert. I noted that giving in to Wright’s extortion previously had made Wright only increase his demands; if we did anything further along these lines, Gray would not be able to look himself in a mirror. Wright had all the power as long as he could extort without paying any consequences. I proposed that we go public with what he was doing. It was unconscionable to leave Vernon Savings open. The Bank Board should close it and signal that the Speaker could no longer intimidate the agency.
To the surprise of most Bank Board staff, but not me, Gray agreed. Frankly, he didn’t take much convincing; I believe he had already reached the same conclusion when he heard our report on the February 10 meeting. Neither of us thought we could win, but we thought we should go out trying to do the right thing. The truly astonishing thing is that it worked as well as it did. It was an important reason why Wright eventually resigned to avoid censure.
Wright’s pressure on the House Banking Committee to gut the FSLIC recap seemed successful in February 1987. The committee sent investigators out to hear charges that supervisors at the FHLB-Dallas were acting like nazis. The effort, however, backfired because the committee sent two honest, competent inspectors. They were former GAO auditors, Jim Deveney and Gary Bowser. They found that the Dallas district was awash with control frauds, had been ineptly run before Selby’s arrival, and had properly taken action against fraudulent owners (U.S. House Conduct Committee 1989, 211–212).
On March 3 and 4, 1987, the key House banking subcommittee held hearings that focused on Texas, the FHLB-Dallas, reregulation, and forbearance.
Deveney stated that the hearings supported his findings from his investigation of the FHLB-Dallas: The regulators made a good case and the savings and loan operators did not. Deveney was surprised when St Germain thereafter offered a $5 billion recapitalization plan. He recalled commenting to Bowser that he “was amazed at how things are accomplished up here on the Hill.” (U.S. House Conduct Committee 1989, 212)
We briefed the House Banking Committee staffers throughout this period, explaining about the control frauds and why they were not innocent victims of a bad economy, but lead perpetrators in the collapse of Texas real-estate values. I designed studies for our economists that elucidated these points, and we prepared simple charts and handouts that made the results clear. We received canny assistance from Mary Ellen Taylor and my aides Mike and Ruth, all of whom understood how the House Banking Committee worked. I made a series of presentations to the staff on what was really happening in Texas. Joe Selby and I made a joint presentation to another group of staffers. We explained how an ADC Ponzi scheme works. We knew the presentations were effective because of the staffers’ reactions. The folks who were not active proponents of forbearance were very impressed, but the reaction of opposing staffers provided an even more sincere compliment. They were enraged, but had no ability to respond.
We spent most of our efforts trying to defeat the forbearance provisions designed to emasculate the Bank Board. We had to explain three major points: how the provisions would end our ability to deal with the control frauds; how regulatory weakness, not vigor, had caused the crisis; and how our opponents’ argument, a variation of “It’s the economy, stupid!” was wrong.
We emphasized that the California control frauds had failed, amidst a robust real estate market, to counter this last argument. We prepared simple graphics showing trend lines for the tangible capital of the control frauds in Texas and California; they were so similar that they made our point instantly understandable even to staffers who disliked math and economics. We showed that all parts of the Texas S&L industry did not look the same; the high fliers’ (which we called the “Texas 40” on our charts) trend line looked very different from that of the rest of the industry. The Texas control frauds had been insolvent before oil prices crashed. We spent a great deal of our time explaining why leaving control frauds open was disastrous for the honest bulk of the industry and for Texas homeowners and why it could cost the taxpayers many billions of dollars.
Wright had prevented the House Ethics Committee from roasting St Germain, so he owed Wright.2 Our sense, however, was that St Germain knew Wright was wrong and resented what he was being forced to do. No committee chairman likes to see the Speaker take over his or her committee. Behind the scenes, St Germain’s staff was frequently helpful by providing us an opportunity to make our case. By March 1987, we had solid support among House Banking Committee staff and growing support among the members.
The first step was to get immediate public attention about the Speaker holding the FSLIC recap hostage in 1986 and 1987. Barry (1989, 237) provides the Speaker’s reaction to our initial effort:
Gray talked with an underling of Jack Anderson, and Anderson wrote a column—as many as eight hundred publications ran some of his columns—in mid-March accusing Wright of pressuring regulators to go easy on a sleazy operator. Yes, I called Ed Gray, Wright said with cold anger when he read it. I would have done it for anyone in the same situation. I never met Dixon in my life. The story bothered him mostly because it impugned his reputation.3 (emphasis in original)
But Wright did not intervene with Gray on “anyone[’s]” behalf. He intervened only on behalf of contributors to the Democratic Party, like Dixon. Worse, he intervened on behalf of DCCC contributors without investigating their complaints. As a result, outright criminals like Dixon and Gaubert used him. Wright clearly never thought about the negative consequences of intervention. Helping Dixon and Gaubert helped DCCC contributors by harming Wright’s constituents—and all American taxpayers. There is no evidence that Wright ever recognized this—even when he knew they were convicted felons.
I began to visit the editorial boards of Texas papers and national papers like the Wall Street Journal, A series of stories and editorials criticizing Wright for holding the FSLIC recap bill hostage began to appear nationally and at the state level. Wright began to feel under siege from the press and would periodically lash out ineffectively in frustration.
The league’s professional lobbyists were all over the Hill, pushing forbearance and opposing any meaningful money for the FSLIC, but their arguments were internally inconsistent, and they were not winning the undecided. They had their usual stable of politicians who always sided with the league, and the intense support of politicians whom the control frauds influenced, but there was no member of Congress who was an effective advocate of their positions. The league’s professional lobbyists did not strike out; they were too good and the league was too powerful for them to fail entirely. We were amateurs, and not simply in comparison with them. But we had by far the best case substantively, and we hammered away on the facts (our strength) instead of on schmoozing. We could tell that we were being effective because the league cranked up the volume of its complaints against the Bank Board until their rhetoric was indistinguishable from the control frauds’. The league was worried it might lose; we began to dare to hope.
Some of the major problems the league had in lobbying against the FSLIC recap were with the Texas League. The Texas League knew all about the control frauds that were destroying Texas. At the same time that it was lobbying against the FSLIC recap, it was working on a “Report on the Texas Thrift and Real Estate Crises” (released October 30, 1987). The report explained that “entrepreneurs with backgrounds in real estate development either own or owned 20 of the 24 most deeply insolvent thrifts in Texas (with the remaining four copying the tactics of the real estate entrepreneurs)” (18). The report emphasizes that ADC loans “turned out to be veritable ticking time bombs whose subsequent explosions devastated substantial numbers of Texas thrifts” (10). Concluding that “while there was not anything necessarily wrong with this ‘grow out of it’ strategy,” it led to “frenzied growth” which “became an increasingly vicious cycle” (14, 15).
Many of the newcomers, as well as some of the existing owners, also began to engage in fraudulent and otherwise illegal schemes. (18)
The report repeatedly complains of appraiser fraud and inadequate supervisory vigilance (20, 32–33). Nevertheless, the report calls for greater forbearance, including elimination of any regulatory or supervisory agreements entered into as a result of prior failures to comply with regulatory capital requirements (44).
The report then goes on to call for the creation of additional creative RAP provisions and a prohibition against classifying assets if doing so would “cause” a Texas S&L to fail to meet its capital requirement (50–53, 56–57, 60). The report calls for a slowdown on the issuance of Bank Board rules and an end to “‘regulation to the lowest common denominator’ as was done by the FHLBB under Chairman Gray” (62).
This was obviously and logically incoherent. It confirmed that the worst Texas S&Ls were control frauds running ADC Ponzis; that there were large numbers of such frauds; that supervision in Texas was horribly weak; that the Bank Board under Gray had moved to get the control frauds under control; and that the key reform needed was to weaken supervision!
We had a field day responding to this kind of logic. The Texas League proposed a “get out of jail free” card (release insolvent S&Ls from supervisory agreements) plus an “immunity from arrest” card (the Bank Board cannot show that an S&L is insolvent by classifying its problem assets).
But illogic was not the only reason that the league discovered it could not rely on Texas League officials to establish the case for forbearance. They also had to deal with the problem that Bo McAllister (head of the Texas League) answered direct questions truthfully, e.g., his admission to me that the Bank Board had not closed any Texas S&L that should not have been closed. The honest members of the Texas S&L industry generally despised the control frauds. They were willing to enter into this Faustian bargain because the control frauds had such political clout with Speaker Wright and because their honest S&Ls were also insolvent. They were not willing to defend Gaubert, Dixon, and their ilk.
The national office of the league also had to deal with the Texas wild card factor. Texans are (proudly) quirky. Tom King, the Texas League’s executive director, said that Texas needed “rinky-dink” accounting. The first rule, of course, in asking for rinky-dink accounting is to never call it by its true name.
In the absence of credible spokespersons in Congress or the Texas industry, the league had to rely on rhetoric. As I explained, when the league became more desperate, it ratcheted up its diatribes against Gray. The league had started out its 1987 attack on the FSLIC recap bill by saying that the industry had turned itself around and was profitable and overwhelmingly healthy. The league soon realized that this argument undercut its rationale for forbearance and promptly adopted a very different claim. As the league stressed in a letter to its members (American Banker, February 10, 1987, 1):
It should be emphasized that there is an essential linkage between the two elements of our program. Frankly, if we do not get the necessary regulatory reforms and “stretch out” the resolution of problems in depressed areas, the amounts required by FSLIC will run easily into the tens of billions of dollars. But a series of time buying initiatives by the regulators will greatly reduce the demands on FSLIC. (emphasis in original)
The new league line was that there was a severe problem, confined to distressed areas, and that if the Bank Board dealt with it now it would cost “tens of billions of dollars,” but forbearance would eliminate the vast bulk of that cost, leaving the $5 billion league plan adequate to fund all needs. The league was relying on a classic “silver bullet” solution, painless and surefire.
If forbearance was painless and surefire, it followed that Gray’s reregulation and vigorous supervision policies must be irrational and disastrous. As the league argued on February 9 in a letter to Senator Boren:
Arbitrary and excessive writedowns [are] dictated by current FHLBB rules and procedures. Those writedowns and reclassifications are unnecessarily forcing soundly-managed companies into insolvency and magnifying the FSLIC’s caseload of troubled institutions. (U.S. League of Savings Institutions, Book 1, Tab C-16 at 1)
On March 6, 1987, the league wrote the comptroller general that there was no S&L crisis; that Gray’s supervisory policies were causing the industry problems; and that no funds should be provided to the FSLIC until it stopped requiring insolvent S&Ls to admit their insolvency.
The Board’s failure to moderate its appraisal and classification rules for depressed areas is responsible in substantial part for the problems of FSLIC….
[B]ecause, among other things, of the regulatory appraisal and asset classification rules used by the Board, we are seriously troubled about the FSLIC’s ability to use wisely monies provided to it. (U.S. League of Savings Institutions, Book 6, Tab C-4 at 1–2)
As it became clear that the league was in grave danger of losing in the House Banking Committee, its rhetoric reached a peak. On March 13 the league wrote to its members, urging them once more to lobby Congress in favor of forbearance and the league’s $5 billion FSLIC recap plan. The Senate Banking Committee had just approved a $7.5 billion FSLIC recap plan.
We do not want to provide so much money that the FSLIC will be able to indiscriminately close down well-managed institutions that are the victims of local economic conditions….
Frankly, with a [league] forbearance program in place, we don’t believe an extension of the FSLIC funding program [beyond $5 billion] will be necessary. (U.S. League of Savings Institutions, Book 5, Tab A-19 at 1)
No one could point to any well-managed S&L closed by the Bank Board. The league did not attempt to explain why the Bank Board would want to close down well-managed S&Ls indiscriminately, but some league lobbyists presented the nazi theory (though not in writing). The league was claiming that a one-shot $5 billion in extra FSLIC funding would be enough for all time. Indeed, a subsequent letter said that $5 billion would be more than was needed (Black 1993a).
Wright and the league allied themselves against the FSLIC recap in 1987. Indeed, Wright’s defenders later emphasized this link because it bolstered the theory of his ethics defense that he was acting in the interest of the public, not individual contributors. As I quoted, the Texas League took credit for helping convince Wright to put a hold on the bill in 1987.
What is difficult to understand is how limited and uncoordinated this alliance was despite the strong common interests and expertise of both allies.
On February 10 the league wrote its members to explain that “key members of Congress are insisting that the Board take [forbearance steps] before any recapitalization program is adopted” (Black 1993a; U.S. League of Savings Institutions, Book 5, Tab A-16 at 2). The letter attached a news article noting that Wright and Congressman Steve Bartlett from Texas were working with the league and that Wright had gotten St Germain to cancel a planned vote on the FSLIC recap. The article quoted Wright as saying
We don’t want to give them $15 billion to … close down an enormous lot of institutions….
They need a little bit tighter tether.
“Tighter tether” was a variant of the phrase used by both the league and the control frauds. The idea was that by drastically reducing the amount of money provided to the FSLIC, Congress could ensure that it kept the Bank Board on a “short leash” and could make the agency responsive to political intervention designed to prevent the closure of insolvent S&Ls. The Bank Board, in this metaphor, was the dog that had not yet learned obedience. The Speaker of the House was the perfect man to ensure that the agency was “House” broken.
One of the few meetings between the league’s leader and the Speaker occurred by chance.
Wright ran into the [league] lobbyist and [Mr. O’Connell]. They thanked him for his help, then said, “We’ve got to do something about that reevaluation of property values. Let me give you those figures.”
“I can’t talk about it now,” Wright said.
They insisted. Suddenly Wright exploded. “Listen! My back got tired of carrying all you people. When those bastards were writing all those stories about me, I was alone. Where were you then? This is a two-way street. That’s the way things work up here. You come and tell me your problems but you don’t tell the press. You don’t do a damn thing to support yourselves or me. You left it to me to do it all.” (Barry 1989, 240; emphasis in original)
Mr. O’Connell responded to the Speaker’s criticisms by writing Newsweek and the New York Times to protest articles critical of the Speaker and to blame the Bank Board for industry problems.
It is clear from Wright’s comments to O’Connell that there was little or no coordination even behind the scenes between Wright and either the national or Texas League. Overwhelmingly, Wright got S&L input not from the league, but the control frauds.
Wright was hopelessly unable to comprehend the substance of the S&L crisis. His staff never understood the S&L debacle; they did not try to counter us as we played the role of the tortoise and briefed House Banking Committee staffers (and members, where we could) about the merits. Bartlett, the Republican congressman who later became mayor of Dallas, led the push for forbearance in the committee. His party affiliation was a godsend to the committee Democrats who supported forbearance. It made it a bipartisan effort, so they were delighted to let him get out front on the issue. Bartlett, however, was not effective at arguing his case and his staff was even weaker. They came to our briefings of House Banking Committee staffers and glared, but they never attempted to counter our findings and charts.
One of the best testaments to Wright’s tactical weaknesses in attempting to keep the House Banking Committee’s increasingly restive members in line was that he came to rely a great deal on Curt Prins. Prins was Frank Annunzio’s chief staffer. Annunzio, a senior Democrat on the committee, was from Chicago, the home of the league’s national headquarters, and he was a strong supporter of the league. Indeed, his sons-in-law worked for the league and for relatives of the league’s leader, Bill O’Connell (Day 1993, 211). Annunzio was also a close ally of Keating. Remember that Annunzio led the effort in the House to block the direct-investment rule. Annunzio passionately disliked Gray. Annunzio had always had a very poor reputation as a legislator, and by 1986 he was also in such bad health that he was reduced to reading questions prepared by his staff; often, he could not even manage that.
Prins tried to fill the role of representative (which Annunzio had essentially left vacant). Top aides, e.g., John Mack, often have formidable power, but members of Congress never consider them equals. Prins’s efforts led other members of the committee to refer to him as “Representative Prins” (Day 1993, 213). That is a very unfriendly remark in the House. Prins was even deeper in Keating’s pocket than Annunzio, and both remained deep in his pockets even in 1989, when Keating’s frauds became obvious to everyone.
Prins told us that he “was carrying the Speaker’s water to House Banking” on the FSLIC recap.
That use of Prins reflected how weak Wright’s influence was with the rank and file on the committee. Wright could not rely on any Democratic committee member to carry water on behalf of Dixon and Gaubert. Even the ablest and best-regarded staffer is a lesser creature on Capitol Hill; only members count. Prins was neither able nor well respected. The members of the Committee, their staffs, and the media all despised Prins (Day 1993, 213). He was a vicious, unprincipled bigot (ibid.). Only desperation could have made Wright turn to Prins. Wright’s other alternatives on the committee must have been even worse. St Germain, for example, had one of the poorest reputations of any member of Congress and was not popular among Democrats on the committee. Moreover, St Germain probably secretly opposed Wright’s actions of the FSLIC recap bill.
The Treasury Department did a generally low-key, competent job of lobbying for the FSLIC recap in 1987. However, Treasury made a serious mistake that provided the league with its best substantive argument. The blunder was trying to add another argument to an already winning argument: the supplementary argument ended up undercutting the winning argument. The issue was how much money the FSLIC recap should provide. Treasury always cared primarily about the money in the bill; by mid-1987 the Bank Board cared primarily about the forbearance measures. The industry wanted to minimize the amount of money they would have to pay to deal with the costs of the debacle. They said that the FSLIC would close too many S&Ls too quickly if Congress passed the $15 billion FSLIC recap bill, even though the premise of the FSLIC recap was that closing down the control frauds quickly would reduce the cost of the S&L cleanup.
Treasury, however, decided to argue that the FSLIC would not close many S&Ls if Congress approved the recap, because the FSLIC lacked the capability to spend more than $5 billion in a year effectively.4 Treasury was wrong. Resolving the three worst S&Ls would have cost well over $5 billion. The FSLIC could have effectively closed at least fifty S&Ls annually. The standard industry joke was that if you landed at Dallas–Fort Worth Airport and resolved the insolvent S&Ls you drove past while taking a cab to Dallas, you would spend $15 billion before you arrived downtown. Treasury’s argument also vitiated the rationale for a $15 billion recapitalization. The league’s very competent lobbyists instantly recognized the immense value of the Treasury gaffe and used it to great advantage (NCFIRRE 1993c; Day 1993, 253–254).