Creature From Jekyll Island by G. Edward

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appear to be sham transactions, in which failing thrifts were sold to failing thrifts, which are failing all over again....

Although the thrifts proved to be in far worse shape than the Bank Board estimated, Mr. Wall defends his strategy for rescuing them with open-ended assistance. 'We didn't have the money to liquidate,' he says.1

When Congress passed HRREA the previous year to 'safeguard and stabilize America's financial system,' the staggering sum of $300 billion dollars was authorized to be taken from taxes and inflation over the following thirty years to do the job. Now, Federal Reserve Chairman Alan Greenspan was saying that the true long-term cost would stand at $500 billion, an amount even greater than the default of loans to all the Third-World countries combined. The figure was still too low. A non-biased private study released by Veribank, Inc. showed that, when all the hidden costs are included, the bill presented to the American people will be about $532 billion.2 The problems that President Bush promised would 'never happen again' were happening again.

BOOKKEEPING SLEIGHT OF HAND

Long before this point, the real estate market had begun to contract, and many mortgages exceeded the actual price for which the property could be sold. Furthermore, market interest rates had risen far above the rates that were locked into most of the S&L

loans, and that decreased the value of those mortgages. The true value of a $50,000 mortgage that is paying 7% interest is only half of a $50,000 mortgage that is earning 14%. So the protectors of the public devised a scheme whereby the S&Ls were allowed to value their assets according to the original loan value rather than their true market value. That helped, but much more was still needed.

The next step was to create bookkeeping assets out of thin air.

This was accomplished by authorizing the S&Ls to place a monetary value on community 'good will'! With the mere stroke of a pen, the referees created $2.5 billion in such assets, and the players continued the game.

1. 'Audit Report by FDIC Shows Wall's Estimates for Thrift Bailouts in 1988 Were Wildly Low,' by Charles McCoy and Todd Mason, The Wall Street journal, Sept. 14, 1990, p. A-12.

2. 'S&L Industry Rebuilds As Bailout Reaches Final Phase,' Veribank News Release, Veribank, Inc. (Wakefield, Massachusetts), January 12,1994, p. 2.

HOME, SWEET LOAN

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Then the FSLIC began to issue 'certificates of net worth,' which were basically promises to bail out the ailing S&Ls should they need it- The government had already promised to do that but, by printing it on pieces of paper and calling them 'certificates of net worth,' the S&Ls were allowed to count them as assets on their books. Such promises are assets but, since the thrifts would be obligated to pay back any money it received in a bailout, those pay-back obligations should also have been put on the books as liabilities. The net position would not change. The only way they could count the certificates as assets without adding the offsetting liabilities would be for the bailout promises to be outright gifts with no obligation to ever repay. That may be the eventual result, but it is not the way the plan was set up. In any event, the thrifts were told they could count these pieces of paper as capital, the same as if the owners had put up their own cash. And the game continued.

The moment of truth arrives when the S&Ls have to liquidate some of their holdings, such as in the sale of their mortgages or foreclosed homes to other S&Ls, commercial banks, or private parties. That is when the inflated bookkeeping value is converted into the true market value, and the difference has to be entered into the ledger as a loss. But not in the never-never land of socialism where government is the great protector. Dennis Turner explains: The FSUC permits the S&L which sold the mortgage to take the loss over a 40-year period. Most companies selling an asset at a loss must take the loss immediately: only S&Ls can engage in this patent fraud. Two failing S&Ls could conceivably sell their lowest-yielding mortgages to one another, and both would raise their net worth! This dishonest accounting in the banking system is approved by the highest regulatory authorities.1

U.S. News & World Report continues the commentary: Today, scores of savings-and-loan associations, kept alive mainly by accounting gimmicks, continue to post big losses.... Only a fraction of the industry's aggregate net worth comprises hard assets such as mortgage notes. Intangible assets, which include bookkeeping entries such as good will, make up nearly all of the industry's estimated net Worth of 37.6 billion dollars.2

p tennis Turner, When Your Bank Fails (Princeton, New Jersey: Amwell publishing, Inc., 1983), p. 141.

W ? r s T o u c h A n d Go f o r Troubled S&Ls,' by Patricia M. Scherschel, U.S. Neivs & 0rUt Report, March 4,1985, p. 92.

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ACCOUNTING GIMMICKS ARE NOT FRAUD

We must keep in mind that a well managed institution would never assume these kinds of risks or resort to fraudulent accounting if it wanted to stay in business for the long haul. But with Washington setting guidelines and standing by to make up losses, a manager would be fired if he didn't take advantage of the opportunity. After all, Congress specifically said it was OK when it passed the laws. These were loopholes deliberately put there to be used. Dr. Edward Kane explains: