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Financial Implosion: 2nd Chance for Progressive Banking Reform?

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When present and former public officials ranging from Treasury Secretary Henry Paulson to Lawrence H. Summers, the former Treasury secretary under President Clinton, started calling for the creation of a new agency that would buy the almost worthless assets from staggering financial companies, my first thought was great. As Barney Frank, Democrat of Massachusetts, who heads the House Financial Services Committee, said this week, the question of a broader more systemic action in which the government tries to help resolve these things is very important.

When I realized these leaders would model a new agency along the lines of the Resolution Trust Corporation, all I could think of was Charles Keating, the Savings & Loan bailout, and the response by progressives to that bailout, and I shuddered. What should we do?

Keating—head of the Lincoln Savings & Loan, which in the words of Frank Rich in today’s New York Times, “went belly up because of risky, unregulated investments”—became the poster boy of the S & L bailout of the 1980s. He started his public career in the late 1950s, founding the Cincinnati anti-pornography organization Citizens for Decent Literature. A greedy man, he was determined to make his mark in the banking business. As the head of Lincoln Savings of Irvine, Calif., he made millions through nepotism, buying politicians, and speculating with bank deposits.

Keating took advantage of the federal government’s rush to deregulate banks. It eased federal restrictions on the S&Ls, corrupting the federal rules originally created to provide homeownership to families with modest means.

Congress changed the rules by lifting the lid on interest rates. This gave S&Ls, whose deposits were insured up to $100,000, a green light to engage in real-estate speculation. Soon we had bankers, exemplified by Keating, leading the country into a massive abuse and misuse of deposits for quick profits.

These risky investments might go belly-up, but the S&L executives knew that, should their companies fail, their depositors would be protected by federal insurance. The S&Ls executives, paid themselves excessive salaries, and engaged in high-stakes investments—from shopping malls to golf courses to luxury condo projects. And all, they thought, without any risk to depositors—a shell game protected by federal insurance.

Because both the Democrats and Republicans in Congress had close ties with the S&Ls—including campaign contributions from S&L executives—neither party was interested making the corruption scandal a public issue. But by 1989, the magnitude of the financial crisis—the large number of S&Ls threatened with bankruptcy—couldnt be hidden. Leaders in Congress and President George H.W. Bush abruptly announced that the taxpayers must bail out a broke industry.

Because of Keating, more than 21,000 mostly elderly investors lost their life savings, in total about $285 million. His attempts to escape regulatory sanctions led to the Keating Five political scandal, in which five U.S. senators, including Republican John McCain of Arizona, were implicated in an influence-peddling scheme to assist Keating. Great law firms, accounting firms, and investment bankers were also implicated in the scandal.

The bankruptcies, foreclosures, and massive investment losses by the S&Ls and the price taxpayers paid would soon become, as William Greider put it, a grotesque case study of how representative democracy has been deformed.

To solve the crisis, Congress created the Resolution Trust Corporation. It would be responsible for closing or reorganizing more than 700 institutions holding assets of nearly $400 billion by seizing the assets of the nearly bankrupt savings and loans and then reselling them to recoup the taxpayers cost.

At the time, it looked like an issue made to order for a populist progressive movement for reform. No single issue aroused general public anger and promised to unite people across class and race lines as much as this debacle. It had all the ingredients for an effective grass-roots campaign: big business bullies, corrupt politicians, aggrieved and outraged citizens.

People at the grass roots tried to force the RTC to act in the public interest. A small research group, the Financial Democracy Campaign (FDC), headed by Tom Schlesinger, rallied groups like ACORN and others into a large coalition, staged dramatic demonstrations in dozens of cities, and testified intelligently at congressional hearings. The coalition proposed new taxes on the wealthy and financial institutions to help pay for the bailout. It also advocated requiring the mammoth RTC to sell off some of the S&L assets for affordable housing, instead of the highest bidder, and amending the bail-out legislation to require S&Ls to focus more on affordable housing.

The FDCs closest allies in Congress were two liberal Democrats—Representative Henry Gonzalez of Texas, chair of the House Banking Committee and Representative Joseph Kennedy 2d of Massachusetts, son of the late Robert Kennedy, also a member of the Banking Committee. Kennedy—whose Boston constituents included a number of activist groups working on fair banking issues, including ACORN—introduced legislation to revamp the S&L bailout plan that called for a surtax on the rich and the elimination of a loophole that allowed capital gains at death to go untaxed. Together those provisions would have raised money to avoid the astronomical costs of borrowing hundreds of billions over a 30-year period. The coalition lined up support from several hundred diverse citizen groups and local officials like Ray Flynn, the mayor of Boston, the Rev. Jesse Jackson, and consumer advocate Ralph Nader to promote the sweeping reform agenda.

The coalition also lobbied for a provision in the federal bailout law to require that some of the houses sold by the RTC be targeted for low- and moderate-income housing. It was one way for the Financial Democracy Project, ACORN, and others to gain some social good from an economic disaster.

The 1990 ACORN convention in Chicago provided an opportunity for several members angry at the S&L crisis to make some noise. They went out and squatted in three RTC-owned houses, trying to force the RTC to sell the foreclosed properties to ACORN.

Yet, despite a year-long campaign, the grass-roots coalition was able to win only a minor, but useful amendment that promised tens of thousands of empty houses that the government took over as a result of the massive bank defaults be made available to low-income families and community housing organizations on a preferential basis. The major reforms advocated by grass-roots groups were ignored, exposing the weaknesses of our democratic institutions.

RTC sold ACORN some 500 homes for low- and moderate-income people that would otherwise have been auctioned off to wealthy bidders and sold for at high prices. What ACORN won in this campaign was emblematic of the kind of power ACORN and its allies wielded in America at the beginning of the last decade of the twentieth century, compared to that of large financial interests.

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John Atlas is President of the Montclair, NJ based National Housing Institute and contributing editor of Shelterforce magazine. He is the author of the forthcoming book SEEDS OF CHANGE.The Story of Acorn, America's Most Controversial Anti-Poverty (more...)
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