European Stars and Stripes (Newspaper) - July 4, 1990, Darmstadt, Hesse                                Wednesday thursday july 4/5, .1990 the stars and stripes a a a Page 3the savings amp loan crisis by Jeff Gerth the new York times 4 Washington a behind the collapse of the nation s savings and loan Industry is the Story of How the Public and private safeguards intended to ensure the financial health and integrity of the savings system failed. To a free Market philosophy. Until the 1980s liberalization a savings and loan was required to have at least 400 shareholders a Rule intended to limit the influence of developers who saw the institutions As a milk cows Quot As Case put it. 35 30 25 20 15 10 the professionals a a accountants appraisers auditors directors and government examiners a Manning the Chain of accountability in the savings Industry were overwhelmed by the sweeping deregulation of the 1980s and the changes it brought. Some were confused by the new rules others were lulled into complacency by Federal insurance on deposits and some were willing to approved questionable practices As Long As they were paid handsomely. American savings and loan of Stockton calif., was a Case in Point. According to Philip w. Maher an appraiser at the California institution the practices there during the mid-1980s at times seemed like scenes from a Peter Sellers comedy. For example when its management officials guaranteed they had looked at Quot the appraisals on Loans they meant they had seen the bookshelves that held thousands of bound documents not the actual appraisals Many of which were false or inflated Maher said in a sworn court declaration. He had raised questions about the practices. The Cost of the Slipshod and suspect work at american savings has since become painfully apparent. In 1988, it was de. Glared insolvent the largest savings institution in the country to fail and is expected to Cost the Federal government billions of dollars. The breakdown of the Industry a controls is a key reason Why the savings crisis grew unchecked for years and Why the bailout has become so expensive costing the nations taxpayers As much As $500 billion Over the next three decades. The generous Federal insurance on savings deposits and Federal guarantees on mortgage backed securities mean that the Industry a troubles became the governments problem. Professionals stood at each checkpoint in the savings system supposedly responsible for giving Independent and expert advice. For example appraisers were to provide unbiased estimates of property values outside accountants were to scrutinize the financial statements of savings institutions in House auditors were to oversee a system of internal controls state and Federal examiners were to evaluate a savings units safety and soundness. And outside directors were to oversee independently an institutions managers. Yet at the savings and Loans that collapsed experts increasingly see a common pattern. A the breakdown of safeguards was pretty much across the Board of those thrifts that were in trouble a said Fred e. Case who retired recently from the How the a amp a crisis grew 5 the Bush administrations bailout plan enacted into Law in August 1989, is the government s latest attempt to resolve a savings and ban crisis that has been building for years Here s a look at some of the financial deregulation on a amp is since 1980 along with the costs of resolving some of the insolvencies. In billions of dollars per year spent on Thrift bailouts by the Federal savings and loan insurance corp. And the Resolution Trust corp. $40 x is amp a insolvencies in number of institutions per year. ,1 a Malhi. Lri a a a i a it nil in in ill -j---1 a. ---i-��?1 100 o 1980 �?T82 �?T84 86 88 89 As of june 30 sets capital standards requires thrifts to increase ratio of Home mortgages forms office of Thrift supervision a a approves $10.8 a gluon i a i refinancing of Suc 1 permits Money Market accounts  Loans by a amp is allows negative net Worth to be counted As positive capital to 5r5 Subbs u1980 81 82 83 84 85 86 87 insolvent thrifts were placed in a conservatorship in february Resolution Trust corp. Took Over duties of final resolutions on aug. 8 sources Chicago Tribune off c Thrift supervision Federal Deposit insurance corp., news reports graduate business school of the University of California at los Angeles where he was a professor of real estate. William j. Crawford who until recently was californians chief savings and loan regulator traced the breakdown in standards in the Industry to an uncritical acceptance a so much in fashion at the time a that regulation meant inefficiency and that free Market policies would work to everyone s Benefit. A they All got caught up in this thing of the free Market but it Wasny to a free Market a Crawford said in an interview. A the government was insuring the deposits. It Wasny to entrepreneurialism it was High fliers operating with the Public a Money. There was no  and Sharp scrutiny seemed less pressing because the Economy was booming. A nobody paid much attention there was euphoria in the markets everybody made a ton of Money a said Frederick w. Wolf the former assistant comptroller general of the general accounting office who is now a partner at the accounting firm of Price waterhouse. The deregulation of the savings Industry allowed fundamental changes in the ownership and investment policies of these traditionally conservative institutions that help explain the Industry a collapse. In essence decades old structural safeguards were abandoned in the Rush the directors of an institution in theory acted As a further Check. But in 198on the theory that Banks enjoyed a similar status the Federal Home loan Bank Board permitted savings and Loans to be owned by Only one shareholder. The following year the Board provided further incentives for developers when it allowed owners to invest less of their own Money and use real estate rather than Cash As the basis for their investment. By 1982, every Dollar of capital a the real estate or Cash contributions made by owners a was a License to raise $33 in federally insured deposits. Previously Congress had raised the level of insured deposits to $100,000 from $40,000. The new liberalized rules also made possible increasingly sophisticated and risky investments. In the mortgage backed securities Market fuelled by the expansion of other Federal guarantees savings and Loans sold off mortgages to Wall Street firms freeing funds for More ambitious investments. The investment Banks pooled the Home mortgages and sold them As securities to investors part of the 1980s trend of  but As savings institutions increasingly pulled Back from their traditional business of making Long term Loans to Home buyers the links Between borrowers and lenders were eroded. The dictum of a a know your borrow Era got lost a Crawford said. The Broad regulatory changes led to a Subtle shift in the balance of Power. For example savings and loan Dirac tors even those inclined to be Independent minded did not understand the sophisticated new financial transactions Well enough to question the Wisdom of the More aggressive investment practices. So More Power accrued to managers Many of whom had ties to Duvel of pcs or securities firms. A if directors Don t know about complicated instruments they have to rely on financial data and reports from internal auditors and accountants a Crawford said. A one of the Best Thrift safeguards is to have the internal auditor report to the Board but i found this lacking at most associations a said Case who is co author of a 1988 Book Quot where deregulation went wrong a Tor the United states league of savings institutions. The principal tool in do tar mining whether a company is solvent or in trouble is the financial report which must be scrutinized and approved by Independent accountants. As the savings and loan crisis grew Alt too frequently reports on ailing institutions failed to accurately portray their financial condition. Last year the Gao an Arm of Congress found that outside audits of i Texas savings institutions had reported a cumulative net Worth of $44 million even though the savings and Loans at the time they were seized by the government had a total negative net Worth of $1.5 billion. In California Crawford found a is Miliar situation 29 of 31 insolvent savings and Loans had clean audits before they were taken Over by the government. The Gao found the auditing problems significant enough to refer six unnamed firms to professional and regulatory agencies for possible disciplinary review. In addition Federal regulators have sued a dozen accounting firms for savings auditing failures including Coopers amp Lybrand Grant Thornton Ernst amp Young the firm created by the merger of Arthur Young amp co with Ernst amp whinny and Eloitte touche created by the merger of Eloitte Haskins amp Sells and touche Ross. To be sure some accounting firms steered Clear of the savings and loan Industry. Others raised so Many questions that they lost clients. But in a Echo of changes taking place in the Industry a significant number Crawford said became cheerleaders in their Pursuit of clients. A when i Clame into the business in 1974, the hero or King was the smartest the most Independent person the one who could say a no a a said Thomas r. Bloom the Bank boards chief accountant in 1987 and 1988. Bloom now a partner with Kenneth Leven Hal amp co., added that a by 1984, the Salesman became the hero of the profession a