It is not necessary to hope in order to attempt, or to succeed in order to persevere.
ATTRIBUTED TO WILLIAM THE SILENT, PRINCE OF ORANGE (1533 –1584)
The first March miracle was that the key House subcommittee voted in favor of a $15 billion FSLIC recap bill. The second was that the press began to come around, recognizing that Gray was following good policies in the face of intense political intervention by the Speaker on behalf of Texas control frauds. The second miracle helped explain the success of the FSLIC recap in the subcommittee, so I will discuss it first.
Gray’s reregulatory efforts began to receive positive coverage in the mainstream and trade press. That was remarkable. Gray had received extraordinarily bad press coverage for his entire term, and it had been getting worse. Senior administration officials attacked him regularly, as did powerful members of Congress, most of the industry, and a fair number of his own staff. He was presented as venal (all the expensive trips), malicious, and dumb as a doornail.
Gray was an extremely poor spokesman for his own cause. He typically wrote and typed his own speeches until four in the morning, showed up the next morning at a microphone looking like death warmed over, read a long speech that everyone had heard many times before, and praised himself as a latter-day Churchill. The speeches went over like a depleted-uranium balloon. To top it off, Gray could not understand why people did not react well to his speeches. He thought they were great. He sent them to every S&L in the country. (Their substance comes across very well when they are read now: he is constantly warning, accurately, that certain practices will lead to disaster.)
By March 1987, however, Gray was often dealing with a different part of the press. The S&L story had been a business story; it now became a political story. (It had always been both; the jurisdictional gulf between the business and political reporters was one of the reasons the press performed so miserably in dealing with the S&L debacle.) Better yet, it was a political scandal, which meant that a reporter could hope for more column inches to explain the story and a much more prominent placement in the paper. This new group of reporters investigated the issues from different perspectives and with different sources. Financial reporters spent their time talking to S&L leaders. They were close to unanimous in their contempt for Gray. Financial reporters had to be present for Gray’s numerous speeches. They groaned and made fun of him (to one another) when he gave a speech.
Political reporters did not come to the story with that preconception. They knew that the story would work better if it had a protagonist. The idea of Gray as a protagonist was inconceivable to most financial reporters, but for someone writing about the politics of the debacle, Gray looked like a very attractive one. He had started as an impassioned deregulator; he was a friend and strong supporter of the president; he had become the great reregulator out of conviction (not ideology); and he had persisted despite the efforts of senior administration officials to drive him from office and the efforts of the control frauds to bribe him away. Now he was taking on the most feared person on the Hill, Speaker Wright, and Speaker Wright was trying to aid the control frauds.
Although the industry hated Gray, his peers praised him. William Seidman, the FDIC chairman, and Paul Volcker, the former chairman of the Federal Reserve, were strong supporters of Gray, and they had excellent relations with the press. Gray’s conversion and his dogged willingness to take on the powerful made for one hell of a story. Political reporters also knew that when the powerful are criticized, they always respond by trying to smear their accusers. The efforts by Don Regan, Charles Keating, and Speaker Wright to blacken Gray’s name might have been proof of his courage, not his mendacity.
Jack Anderson criticized the Speaker in a syndicated column for putting a hold on the FSLIC recap in order to coerce favors for DCCC contributors. That, along with our efforts to explain what the Speaker was doing to block the recap, began to bear fruit in the form of very bad press for the Speaker. Barry (1989, 390) provides Wright’s reaction:
Every time Wright thought he was shut of that damned issue, it came back to haunt him. The savings and loan thing would not go away. Newsweek had done that story. The New York Times had done it. Business Week was doing it. The Texas papers, the Houston Chronicle, Dallas Morning News, Austin American-Statesman, Dallas Times-Herald had all done it over and over. In late September [1987], a writer asked him what disappointments he had suffered. Wright did not mention any policy. Instead he talked of the press coverage of his involvement in the S&L issue. (emphasis in original)
These articles greatly restricted the Speaker’s ability to openly hold the FSLIC recap hostage and put him on the defensive. They also made it far more likely that members of the House Banking Committee would oppose the forbearance provisions drafted by the control frauds and support a $15 billion recap.
The other miracle was even more improbable: standing up to Wright and criticizing his actions almost led to passage of the FSLIC recap in a desirable form. The second (near) miracle was a testament to three things. First, Gray was on the right side of an important issue, and Wright and the league were on the wrong side. Second, our opposition’s weaknesses kept Wright from responding effectively to our arguments in the House Banking Committee. Third, there were some truly good public servants on the House Banking Committee and its staff who were willing to buck the will of an exceptionally powerful and nasty Speaker and a powerful trade association. I have already addressed the first two points, so I will turn to the third.
My discussion up to this point has emphasized the efforts of the Bank Board and our opponents. This has the danger of implying that our efforts were decisive in producing the near miracle in the House Banking Committee. In fact, the most important factor was the strength of a bipartisan group of committee members who became convinced that the FSLIC recap was vital. The leaders of that group were (in alphabetical order) Tom Carper (Democrat from Delaware), Henry B. Gonzalez (Democrat from Texas), Jim Leach (Republican from Iowa), and Buddy Roemer (Democrat from Louisiana).1
That mere listing presents two very unlikely facts. First, although the group was bipartisan (and, indeed, nonpartisan), most were Democrats. That may not seem strange. Democrats were generally less enamored with deregulation than were Republicans, particularly by 1987. It always mystified Gray why so few Democrats supported his efforts at reregulation that so distressed the administration. But the FSLIC recap was an administration bill, so the first question was why there were so few strong supporters for the bill from the Republican side of the aisle. Jim Leach was one of the vanishing breed of Republican moderates who was famous for his willingness to buck the administration. None of the partisan Republicans on House Banking took a leadership role in support of the FSLIC recap.
The fact that most in the group were Democrats was important for another reason. It indicated that the Speaker had failed to sway them to his cause even though he had made clear his intense personal interest in their support, framed the issue as a partisan issue, and personally asked for their support. That third element is particularly important. As Barry (1989) repeatedly emphasizes:
The most pressure a Speaker can apply is to ask. It is a lot. (102)
Although he said he was not dictating anything—“Please let me know how you feel,” he wrote [in his notes to the Democrats on Ways and Means]—between the lines came a stronger message: There will be taxes. Are you with me or not? Are you friend or foe? (147, emphasis in original)
Pressure? What’s pressure? There’s nothing higher than the Speaker asking for your help. There’s nothing higher than that, … (446, emphasis in original)
Wright’s holding the FSLIC recap hostage at the behest of the control frauds was one of the key acts that began to erode the hill of sand on which he had built such apparent power. Barry (1989, 238) provides part of the tale.
Inside the House Wright was having problems on the issue too. He wanted a $5-billion package. Strong sentiment existed on the Banking Committee for the $15-billion package. The industry was in shambles and the sooner it was cleaned up, the less expensive it would be in the long run….
Wright and his Texas colleague Mike Andrews testified before a closed caucus of Banking Committee Democrats [on March 19, 1987] about their concerns about the regulators, and their fears of giving them too much power.
The context of Wright’s personal appeal to the Democrats on the House Banking Committee is revealing. As Barry’s book makes clear, Wright was experiencing unbroken success in the House on his priorities during 1987 and gaining largely positive reviews in the press. Barry (1989, 387) describes the extent of his power:
Wright seemed in absolute control of the House [by September 1987], about to challenge the President for supremacy.
He was in danger of losing only on this priority issue. He was losing despite having an enormous number of advantages. The FSLIC recap was, at best, a fourth- or fifth-tier administration “priority.” His primary opponent, Gray, was weak as well as actively hated by the powers that be in the administration. The league was immensely powerful politically; its membership was united; the FSLIC recap was its sole priority; and it supported Wright fully. (We were able to garner support from the realtors and the National Association of Home Builders. This was quite a coup. Understandably, however, the FSLIC recap was never a priority for them, so their support was heartening but not active.) Wright had bipartisan support in the form of Representative Bartlett. The Texas delegation was famous for its strength and solidarity. Texas state officials, particularly Attorney General Mattox, lent their weight. Wright had the chairman of the committee, St Germain, in his palm because of his exposure on the ethics charges. Wright should have been crushing the opposition.
Instead, Wright knew from the intelligence provided by his whip organization (which Coelho chaired) that he was in grave danger of losing the vote in the House Banking Committee. Nothing had gone right for the Speaker on this issue. Yes, by meeting personally with St Germain and other senior Democrats in January he had been able to halt progress on the bill, but the cost in political capital and vulnerability to press criticism had exceeded the gain. The attempt to intimidate Gray by having Barnard ask him about Vernon Savings and Independent American had blown up in the Speaker’s (and Gaubert’s) face. The February 10 meeting had been a fiasco for the Speaker. The once-compliant Gray now refused to do any more regulatory favors. Coercing the House Banking Committee to investigate the Bank Board’s supervision of Texas S&Ls had made matters far worse because it exposed the supposed victims as frauds and the supposed nazis as conscientious workers trying to do the job their predecessors had shirked. The hearing that was supposed to showcase the nazi reign of terror had embarrassed the proponents of forbearance. Mattox’s threats against Gray and Selby had been so crude that they hurt his reputation, not theirs. The press had turned against Wright on this issue and, most galling of all, in favor of Gray. There was no one on the committee whom Wright could rely on to lead the effort against the FSLIC recap.
It was bad enough to lose, but to lose to Gray, a man he personally hated, was unthinkable. Wright decided to intervene personally.
This was the context when Wright and Andrews addressed the Democratic members of the House Banking Committee on March 19, 1987. A meeting like this—the Speaker addressing a closed session of a committee’s Democratic caucus to plead for its members’ support—was rare. It indicates that several things were going on. First, Wright knew that he was about to lose the House Banking Committee vote. Second, Wright cared enormously about the vote. He was expending tremendous political capital to try to win it. Worse, he was identifying his prestige as their leader with his success on the vote. If he lost the vote, he would damage the perception of power that he had so carefully cultivated. Indeed, the erosion had already begun: Democrats on the committee knew that Wright wanted very much to defeat the FSLIC recap, yet several were prepared to join Republicans to defeat Wright’s position.
Third, he was asking colleagues, as Democrats, to support him. He was making a partisan issue out of defeating a bill that was not a partisan dispute and that had previously enjoyed bipartisan support. Mayer (1990, 238) reports what Wright told the caucus.
The [Texas] economy was passing through a hard time, but there wasn’t, at bottom, anything wrong with the S&Ls. The problem was Gray and Roy Green of the Federal Home Loan Bank of Dallas, a nest of Republican regulators who were trying to kill off good Democrats, big contributors to the Democratic party [sic]. It was the duty of the Democrats on the committee to exert themselves and put a stop to that, first of all by holding down the FSLIC recap bill to $5 billion at the very most.
Henry Gonzalez recalled that Wright claimed the Bank Board was “saving the Republicans and damning the Democrats…. My request was, give me the documentation. And when the documentation was not forthcoming, I did not act” (Mayer 1990, 238). Barry doesn’t discuss this failure. If Wright had been able to document his charges, he would have done so. Day (1993, 253) says that the Speaker told “horror stories” about the regulators.
After Wright made these repeated, highly unusual efforts to induce committee Democrats to support him on a matter they knew was dear to his heart and the interests of his constituents, it was particularly impressive when three Democrats became leaders in the struggle for the FSLIC recap. It was even more impressive considering that a vote to gut the bill did not seem likely to cause any political embarrassment and that their efforts on behalf of a good bill were almost certain to fail.
Two of the leaders supporting the FSLIC recap came from states where they were likely to suffer for their support: Gonzalez was from Texas (San Antonio) and Roemer was from Louisiana. Every S&L in Texas and Louisiana opposed the $15 billion FSLIC recap bill and supported ruinous forbearance. Although many of them privately blamed the control frauds, publicly they all blamed the sharp fall in oil prices for causing a regional recession. Gonzalez and Roemer were taking a real risk that their constituents would consider them traitors. Voting in favor of a $15 billion FSLIC recap bill could not win them a single vote or a dollar in campaign contributions.
All of this, of course, made them invaluable as supporters of the Bank Board. The fact that “oil patch” Democrats supported the Bank Board made the complaints that we were nazis seem even more ridiculous. If they were willing to anger powerful constituents for whom the bill was the first priority, surely other committee members from states with strong economies would not shrink from paying the small political price for supporting the FSLIC recap.2 No one could claim that Gonzalez or Roemer was ignorant of, or unsympathetic to, the problems of Texas and Louisiana. And they were both Democrats willing to oppose the Speaker.
The four members of the House Banking Committee who took the lead in supporting the FSLIC recap were Gonzalez, Leach, Carper, and Roemer, and they all shared several traits. Their colleagues knew they were independents and considered them reformers. They all had advanced degrees. Three of the four were moderates who were highly respected by their peers (the exception was Gonzalez).3 These four were so effective that we actually had the potential to win in the House Banking Committee.
The Japanese love cherry blossoms. They bloom all in a rush, and a single day of wind or rain can sweep them away. Their attraction lies in the ephemeral nature of the bloom as much as in the pale beauty of the blossoms. Japan gave cherry trees to the United States for our nation’s centennial. They ring the Tidal Basin in Washington, D.C. Our first two children were born while the trees were in bloom; we marveled at them on our drive home from the hospital. Blooming in late March or early April, they are the capital’s quintessential symbol of spring, rebirth, and hope.
March 31, 1987, was cherry blossom day as far as the Bank Board was concerned. Wright’s fears about the House Banking Committee vote were accurate. The Phelan report explains:
On March 31, the Subcommittee on Financial Institutions considered the recapitalization bill. St Germain offered a $5 billion, two-year plan with forbearance provisions as a substitute for the $15 billion, five-year plan without forbearance provisions which he had introduced at the beginning of the session. Congressman Carper moved to amend St Germain’s substitute bill by raising the recapitalization amount to $15 billion. The Carper amendment passed the Subcommittee by a vote of 23–20. (U.S. House Conduct Committee 1989, 212)
A bizarre incident immediately after the vote revealed to me how intense the pressure was on Gray. Carper had taken the lead in delivering a subcommittee vote in favor of the $15 billion FSLIC recap. Gray approached him as soon as Carper went back to his office. Carper probably expected Gray to congratulate him. Instead, Gray blazed away about how the bill they had just passed had exit fees that were too low. Gray feared that healthy S&Ls would convert to bank charters to avoid the costs imposed by the FSLIC recap. Gray had “lost it”: the tension had overwhelmed him. Mary Ellen Taylor and I rushed to undo the damage. If I had been in Carper’s shoes, I would have told Gray off. Carper was clearly startled, but he said nothing. He calmed himself and quietly explained to Gray that no one wins all the battles at the same time and that he would try to help improve the exit-fee provisions. Mary Ellen and I gave Carper the Bank Board’s fulsome thanks for his efforts. Then we took Gray aside and calmed him down before he lit into another ally.
Gray aged noticeably during 1987; his hands now shook. He knew how faint were the chances of success on the FSLIC recap; he worried about how deeply he was in debt and how poor were his job prospects, given the powerful enemies he had made and the damage his reputation had suffered from attacks in the press. He had to force himself to continue, and he did.
The subcommittee included virtually all the members of the full House Banking Committee. The full committee would vote on the FSLIC recap the next day, April Fools’ Day. Unless something drastic changed overnight, Wright was about to suffer his first major defeat as Speaker. But that night brought a chill deluge that swept all the blossoms off the cherry trees. Barry (1989, 238–239) explains:
The vote stung Wright. That night Wright gave Jack Brooks a ride to a dinner. They talked about it. Wasn’t it a shame, Wright said, that Ed Gray would go to the newspapers and lie about him and then win? Brooks had heard all the complaints from thrift executives too. The next day the full committee was going to vote on the bill. At breakfast, one Wright aide said, “I think I can turn the vote around. Should I?”
“No!” Wright said firmly. This had already become stickier than he wanted. “Stay out of it. The forbearance language is all I care about and it’s in there.”
Wright and his staff did nothing. But Brooks worked the committee hard. So did Andrews: “I talked to everybody I could get my hands on. Probably fifteen. I went to younger members I knew well. I think I did some good.” The full committee voted 25–24 to reverse the subcommittee. That only sparked more bad newspaper stories about Wright’s involvement. (emphasis in original)
Wright gives Jack Brooks, a fellow Texan and staunch ally, a ride to dinner and says it’s a shame that Gray could lie about him and win. Brooks knows that our disclosures to the press have made it impossible for Wright to repeat his open effort to gut the recap. Wright used Brooks and Andrews to do the dirty work and provide him with deniability. But Wright was too clever by half. The April 6 Banking Report from the Bureau of National Affairs reveals that “Carper said he had reconfirmed with Wright early April 1 that Wright was committed to Carper’s $15 billion compromise recapitalization plan.” Wright deceived Carper.
Barry does not even note the glaring contradiction in the passage just quoted. Why, if forbearance, which is in the Carper bill, is all that he cares about, is Wright “stung” by the Carper bill and furious that it has been passed? Why did the Speaker confirm to Carper on April 1 that he supported his bill when he was, in fact, furious that it had passed? Carper, disgusted with the Speaker’s high-pressure tactics and dishonesty, said on the floor on April 1, 1987, that “I’ll let today’s vote and the broken arms speak for themselves” (Day 1993, 253).
Wright won by the narrowest of margins, 25–24. Congresswoman Kaptur switched her vote from Carper’s $15 billion bill to Congressman Neal’s $5 billion bill. Doug Barnard, Hamlet to the end, decided “not to be”: he passed when the time came to vote. A tie vote would have meant the adoption of Carper’s bill. St. Germain broke the tie by using the proxy of Walter Fauntroy (a delegate representing the District of Columbia) to kill the $15 billion FSLIC recap bill (Rom 1996, 181, 302n89); Fauntroy had promised Carper that he would vote for the $15 billion bill.
After losing the crucial vote on the $15 billion FSLIC recap bill in the full committee, Carper proceeded, undaunted, to try for a lesser amount. In the effort to rally support he was slightly late (seconds late) in raising the right procedural motion for offering his proposed amendment. St Germain ruled it out of order. St Germain had the power to do this, but it is the kind of thing you do not do in the modern world. St Germain’s action caused an involuntary gasp from several spectators. Carper was clearly upset. I watched him struggle with his emotions for about five seconds. He then straightened his shoulders and in a mild, calm voice asked for unanimous consent to be able to raise his amendment. He did not protest, complain, or scowl. St Germain realized that he had made a mistake in barring Carper from offering his amendment. The room began to relax. Suddenly, Prins was whispering in Annunzio’s ear. Annunzio objected; there was no unanimous consent.
Now St Germain was in even deeper trouble. He was aware that the press was going to criticize him for killing the $15 billion bill. Using a never-enforced technicality to prevent the committee from considering a $12.5 billion bill would look terrible not only to the press but also to the rest of his committee. Annunzio’s action made it look even worse: the committee members believed that no two members of Congress were deeper in the league’s pocket than St Germain and Annunzio. St Germain, especially, was notorious for his unethical ties to the league.
There was shock and then a tumult of noise after Annunzio raised his objection. Through it all, Carper sat ramrod straight with a look of great dignity. His presence demanded reasonable action, though he said nothing. Other senior members of the committee began hammering Annunzio. Prins’s having caused him to raise the objection made it far worse. It took several minutes, but Annunzio backed down. The end was anticlimactic: the House voted down all of Carper’s proposed amendments and approved the $5 billion bill the Speaker wanted. But Carper is the kind of guy I would want on my side.
Using Brooks and Andrews, neither of them a member of the House Banking Committee, to “break arms” reinforced the Speaker’s weakness in dealing with the committee. Brooks was chairman of Government Operations, an extremely powerful committee. Between his direct leverage and the Speaker’s power, it is remarkable that Wright still won by only one vote.
Lee Henkel, Keating’s Bank Board member, resigned March 31 (the second miracle that day), and it became public, appropriately enough, on April Fools’ Day. Keating had told Gould, the Treasury undersecretary, that he could influence the votes of five senators on the FSLIC recap (Williamson 1991). The president often has difficulty delivering the votes of five U.S. senators. Keating was claiming unprecedented power for a private individual in the modern era. Even in the “robber baron” era, owning one senator was a coup. Gould was so offended that he ended the meeting and ordered the guards to bar Keating from entering the Treasury building.
On April 2, 1987, four U.S. senators made it clear that Keating was not bragging. They called Gray in to meet with them and told him not to bring any staff; they also excluded their own staff. The four senators who showed up were miffed that Senator Riegle had not joined them, despite indicating that he would be there. Seven days later, Riegle joined them in a meeting that would make them infamous as the Keating Five.4 They wanted Gray not to take enforcement action against Lincoln Savings for its $600 million violation of the direct-investment rule. The defeat of the FSLIC recap in the House Banking Committee meant that the Bank Board’s only hope lay in the Senate. The clout of five senators, added to the Speaker’s power and the league’s power, should have been an irresistible force. They would surely succeed for Keating where Henkel had failed. The story of the Keating Five is continued in later chapters.
In the end, Wright had not simply squandered his political capital in this barely successful effort on Dixon and Gaubert’s behalf. He had done permanent damage to his reputation, helped elect George H. W. Bush president of the United States, caused large losses to the taxpayers, and made enemies of a substantial number of Democrats on the House Banking Committee.
Mayer (1990, 238) explains the import of the Speaker’s asking them to support control frauds.
Another congressman who was at the meeting told me in early 1989, when commentators still believed the ethics investigation of Wright would fail to produce any action, that if the Speaker got into any real danger, and it began to seem unlikely that he could retaliate, the Democrats on the Banking Committee would abandon him. There are, after all, very few ways a man can lose his seat in the House, and one of them is going to bat for the likes of Don Dixon and Tom Gaubert. Wright had asked members to do that, and they would not forgive him for it.
Wright caused problems that went beyond angering the Democratic members of the House Banking Committee. He nullified the Democrats’ best issue, the “sleaze factor,” against the Republican candidate in the rapidly approaching 1988 presidential election. He did it despite strong efforts by fellow Texan and party elder Bob Strauss to get him to stop. If the Democratic candidate lost the 1988 presidential election, there would be many Democrats furious with Wright and scared of what he might do next. House Democrats knew it would be unpleasant to be in the minority, which was where Wright’s lack of judgment seemed to be taking them.
The real irony, however, is that none of it was necessary. Had the Speaker not felt personally stung by the vote and determined to reverse it, the league would have done his dirty work for him. The league, almost as terrified by a $15 billion FSLIC recap bill as were Dixon and Gaubert, was gearing up to kill the bill and chew up anyone who got in the way. The league and Wright, acting separately, each had enough muscle to pervert the FSLIC recap into a device for gutting the Bank Board’s regulatory powers. But they were not acting separately; they were allies. Together they ensured that the FSLIC recap would face the May massacre.
Barry makes clear that Wright had utter disdain for President Reagan; it is also clear that the contempt was mutual. The irony is that the administration almost saved the Speaker from himself. Having already unintentionally damaged chances for a $15 billion FSLIC recap bill with their “friendly fire” assertion of the FSLIC’s purported inability to spend more than $5 billion in any year, the administration now engaged in intentional fire at Gray. With “allies” like this, who needed the league and the Speaker as opponents?
The Reagan administration decided to make a separate peace with Wright. In late April 1987, Treasury Secretary Baker asked Wright for a meeting on the FSLIC recap. Baker kept the meeting secret from Gray. The administration offered not to reappoint Gray as Bank Board chairman. His term expired June 30, 1987, so he would never control a penny of the FSLIC recap money. Danny Wall would be the new chairman, and he was a big believer in two things sure to please Wright: forbearance and trying very hard never to upset powerful politicians. Wall supported Craig Hall and suggested to Gray that he fire Selby, so he was on the “Wright” side of the issues.
Wright knew, of course, that because key administration officials loathed Gray, there was no chance that Reagan would reappoint him. Wall’s appointment was essentially a done deal. Thus, the administration wasn’t really offering Wright anything in return for his support of a $15 billion FSLIC recap bill.
Wright had no real objection to a $15 billion recap if it subsidized Texas S&Ls and their borrowers. He said he would support the $15 billion recap if the administration agreed to support the forbearance language. The administration had always supported covering up the scope of the FSLIC crisis, so it was happy to agree to forbearance provisions.
This was, finally, a smart political and PR move on Wright’s part. He would neutralize press criticism by publicly supporting a $15 billion FSLIC recap bill. Like Baker, he wasn’t really offering anything. He could, behind the scenes, help kill the $15 billion recap. The $5 billion recap, with crippling forbearance language, was certain of passage given the unified front of the league, the control frauds, and the Speaker. He could have the best of both worlds. It was also, of course, a deeply cynical move that would hurt the public interest and future relations with the administration.
All really great disasters involve bad luck, and Wright experienced his share during the media focus on his blocking the FSLIC recap. A few days after he met with Secretary Baker, and before Wright announced his support of the recap, the Bank Board put Vernon Savings in receivership and immediately brought a civil suit alleging that Dixon had looted Vernon Savings and seeking to freeze Dixon’s assets. We had put Vernon Savings on the front burner for a takeover as soon as Gray decided to take on the Speaker. The publicity was horrific for the Speaker. It was bad enough that Vernon had a private air force and navy; it was far worse that the Speaker had used both. The average person was stupefied that any S&L could have over 90 percent of its non-Texas loans in default. We kept the pressure on Wright with a series of news items on the MacNeil/Lehrer NewsHour featuring Vernon Savings.
Wright went ahead and announced the day after we filed suit against Dixon that he was supporting the $15 billion FSLIC recap. He said that his change of position had nothing to do with Vernon’s closure. The world concluded that Wright had changed his position because his support for Dixon had become politically untenable, given the receivership. The irony is that Wright’s supporters promptly sealed this conclusion by openly threatening Gray. Prins allowed the Washington Post to quote him by name, saying:
If this is an attempt to embarrass Wright, then Mr. Gray is lucky that the Speaker is an advocate of the homeless, because after June, when Mr. Gray is out of a job, he may be sleeping on a grate. (Day 1993, 245; Mayer 1990, 159; Binstein and Bowden 1993, 262–263)
Wright’s hopes for good publicity over his purported decision to support the $15 billion recap turned sour.
We could compete with the league’s professional lobbyists when the setting was the House Banking Committee. The members knew something about S&L issues; their staffs were often knowledgeable; and the number of members was large but not enormous. We could not possibly, however, compete with the league’s grassroots lobbyists, i.e., the local S&L executives who were on a first name basis with the senator or representative, contributed to their campaigns, and ran their election committees. More particularly, we could not compete with 500 such grassroots lobbyists descending en masse on the Capitol and fanning out to meet every member of Congress in two days.
The league now called hundreds of S&L executives to Congress to lobby personally virtually every member of the House. As Mr. O’Connell testified in 1993 before the National Commission on Financial Institution Reform, Recovery and Enforcement:
I was the guy who organized the grass roots political organization for the savings and loan business. I think I did a good job, and I think it was successful when we had to go to the Hill. We spent a fair amount of money from the trade association….
I tried to have political contact people from the business in each congressional district. [W]hen I wanted to get three, four, five hundred people in there, I got three, four, five hundred people there [on the Hill] and usually had all the congressional districts covered. (NCFIRRE 1993b, 181)
On April 30 the league faxed its members and said that Wright’s and St Germain’s “turnaround” created the “need to flood these Members’ offices with phone calls” before the full House voted on the FSLIC recap on May 5 (Black 1993a, 47). The requested deluge occurred.
It was clear that we were going to suffer a defeat of epic proportions in the House. The league might have only trounced us if we had won the vote in the House Banking Committee, but because we had lost, other members had political cover for voting against the Bank Board.
Wright could have actually supported the $15 billion recap plan, and it still would have lost. This would have been of great benefit to him in fending off bad publicity and ethics charges. Instead, he tried to be too clever by half. This simply led to more bad press and the accurate perception on the part of the administration that Wright had deceived them.
Wright should have reconsidered his strategy of publicly supporting, while privately killing, the $15 billion recap once the storm of bad publicity about Vernon Savings broke. He did not. Undersecretary of the Treasury George Gould explained:
We saw the Speaker go to the well and deliver an impassioned speech. But our people on the Hill told us it was hopeless: While Wright was speaking his whip Coelho had people all over the floor telling congressmen not to pay attention, the Speaker didn’t mean it. And sure enough, the House repudiated its Speaker by a record margin. The hypocrisy was incredible. (Mayer 1990, 241)
The league’s success seemed total. Martin Lowy (1991, 193–194) described the May 5 vote as
the high-water mark of the League’s political power. And certainly it was the night that everyone in Congress resented most when it turned out that the League had hornswoggled them.
According to Jim O’Shea (1991, 257),
It was an incredible display of the U.S. League’s legislative clout….
Virtually every congressman who received money from high-flying and traditional thrifts voted the way the industry wanted on at least two of the three votes [on May 5]. And when one or two lawmakers strayed from the League’s path, it was usually a face-saving move like Wright’s.
The league shared this view of its power. On May 8 it wrote each of its members:
Thank you for your part in achieving one of the greatest grass roots legislative victories in our history. Your calls, letters and visits to your Members of Congress made the difference….
The New York Times called the vote “a major lobbying victory for the thrift industry’s largest trade group, the … League …, and a dramatic display of the influence of local thrift institutions on their elected representatives….
The lesson of this week’s events is that it pays to be actively involved in politics in your local Congressional district and in legislative efforts affecting your business. Your voice and your vote count and nothing demonstrated this so dramatically as the House vote Tuesday on the FSLIC recap bill. As a Congressman who fought unsuccessfully for the $15 billion amendment said afterward, the vote for $5 billion “proves (former House Speaker) Tip O’Neill’s axiom that ‘all politics is local.’ It is very hard for a Congressman to say no when his local S&L executive calls him about a vote.” (U.S. League of Savings Institutions, Book 5, Tab A-22)
A majority of Republicans (98–72) voted against the administration bill. The Republicans voting to gut the FSLIC recap included Trent Lott, Newt Gingrich (the hysterical and hypocritical critic of Speaker Wright on S&L matters), and other luminaries. Overall, the vote for the $5 billion FSLIC recap bill with the ruinous forbearance provisions was 258–153. Democrats voted against the bill by more than a two-to-one margin. Gray had tried to stand in the way of the biggest sixteen-wheeler anyone had ever seen. The league ran us over, and so little was left that we did not even constitute road kill; we were just a smear on the pavement.
Representative Bartlett introduced the forbearance provisions. The Texas control frauds drafted the language. Their drafting combined sophistication and crudeness to dramatically reduce the Bank Board’s ability to take action against them. The cleverest provision required the Bank Board to calculate real-estate losses no more stringently than under GAAP. That sounded reasonable. The view was that the Bank Board had many creative regulatory accounting principles (creative RAP) designed to hide real losses. GAAP was the normal standard. Adopting GAAP sounded like a reform.
The control frauds knew that Gray had gotten rid of virtually all the creative RAP and was about to sweep away the last vestiges. They also knew that the Bank Board RAP for loss recognition was more stringent than GAAP because GAAP understated real (market-value) losses on bad real-estate loans and investments.5 Mandating the use of GAAP would lead to inflated values of real estate, which was very bad for taxpayers. By the time the Bank Board could establish that an S&L was insolvent according to GAAP, it would be severely insolvent on a market-value basis. When the FSLIC sold assets, no buyer would pay the inflated GAAP value. Buyers care about market values.
The even more severe problem, however, was that by making asset values a question of GAAP interpretation, the forbearance provisions could devastate supervision. The best possible tactical position for an insolvent control fraud would be to have the Bank Board forbidden to require the recognition of any losses greater than those required under GAAP. That meant that the controlling expertise was in GAAP, not in the actual (i.e., market) value of the asset. The experts in GAAP, of course, were the Big 8 audit firms. As previously explained, the control frauds routinely hired Big 8 firms and received clean opinions signed by an auditor who had a resume that made him or her look like God’s accounting representative on earth. In a hearing or trial related to the S&L, the auditor would attest to the “fact” (i.e., fiction) that the S&L’s financial statements were reported in accordance with GAAP. The Bank Board would then put its examiner, who might have taken two courses in accounting, on the stand. We had little doubt about whose view a judge was likely to credit. By the same token, the Bank Board was the expert under the classification-of-assets rule that the Bank Board and every other federal banking regulator used. On the issue of supervisory judgment as to the credit quality and risks of an asset, no Big 8 auditor could claim comparable expertise.
The Bank Board had to be able to demonstrate that an S&L had incurred great losses before it could take over an S&L or even take enforcement action. This forbearance provision would severely reduce the Bank Board’s ability to act to protect the taxpayers.
A related forbearance provision called on the Bank Board to welcome abusive TDR accounting. The league’s January 22, 1987, letter to its members favorably cited the GAAP provision that prevented current loss recognition for TDRs (FAS 15); the letter also supported allowing inflated asset values even for troubled assets that did not qualify for FAS 15 treatment (Black 1993a, 38). Though the league admitted that FAS 15 represented a “loophole in commercial bank regulatory discipline” (ibid., 30), it claimed that allowing such inflated values “represents a far more accurate accounting for the asset” (ibid., 33). This was patent nonsense.
The control frauds tried to gut the Bank Board’s ability to require recognition of their losses by two other major means. One provision allowed S&Ls to defer recognizing loan losses due to poor credit quality over a ten-year period. Another mandated an appeals procedure that would allow the S&L or borrower to appeal any loss that the Bank Board required an S&L to recognize. The idea was to delay the recognition of losses for many months and to tie up agency personnel with hundreds of appeals.
Another proposal forced the agency to terminate its highly praised “R41c” appraisal standard. The control frauds targeted the appraisal standard because it required real estate to be valued at market value.
Collectively, the impact of these provisions would have been devastating on the agency. That was exactly what the control frauds intended.
We picked ourselves up after the May 5 massacre and continued the battle against forbearance. Indeed, we left the effort to get more money for the FSLIC almost entirely to Treasury and focused on the forbearance clauses: they represented a far greater danger than the slashing of funds to the FSLIC. Our battle against forbearance had four major components. First, we worked to dispel the “nazi” premise underlying forbearance. We explained how the Bank Board under Pratt had granted vastly more forbearance than the banking agencies and that continuing such extreme forbearance would increase losses.
Second, we pointed out a revealing flaw in the forbearance language. It applied only to the Bank Board. If it was good policy, why should it apply only to the Bank Board and not to the banking regulatory agencies? The answer could not be that the banking regulatory agencies had all along followed the policies that Congress was proposing to mandate now for the Bank Board; the banking regulatory agencies had been classifying assets for scores of years.
Third, we talked to House Banking Committee members and staff and Senator Gramm and his staff about the merits of the forbearance language. We defended our policies on the merits and explained how the so-called forbearance provisions would benefit control frauds and harm honest S&Ls. The control frauds increased interest expenses and decreased asset yields. The sooner the Bank Board closed them, the better for honest firms. We noted that Representative Barnard had praised the Bank Board’s R41c appraisal standard and recommended that it serve as a model for other banking regulators. His subcommittee’s hearings documented pervasive abuses by appraisers inflating values for control frauds. The appraisal industry had no uniform, national licensing standards or professional guidance. Virtually all appraisers supported R41c’s requirement that they use market value.
We also explained in detail exactly how forbearance would inflate values, gut the agency’s powers, make it far harder to take the necessary actions to get the criminals under control, and raise costs to the taxpayers. We made this our consistent message to reporters and began to generate a series of stories attacking the forbearance provisions.
The fourth way that we sought to counter the forbearance provisions was to draft substitutes that sounded similar to those proposed by the control frauds but with small differences that greatly reduced the damage they would do. We also worked up language for committee reports and colloquies that would allow courts to interpret the provisions in the least harmful fashion. A colloquy is a planned question-and-answer exchange done on the public record by two members of Congress for the purpose of providing the intent underlying a particular legislative provision.
Representative Leach and Senator Gramm greatly aided these endeavors. They, and their staff, worked with us to gain expertise in the subtle and arcane means by which the proposed forbearance language would emasculate the Bank Board’s power to act against the control frauds. Senator Gramm always kept a foot in both camps. His speeches were consistently sympathetic to the plights of Texas banks and S&Ls. Behind the scenes, he believed that it was essential to close the control frauds. The proposed forbearance language offended him.
Representative Leach worked full throttle against the control frauds and the league. He took the lead in defeating the worst forbearance provisions. Overall, we were effective beyond our most optimistic expectations in limiting the damage caused by the forbearance proposals.
One of our best wins was the addition of a single clause to the provision stating that the Bank Board could not require the recognition of losses beyond those required under GAAP. We were able, by working with Leach and Gramm, to amend that provision by adding “except for supervisory purposes and to the extent consistent with the practices of banking regulatory agencies.” We only acted “for supervisory purposes,” so the “exception” covered everything we were concerned about. The Bank Board’s opponents could hardly object to the agency acting in a manner consistent with its sister agencies, because the premise of their (false) argument was that the Bank Board was acting like nazis.
Cranston and his staff, acting at Keating’s behest, worked in the Senate to defeat our efforts to counter the original forbearance language. Overall, the Senate was no better than the House. It voted out a $7.5 billion recap bill with forbearance. Senators Cranston, Riegle, and Sanford (all Democrats) took the lead in killing the $15 billion proposal.6 Garn was the strongest proponent of a $15 billion recap bill, but he could not carry the Senate Banking Committee, and neither he nor Danny Wall, his top aide who was about to become Bank Board chairman, was useful in fighting the forbearance proposals. This made Gramm’s help critical.
Senator Proxmire was an obstacle, not an ally. Indeed, the league sent a letter to its members quoting him as saying:
[In the next few weeks] we will see stories about how FSLIC is almost out of money, about how there may be one or two large thrift failures just around the corner that will supposedly bust the remaining funds…. I predict these stories will be deliberately leaked to stampede the Congress into acting. (Black 1993, 50)
In fact, soon after Proxmire spoke, the run at American Savings intensified and the Bank Board met urgently with Volcker, who was convinced that an overall S&L collapse could be imminent. Losses at other S&Ls were growing massively. The FSLIC was running on fumes: the total FSLIC fund was down to $500 million dollars. The industry had roughly a trillion dollars of deposits. Gray asked permission to brief closed sessions of the FSLIC’s oversight committees to make them aware of how dire the situation was. Incredibly, St Germain refused permission. Proxmire assumed he was dealing with the usual bureaucratic game: exaggerate your problems and ask for a bigger budget. Officials know that there are more fictional than real crises in Washington, D.C., but that knowledge can delay the recognition of real crises.
Bringing the facts about the extent of the S&L crisis to the attention of Congress was the Bank Board’s only possible counter to the league’s stupendous lobbying power. This is why the league launched a preemptive attack on Gray using the Proxmire quotation. This league strategy caused the FSLIC to remain extremely conservative in its loss estimates.
St Germain remained under the Speaker’s thumb even after the May 5 massacre. His staff requested routine testimony from the Bank Board on money laundering and other topics. However, one of the paragraphs in the invitation letter quoted a Justice Department official about the extensive role of fraud in the Southwest and asked the Bank Board to provide testimony on whether that problem affected or involved S&Ls. It was a heaven-sent opening. We wondered whether someone on his staff blundered or had intentionally given us the opportunity. Either way, it was too good an opportunity to pass up.
I recommended to Gray that we prepare testimony that addressed all the committee’s questions but focused on the Texas control frauds and how forbearance would make it far more difficult to restrain them and bring them to justice. We could get invaluable exposure for our arguments by testifying about these issues. Rosemary Stewart argued against this strategy, counseling that it would upset St Germain. I agreed that it would upset St Germain, but thought that it was still our best strategy to defeat forbearance. Gray agreed.
My aides and I prepared a powerful presentation on the forbearance-related issues, and we incorporated the work of others dealing with the other topics on which St Germain has asked for our testimony. We filed the testimony with the committee the day before the hearing. Bill Robertson was to present it with me. He was still trying to get over our last joint foray, our disastrous February 10 peace meeting with the Speaker.
When we arrived in the hearing room and started to set up our materials, St Germain’s legal counsel, Dick Still, called us forward. Dick informed us, seconds before we were to begin our testimony, that St Germain had “disinvited” us. We were not to testify; he returned our written testimony to us; and he told us to leave. He told us we were testifying about things the committee had not asked us about. I read the portion of St Germain’s letter that had expressly asked for our views on S&L fraud in the Southwest and how to deal with it. He said we had misinterpreted the letter and that we were not to testify.
This was an unwise act on St Germain’s part. There are few things better calculated to attract widespread press interest than a governmental attempt to prevent someone from testifying on a subject after inviting him to testify on that subject. The blunder thrilled me. I began seeking out reporters and explaining that the committee had disinvited us after reading our testimony that disclosed how severe the problem of fraud was among Texas S&Ls and how seriously the forbearance provisions pushed by the Speaker, the Texas control frauds, and the league would harm our efforts to control that fraud. I gave them copies of our testimony complete with the charts and graphs that documented our position.
The press immediately put St Germain’s staff on the defensive. We pointed out to the reporters the portion of St Germain’s letter that explicitly asked for our testimony on the extent of the fraud and the steps needed to control it, and showed them that our testimony responded to every question in the letter. It was obvious to the reporters that St Germain or his staff might have screwed up in drafting the letter, but we had not done anything wrong in our response. That meant that St Germain was disinviting us to avoid any public exposure of the Texas control frauds and the resultant embarrassment to St Germain and the Speaker. That raised the obvious question of whether Wright had ordered St Germain to disinvite me, particularly given his personal attack on me at the February 10 meeting.
Warren Brookes, a columnist who wrote about economic issues, wrote a column in the Washington Times blasting St Germain and the Speaker for suppressing our testimony. Brookes claimed that the Speaker ordered St Germain to block our testimony.
Unfortunately, Gray cracked at this juncture, just as the crude suppression of our testimony was helping us generate a major story in the national media attacking the forbearance provisions as scandalous—drafted by thieves to benefit thieves. St Germain called Gray in a rage. Gray hurried to the Hill to meet him. St Germain excoriated him for our testimony. Gray, according to Gary Bowser, the committee aide who had helped investigate the FHLB-Dallas, blamed it on me. I had acted without authority. Gray ordered us to stop talking to reporters about the incident.
The problem was that Gray’s term was about to end. He had no job, no realistic prospect of getting a good one, and large debts. One of the last things he had going for him was the goodwill of St Germain. I think that goodwill was genuine. St Germain was an atrocious legislator and human being in many ways, but he was capable of supporting others who were basically well motivated.
Brookes’s July 9, 1987, column attacking Speaker Wright for killing my testimony about fraudulent Texas S&Ls, along with the earlier Houston Chronicle article in which I criticized Speaker Wright’s intervention on behalf of Gaubert and Dixon, found their way to Keating’s desk. He wrote to Grogan, his political fixer. Grogan had helped get Henkel appointed and had arranged the Keating Five meeting. Both masterstrokes had not only failed (with Gray and the FHLBSF) but had turned into acute embarrassments. Keating offered Grogan a chance to redeem himself in a memorandum (reproduced as Appendix C) dated July 15, 1987, that enclosed both articles:
HIGHEST PRIORITY—GET BLACK
GOOD GRIEF—IF YOU CAN’T GET WRIGHT AND
CONGRESS TO GET BLACK—KILL HIM DEAD—
YOU OUGHT TO RETIRE7
Dingell was an even more complicated person than St Germain. He and his wife were personal friends of the Speaker and his second wife Betty. Barry (1989, 730) describes Dingell as a “rock” of support for the Speaker throughout his ethics crises. Dingell began his investigations of Gray in a fashion that was brutal even by Dingell’s standards. Recall that the infamous memorandum by Keating’s lawyer (Mickey Gardner) told of their work behind the scenes with Dingell to try to destroy Gray’s reputation. Dingell had followed up with successive investigations that kept the Bank Board reeling. In the face of my vigorous defense of the agency and Gray, Dingell (my hometown congressman!) had threatened me with jail (because of Gray’s resistance to turning over documents about open institutions to him).
Now, in the last month of Gray’s term, June 1987, Dingell conducted one last hearing about the Bank Board. The witnesses were White, Gray, and Black (I joked that we were the “Monochrome Coalition”). Gray had recovered his nerve and decided to go out standing tall. We made my testimony to St Germain an exhibit to our testimony to Dingell, and made sure the press was aware of St Germain’s suppression of it. Dingell understood what we were trying to do by making the suppressed testimony an exhibit and knew that our testimony was intended to generate press stories calling for the defeat of the forbearance provisions. This meant that our testimony would be extremely embarrassing for St Germain and the Speaker. Dingell, the rock on which the Speaker built his ethics defense and Gray’s most effective past critic, would seem to have two choices. He could suppress our testimony, or permit it and try to rebut it by flaying us alive.
Dingell, however, had come to understand who Gray was and what he was trying to do. He understood what Gray was up against better than almost anyone because he was canny and because he knew how Keating and the control frauds operated. Dingell appreciated Gray’s willingness to take on the Reagan administration and push for reregulation. Dingell took a special interest in securities regulation and was a bitter foe of accounting abuses. He was particularly pleased with Gray’s efforts to end Pratt’s creative RAP. Dingell was a fierce opponent of powerful criminals, and he knew that the control frauds had drafted the forbearance language and enlisted the Speaker as their patron.
So Dingell found a third option: embracing Gray and Gray’s positions. He called Gray forward to pose for pictures shaking his hand. He praised Gray’s initiatives and courage. He let us lambaste forbearance and highlight our suppressed testimony. Then, with a twinkle in his eye, he said it was time to move on to the focus of the hearing. It was remarkable. Being somewhat paranoid myself by this time, I wondered initially whether he was praising us just to set us up for a fall. It was soon clear that he meant every kind word he said about Gray. Dingell could not possibly gain politically from what he was doing, and he risked a great deal. I am convinced that he did it because he thought it was the right and fair thing to do (and perhaps from a bit of guilt about how badly he had treated Gray). Dingell’s response helped Gray a great deal psychologically. If a virulent critic like Dingell was now saying kind words about him, then there was reason to hope. It was proof that Gray had tried to do the right thing and that people were beginning to realize and acknowledge publicly that he had tried to do his duty even when doing so was dangerous and almost certain to fail.
The final FSLIC recap bill was an embarrassment, but not a catastrophe. Once Wall replaced Gray, the control frauds’ and the league’s concerns about the amount of money given to the FSLIC declined greatly. Wall and the administration supported forbearance.
With Gray gone, President Reagan was willing to exert some effort on behalf of the bill. He issued a veto threat as the recap bill went to the conference committee. The veto threat related only to the inadequate amount of FSLIC funding in the bills, not the forbearance provisions. The conference committee adopted a $10 billion recap bill, despite the House having voted for $5 billion and the Senate $7.5 billion.8 The media labeled this a win for the administration because a conference committee normally compromises between the House and Senate versions, and $10 billion was bigger than either side had voted for.
Our congressional allies were even more successful on forbearance. My aides kept providing assistance even after Gray’s term ended and I left to assume full-time duties as general counsel to the FHLBSF. Wall was trying to put his team in place and, fortunately, did not understand our role in counteracting forbearance or our ties to Senator Gramm and Representative Leach. Congress killed the scam of amortizing loan losses and adopted the “supervisory exception” that we drafted. The Bank Board could counter the damage the control frauds intended to inflict on the agency if it took full advantage of the exception.
The idea that Gray, hated by the administration, the industry, most of Congress, and much of the media, could successfully expose and fight the Speaker’s ability to hold the FSLIC recap bill hostage was close to delusional. Barry (1989, 234), however, confirms that in his and Wright’s view:
the [February 10, 1987] meeting would ultimately have an impact far beyond the savings and loan industry; it would play a key role in Gingrich’s effort to destroy Jim Wright.
Barry also quotes with approval Gingrich’s conclusion that the S&L matters were decisive in removing Wright from power because they made him seem corrupt and because they were current (1989, 215–216).