[DEBATE] : Subprime crisis is a repeat event for the US

[Riaz K Tayob]

Mike Stark

University of Virginia Law Student, a Marine, and a Citizen Journalist
Posted April 8, 2009 | 12:29 PM (EST)

The Banking Crisis, S&Ls, Virginia and McAuliffe
In September 1980, Harpers Magazine published a story by L.J. Davis 
titled, Chronicle of a Debacle Foretold. It was a comprehensive review 
of the events leading up to the S&L crisis and its aftermath.

A synopsis: S&L's were in trouble in the early '80s, so they sent their 
lobbyists to Washington. There, they found a newly receptive Democratic 
party and an ideologically friendly Regan administration. They lavished 
campaign donations on the Democratic leadership in Congress and courted 
a newly aggressive DCCC. In the end, they got more than they could have 
ever hoped for: an increase in FDIC insurance limits and an absolute 
evisceration of regulations that were designed to keep them trustworthy. 
The mother of all moral hazards was the result. In the most innocent 
cases, S&Ls made extremely aggressive (and stupid) bets with other 
people's money. When they lost, the tax-payer was left holding the bag. 
In many more cases, S&L owners simply looted the public treasury.

How did all of this happen?

Regulatory capture.

Here is an excerpt from Marjorie Williams' book Reputation: Portraits of 
Power:

    In 1983 [McAuliffe] was hired by Tony Coelho, then a California 
congressman, to raise money for the Democratic Congressional Campaign 
Committee (DCCC).


    This is where he began to have an impact on the party. Before 
Coelho, the DCCC had been a desultory little shop, wanly raising money 
at a single dinner each year. Together, Coelho and McAuliffe courted 
business money as never before. Their crucial insight was that 
corporations' political action committees could be sold, as a matter of 
simple business, on the advantages of supporting the incumbent party (or 
of, as fund-raisers like to say, "becoming part of the process"). They 
made the DCCC a powerful machine to perpetuate the party's control of 
the House, then the only part of government the Republicans had not won 
in Reagan's revolution. Just as the House Democrats were becoming the 
most important force in the party, McAuliffe and Coelho were making them 
more beholden to business than ever before.

More from Davis' article:

    To take but one example, Vernon's Don Dixon [subsequently jailed for 
looting his S&L], for whom no excess was too wretched, purchased the 
sister ship of the presidential yacht Sequoia, named it High Spirits, 
anchored it in the Tidal Basin, and made it available to Congressman 
Tony Coelho of California, the majority whip and chairman of the 
Democratic Congressional Campaign Committee, who held fundraising events 
on the vessel eleven times in 1985 and 1986. But because Coelho's mind 
was evidently clouded by affairs of state, he seemed not to notice that 
Dixon and Vernon never billed him the $2,000 half-day charter fee; when 
the oversight was pointed out to him by [banking regulators], Coelho and 
the campaign committee reimbursed Vernon to the tune of $48,450.

 From Wikipedia:

    From 1985 to 1987, McAuliffe served as finance director of the 
Democratic Congressional Campaign Committee.

Just to make the point with a sledgehammer: Terry McAuliffe was the 
finance director of the DCCC that failed to notice a corrupt S&L owner 
had not billed for the use of a yacht the on which the committee hosted 
fund-raising parties.

(An aside: Coelho ended up resigning from Congress when it was 
discovered that he had received a sweetheart S&L loan and used it to 
purchase junk-bonds.)

But that's not even close to the end of McAuliffe's involvement with the 
S&L scandal.

More from the Davis article:

    On the last night of California's 1982 legislative session, a bill 
named for a prominent Republican assemblyman, Pat Nolan, cleared its 
final hurdle and passes in twenty seconds with not a hint of debate. 
Under the Nolan bill a California-chartered thrift could invest 100 
percent of its deposits in any venture it chose. A California thrift 
could purchase stocks and bonds; it could become a corporate raider and 
practice greenmail. It could buy mushroom farms and Antarctic real 
estate; it could invest in junk bonds and perpetual-motion machines. The 
California thrifts, in short, were permitted to become perfect venture 
capitalists - high fliers, indeed, but with full knowledge that beneath 
them spread the safety net of federal deposit insurance. The Nolan Bill 
was quickly copied in Texas and Florida...

Here's something from Businessweek, circa 1997:

    Take his relationship with the International Brotherhood of 
Electrical Workers. In 1991, McAuliffe formed a partnership with a 
pension fund jointly operated by the IBEW and the National Electrical 
Contractors Assn., a management trade group.


    Such funds are regulated under the Taft-Hartley Act, and 
contributions come from both unionized electrical workers and from their 
employers, electrical contractors.
    The fund has co-chairmen-one from the union and one from 
management-and both labor and management employees are beneficiaries. 
The IBEW fund currently has $6 billion invested in stocks, bonds, and 
real estate.

    In the 1991 deal that McAuliffe packaged and brought to the fund, 
the fund put up $38.7 million in cash for five apartment complexes and a 
rundown shopping center near St. Petersburg. McAuliffe got a 50% equity 
stake, even though the fund put up all the money.

    No investment adviser was involved, says John M. Grau, co-chairman 
of the fund and executive vice-president of the National Electrical 
Contractors Assn. because McAuliffe's plan seemed like a slam-dunk: The 
pension plan was acquiring the properties at $10 million below their 
appraised price.

    Why such a deal? Because the seller was the Resolution Trust 
Corp.,which had taken control of the properties from Orlando-based 
American Pioneer Savings Bank.

    The RTC had rescued the S&L and placed it in receivership a year 
earlier-costing taxpayers $500 million. American Pioneer had been owned 
by Richard A. Swann, father of Dorothy Swann, McAuliffe's wife.

    The elder Swann once presided over a $2 billion commercial empire. 
But it crashed when regulators declared the S&L insolvent. Swann filed 
for personal bankruptcy on Nov. 21, 1990.

    Since then, Swann says, he acts as McAuliffe's attorney in business 
ventures and is paid fees for managing McAuliffe companies. McAuliffe 
says Swann is not a partner but is paid to "help with the management."

And finally, to complete the circle, more from Davis:

    In the months and years to come, one can expect the Resolution Trust 
to make any number of sweetheart deals as it moves quickly to sell off 
the real estate accumulated by the busted thrifts. The government itself 
acknowledged earlier this summer that a certain amount of fraud is 
inevitable. That the buyers of these properties might number among them 
the very gentlemen who got the country in the mess in the first place 
should not be discounted, and already certain individuals with 
cash-filled suitcases have made their appearance. Who knows more about 
the true value of the properties the government intends to sell off than 
the developers and thrift owners who defaulted on the properties?

As I've gotten more involved in following the race for the Democratic 
nomination for Governor here in VA, I've been writing about McAuliffe's 
history. And I've taken some withering criticism from people I respect. 
The common refrain is that I'm jumping to conclusions and making much 
ado about things that have been already examined and found wanting. 
McAuliffe has never been indicted or charged with anything, let alone 
found guilty. This type of "attack" is without substance and 
distasteful. We should all strive for civility and keeping our primary 
race "positive".

Ugh.

As I've said before, a "positive" race works out very well for the 
politician with the longest trail of dirt stretching behind him. 
"Positive" is good when there isn't anything that needs to be vetted, 
but if there is... well, the primary is the place to do it.

And here, we have a mother-lode of negativity.

Terry McAuliffe simply will not address these concerns in any real way. 
He's hoping to smile and back-slap his way to primary victory. Of 
course, his millions of dollars in out of state donations - the money 
that has allowed him to hire 98 staffers - will certainly be useful to 
him as he waltzes toward the finish-line. What was that line? Something 
about how "Nothing empties the mind of inconvenient knowledge more 
quickly than if one's career depends upon it"? I'm thinking there may be 
a lot of that going on in Virginia these days, especially amongst the 
netroots.

What else explains the fact that Howard Dean's nemesis - the anti-thesis 
of "people-powered politics" - has captured so many former stalwarts of 
anti-establishment Democratic politics?

Just a year or two ago, the entire netroots pretty much sang with one 
voice: money-power and transaction-based politics had no place in the 
Democratic Party. We wanted proud progressives that demonstrated a 
willingness to stand up and fight against the lobbyists and corporate 
interests.

Finally, we in the netroots reserved special condemnation for the 
corrupt. We railed against Tom DeLay and Jack Abramoff and the K-Street 
project and the self-dealing and the money-fueled corrupt politics that 
characterized Washington DC for the entire life-span of the blogosphere. 
Of course, all of that time was marked by Republican rule, so maybe we 
didn't realize how bad things were under the Democratic leadership of 
the '80s and '90s. We can hardly be blamed for that; to the extent we 
had an internet in those years, it wasn't what it is today. If we could 
stomach it, we were forced to rely upon the MSM for our political news.
But... As the articles I've laid out demonstrate, it is possible to get 
a flavor for what was going on back then. And Terry McAuliffe was right 
in the middle of twenty years of a Democratic death-spiral from the 
mid-eighties until 2006. In fact, Democratic fortunes didn't change 
until McAuliffe left the scene.

Everything that was bad about democratic politics at the national level 
was exemplified by Terry McAuliffe's leadership. Here in Virginia, we 
consistently rate as one of the best governed states in the Union. Do 
you really want McAuliffe leading the Commonwealth?

Think about it. Please.

http://www.huffingtonpost.com/mike-stark/the-banking-crisis-sls-vi_b_184375.html