Who Watches the Watchers?

TO: The San Jose Mercury News , 750 Ridder Park Drive , San Jose, CA, 95190

DATE: May 1st, 1994

The federal regulatory agencies during the Savings and Loan Debacle that began in the early 1980's and continues to this day were the Federal Home Loan Bank Board (FHLBB) and its successor agencies, the Resolution Trust Corporation (RTC) and the Office of Thrift Supervision (OTS). Some of the higher ranking people in these agencies, many of them political appointees, have engaged, and may be engaging in activities that call out for investigation. Because of Whitewater, the hands of the Clinton Administration are tied. Any attempt to investigate the RTC and the OTC would be viewed as an attempt to interfere with the on-going investigation.

But who watches the watchers?

With the Clinton Administration out of action, the only institutions with the power to investigate the regulatory agencies are the Congress and the news media. The Mercury News cannot claim ignorance of highly suspicious activities in these agencies, I have documented a number of them in the letters I've sent you since the fourth of April. Let me try one more time, citing some of the same examples, and giving you a few new ones.

Silverado Banking and Savings and Loan Association.

1984 to 1988. According to Steven Wilmsen's book, Silverado, that S&L began engaging in fraud as early as 1984, but the Kansas Federal Home Loan Bank "actually approved most of Silverado's illegal and wildly imprudent transactions" from 1984 to 1988. The man responsible for "those approvals was Kermit Mowbray, president of the Topeka bank." Regulators at the bank (and not political appointees) discovered the fraud in late 1986 and tried to serve a cease and desist order on the S&L on March 10, 1987, but were overturned by Mowbray. During the 1991 OTS $200 million dollar lawsuit against Neil Bush and other Silverado directors, the defense asked for the release of documents pertaining to the bank's oversight of Silverado on the basis that the bank had approved the transactions. The OTC refused, claiming confidentiality, and stating they would rather receive a contempt citation rather than release the documents. Is this why the OTS finally settled for $49 million dollars, one-fifth of the amount they originally sued for?

1988. In October 1988, Mowbray stopped the closure of Silverado until after the presidential election and after he received a mysterious phone call from Washington. The final bailout costs of Silverado are in excess of $1 billion dollars. The increase in the Silverado bailout costs, based upon the S&L regulator's own estimates of what it would have cost to close the S&L in October 1988 rather than December 1988, ranges from $400 million to $600 million dollars.

1988 - The Accounting Firm of Cooper and Lybrand. In the summer of 1988, the regulators were closing in on Silverado and its accounting firm, Cooper and Lybrand. Cooper and Lybrand had affirmed Silverado was in excellent finanicial health; had affirmed Silverado made a profit of $15 million in 1986 and had let the top four S&L executives take $3.2 million dollars bonuses. In truth, the S&L was near insolvency, had lost $15 million in 1986, and the bonuses were based upon phantom earnings.. For this and other accounting "mistakes," the OTS in December 1990 slapped Cooper and Lybrand with a cease and desist order for its "abusive and self-serving actions." Less than a week later, the RTC awarded Cooper and Lybrand a "lucrative contract" to manage $278 million dollars in loans and real estate from failed savings and loans.

Broward Savings and Loan

In an earlier letter, I mentioned to you that in exchange for $505,000 dollars from Jed Bush and his real estate partner in 1990, the RTC forgave a defaulted loan of $4.5 million dollars. The two men had borrowed the money in 1985 to purchase an office building. On the surface, this appears to be a "sweetheart" of a deal for the President's son; he retains a major equity holding for a payment of one-ninth the original amount of the loan. Who takes the loss? The American people. The only justification for this deal would have been if the $4.5 million in equity had been reduced in value to $505 thousand dollars by declining real estate values in Florida. According to Table 6-10 on page 111 of Lawrence J. White's The S&L Debacle, the price of commercial real estate in the South decreased by 38.3 per cent from 1985 to 1989 (the last year in the table). Assuming about a 40 per cent decrease by 1990, because the prices were decreasing at a lower rate, the $4.5 million equity would have been about $2.7 million in 1990, a figure 5.3 times greater than the settlement figure. What was the basis of this settlement? Did the fact that the government negotiators were sitting across a table from the son of the President of the United States have any bearing on the case? Or were they government negotiators? Was the final settlement negotiated by government lawyers or by a legal firm hired by the RTC?

But we should thankful that Jed Bush was involved, otherwise we would not have known that the RTC was forgiving loans on such advantageous terms to the borrowers. Or where they? We don't know because the matter has not been looked into by the Congress or the national media. Again, what was the basis of the Bush settlement? Did political connections have something to do with the settlement of this (and possibly other) loans or was the RTC in a Santa Claus mode for all the borrowers of money from failings savings and loans?

Franklin R. Mancuso

Go to the Politics forum, then Zippergate and then to the Thread:

The Media's Handling of the Clinton Scandals.