Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (14 page)

⁴²
Jerome Tuccille,
Alan Shrugged
: T
he Life and Times of Alan Greenspan, the World’s Most Powerful Banker
(Hoboken, NJ.: Wiley, 2002), p. 157.
⁴³
Ibid., pp. 157–158.
⁴⁴
Martin Mayer,
The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry
(New York: Scribner’s, 1990), p. 140
⁴⁵
New York Times
TV listings, June 12, 1983.
⁴⁶
“The LongTerm Boom Now in Prospect,”
U.S. News & World Report
, June 6, 1983.
⁴⁷
Greider,
Secrets of the Temple
, pp. 572–574.

Never one to hop off a fence if he could sit on it, the appointed chairman of the National Commission on Social Security Reform moved the deck chairs sufficiently to delay action for another few years. There was room to think that the commission had succeeded.
⁴⁸
The fix was temporary; as Federal Reserve chairman, Greenspan would once again permit the politicians to avoid responsibility. (This is the subject of Chapter 12.)

The United States continued to buy far more from overseas than it produced. The deficit in goods reached $145 billion in 1986. This was quite a splurge, as were the federal deficit and the debt-stuffed corporate balance sheets.

Alan Greenspan saw dark clouds. This is noteworthy, since, as Fed chairman, Greenspan would say that it did not matter if the United States produced things. In 1984, speaking to the
Times
, he had taken a more traditional view: “With some urgency, Mr. Greenspan says the recent trend toward short-lived investment means that a higher percentage of the nation’s plant and equipment wears out each year. Thus, a larger amount of investment is needed each year just to replace this depreciated capital stock, and more investment yet is needed to increase the nation’s net capital stock.” Greenspan stated the consequence: “What happens if you have inadequate capital investment, is you wind up with lower standards of living than you otherwise would.”
⁴⁹

Given his views, Alan Greenspan would seem as well suited as anyone, in an official Washington posting, to warn of a dire future. Instead, he mumbled for 18 years and evaded such discussions.

⁴⁸
In brief, the commission did not touch the age at which a person is eligible for benefits; it taxed beneficiaries if their income was above a certain level, it required federal employees to contribute to the system, and it retained the formula for adjusting benefits for inflation.

⁴⁹
Steven Greenhouse, “Pitfalls in the Capital Spending Boom,”
New York Times
, June 3, 1984.

1984–1985

Charles Keating’s S&L was
the
example of how the industry had spun out of control. [Seidman’s italics.]
¹

—L. William Seidman,
Full Faith and Credit: The Great S&L Debacle and Other Washington Sagas

Greenspan was fortunate that his nomination for Federal Reserve chairman preceded the unwinding of Lincoln Savings and Loan. The infamous “Keating Five” scandal was hatched at Lincoln. Five U.S. senators lost credibility in its wake—Alan Cranston, Donald Riegle, Dennis DeConcini, John Glenn, and John McCain. Greenspan was hired by Charles Keating in 1985 to write a letter to regulators on Lincoln’s behalf. The government bailout of the savings and loan industry cost American taxpayers $124.6 billion.
²
Lincoln alone cost at least $2.0 billion.
³

¹
L. William Seidman,
Full Faith and Credit: The Great S&L Debacle and Other Washington Sagas
(New York: Times Books, 1993), p. 229.
²
Different assumptions produce different totals; http://www.gao.gov/archive/1996/
ai96123.pdf.
³
www.fdic.gov/bank/historical/s&l/.

85

Savings and loans (also called “thrifts”) had suffered whiplash from the rise and fall of interest rates. Many were in danger of extinction. Alan Greenspan had warned of their vulnerability in 1981when he told
U.S. News & World Report
that high interest rates were suffocating S&Ls: they “can only exist in a non-inflationary environment.”
⁴
He told the
New York Times
“[t]here are now a bunch of moribund cases out there.” Greenspan was not sure if “any” of the savings and loans had equity, but that was not the real problem: “The problem is cash flow . . . there are a number of institutions that are barely able . . . to pay their liability side of the balance sheet].”
⁵

Lincoln before Keating: One of the Best

Managed Savings and Loans

What Greenspan said seems overstated, but there was much truth in it. Notably, his concern did not apply to Lincoln Savings and Loan of Irvine, California. It was run by the Crocker family, which owned 40 percent of the shares. Like most S&Ls, it lost money in 1981 and 1982, but it returned to profitability in 1983 (with the decline of interest rates). Donald Crocker, son of the founder, had nursed Lincoln back to health and was ready to sell. Charles Keating offered to pay $51 million in 1983—two and a half times its over-the-counter market price.
⁶
Michael Milken at Drexel, Burnham helped broker Keating’s acquisition.
⁷

Keating inherited a thrift institution with the lowest ratio of delinquent mortgages of any large thrift institution in California.
⁸
When seeking approval from the Federal Home Loan Bank (FHLB) of San Francisco,
⁹
Keating stated that he would continue with the current management in place and that he would concentrate on California home mortgages. Having received approval from the FHLB, he jettisoned Lincoln’s senior management. Keating would later say he fired them because they were incompetent and that Crocker had told him to do so. Crocker had said nothing of the sort.
¹⁰
Keating’s new board was not on the payroll of Lincoln. Instead, board members were paid by Keating’s holding company that owned the bank.
¹¹

⁴
“Are Americans Going Too Deep into Debt? Interview with Alan Greenspan,”
U.S. News & World Report
, August 3, 1981.
⁵
“Talking Business with Alan Greenspan,”
New York Times
, March 24, 1981, p. D2.
⁶
Martin Mayer,
The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry
(New York: Scribner’s, 1990), p. 171.
⁷
Martin Mayer,
The Bankers: The Next Generation
(New York: Truman Talley Books, 1997): “Charles Keating acquired Lincoln Savings and Loan with the help of Mike Milken of Drexel Burnham,” p. 370.

Lincoln, Keating, and Drexel Burnham’s Daisy Chain

A consultant hired to review Lincoln’s books should have looked upon Keating and his connections with some curiosity. Since Alan Greenspan devoted great energy to knowing those who wielded the levers of power, it would have been a strange lapse if he was uninterested in his client. Keating had been executive vice president of Carl Lindner’s American Financial Corporation. Lindner’s reputation rose from the financing boom of the 1960s. Between 1961 (when the company went public) and 1979, American Financial Corporation produced a compound annual return of 19.2 percent.
¹²
During the 1970s, Lindner was an investor in Milken’s early junkbond offerings. In 1979, the SEC had charged Keating with making improper loans to insiders and friends (of Lindner’s Provident Bank of Cincinnati), plus failing to report a pattern of loans to purchasers of assets that Lindner wished to sell. “Keating had consented to a permanent injunction with the SEC, which should have barred Keating forever from ownership of an insured” deposit-taking institution.
¹³
In 1978, Keating had bought a Phoenix house-building company from

⁹
There are 12 regional Federal Home Loan banks. Lincoln Savings and Loan was in the San Francisco district. Until 1989, the FHLBs were the “principal supervisory agents” responsible for the solvency and honesty of ther local S&Ls. Mayer,
Greatest-Ever Bank Robbery
, pp. xi–xii.

¹⁰
Ibid., p. 171.
¹¹
Ibid., p. 170.
¹²
Thomas C. Hayes, “The ‘Money Merchant’ of Cincinnati,”
New York Times
, June 24, 1979, F7.

Lindner. This was renamed American Continental Corporation (ACC). ACC was the holding company that later purchased and owned Lincoln Savings and Loan.
¹⁴
Keating leveraged it and then expanded into several western cities; all of these efforts failed between 1982 and 1987. Martin Mayer, author of
The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry
, wrote: “There is every reason to believe that Keating went after an S&L because he had lost access to other sources of funds and needed government-insured deposits to finance his operations.”
¹⁵

S&Ls were an attractive platform for a businessman with a certain turn of mind. Deregulation of the industry permitted a panorama of investment classes that had previously been forbidden. William Seidman, who had interviewed Greenspan before his Council of Economic Advisers appointment, learned that “S&Ls could raise nearly unlimited amounts of funds through brokered deposits at low [interest] rates because the money was insured by the government. They could … make their profit on the spread between the low and high rates of interest.”
¹⁶

Charles Keating needed money. He needed yield from the securities bought by Lincoln. He needed capital gains from the trading of land and securities. He bought the riskiest junk bonds, land, and takeover stocks.
¹⁷
Keating’s first big investment was $132 million in the common stock of Gulf Broadcast Company. He bought the stock from Lindner’s American Financial Corporation, which had accumulated 19 percent of Gulf Broadcast shares.
¹⁸

In
Securities Markets in the 1980s
, Barrie Wigmore wrote that Carl Lindner and Saul Steinberg “ran small insurance companies and dealt repeatedly in borderline investment tactics.”
¹⁹
In Wigmore’s opinion, the evolution of the pair’s “activities illustrates the combination of native cunning and access to leverage that made them effective.”
²⁰
Regarding the relationship of Lindner and Steinberg, Wigmore wrote: “[i]t is tempting to conclude they also represented a cabal, who worked through Michael Milken’s group.”
²¹

¹⁴
Ibid., p. 167.
¹⁵
Ibid., p. 173.
¹⁶
Seidman,
Full Faith and Credit
, pp. 235–236.
¹⁷
Mayer,
Greatest-Ever Bank Robbery
, p. 174.
¹⁸
Ibid.
¹⁹
Barrie A. Wigmore,
Securities Markets in the 1980s
, vol. 1 (New York: Oxford University Press, 1997), p. 360.
²⁰
Ibid., p. 356.

When Seidman was appointed to head the Resolution Trust Corporation (RTC)—the agency created to resolve problems in the S&L industry—he faced a mystery: why was the heaviest financial carnage among the largest holders of junk bonds sold by Michael Milken? These included Lincoln; Centrust Savings Bank of Miami, Florida; and Columbia Savings and Loan of Beverly Hills, California. Among them, the three banks held $2.5 billion of junk bonds by the end of 1984—which was equal to 35 percent of the amount held by all mutual funds.
²²
(William Seidman later wrote that of the more than 900 convictions initiated by RTC enforcement actions, those of the chairmen of Centrust, Columbia, and Charles Keating were “key.”
²³
)

Later in the decade, Seidman’s investigators discovered that Michael Milken had “rigged the market by operating a sort of daisy chain among the S&Ls to trade the bonds back and forth across his famous X-shaped trading desk at his headquarters in Beverly Hills. By manipulating the market, he maintained the facade that the bonds were trading at genuine market prices. . . . When he [Milken] was brought down, and his trading operation with him, so were the S&Ls that depended on the value of his bonds to stay afloat.”
²⁴
Of note: the in-house pricing of derivatives, such as collateralized debt obligations (CDOs), was essential to the current financial collapse.

Between 1983 and 1984, Lincoln’s assets more than doubled, from $1.1 billion to $2.24 billion.
²⁵
From the time Keating took control of Lincoln in February 1984 through the end of the year, he “had switched virtually all of its activities to real estate development and speculative investments.”
²⁶

²¹
Ibid., p. 346. Wigmore includes one more “old hand” from “the merger wave of the late 1960s”: Meshulam Riklis and his Rabid American Corporation.
²²
Ibid., p. 286.
²³
Seidman,
Full Faith and Credit
, p. 226.
²⁴
Ibid., p. 236. An example of how the daisy chain worked: Drexel put Keating into Playtex stock which Lincoln bought for $420,000. Lincoln sold the shares to American Continental Corporation, Keating’s holding company, for $2.1 million. Lincoln booked the $1.7 million profit. ACC sold most of the shares to Centrust Savings Bank of Miani for $12.47 million. ACC booked a $10.37 million profit. Source: Mayer,
Greatest-Ever Bank Robbery,
p. 175.
²⁵
Nathaniel C. Nash, “Greenspan’s Lincoln Savings Regret,”
New York Times
, November 20, 1989.

Savings and loans that had “exploited California’s liberal thrift industry regulations” were profiled on the front page of the
Times
’s business section on November 15, 1984. Alan Greenspan’s hometown newspaper reported that “Columbia Savings and Loan Association of Beverly Hills nearly quintupled in size” to $4.9 billion over the past two years.
²⁷
The
Times
referred to a
Forbes
magazine article that explained Columbia’s growth was aided by ties to a “confederation of fast-stepping financiers, such as Carl Lindner [and] Saul Steinberg, who buy and sell low-grade commercial paper through the head of Drexel Burnham’s Beverly Hills office, Michael Milken.”
²⁸