Financial Implosion: 2nd Chance for Progressive Banking Reform?
Posted by John Atlas on September 21, 2008
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 — couldn’t 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 FDC’s 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.
The big winners were corporations such as General Electric that got to buy 28 apartment complexes with nearly 6,000 units at a price that was half their market value. The major winners in the S&L bailout were the bargain-seeking investor and the commercial banks, whose policy plans led to the disappearance of the S & Ls their major competitor.
As Greider convincingly documented in his 1996 book Who Will Tell the People? The Financial Democracy group and its allies, including the chair of the House Banking Committee, were too weak when compared to the power of corporations and the rich. In the halls of Congress and behind closed doors, special-interest lobbying had fundamentally broken the state of democracy in America. All efforts at major reform in Washington came up against a political system dominated by hidden relationships that linked politicians with the wealthy and corporate power who could subvert the needs of ordinary citizens.
In the end, the S&L cleanup cost American taxpayers an estimated $124 billion. What did we get in return? The solution by Congress and the Bush 41 administration made things even worse. The RTC was staffed with ex-bankers and political hacks, mostly Republicans.
Ironically, the same rich bankers and investors who had benefited from the deregulation that caused the S&L crisis in the first place were taking advantage of the fire sale sponsored by the RTC. Politically connected investors were snapping up foreclosed properties at RTC auctions at bargain-basement prices. The best-selling author, Martin Mayer, correctly titled his book about the S & L crisis, The Greatest-Ever Bank Robbery. Deregulation of banking continued, full steam ahead.
The Financial Democracy coalition’s attempt to steer the S&L bailout in favor of ordinary citizens was largely a failure. Now, however, progressives and liberals once again have an opportunity to help lead us out of the present financial crises.
Since the early 1990s, progressive forces have grown stronger. For example, ACORN’s strength then was mostly local. It successfully engaged mayors, governors, and business with demands generated from local organizing campaigns. ACORN’s size has more than doubled in size in the early 1990s. With more than 1,000 employees, 400,000 dues-paying families, and chapters in 103 cities in 38 states, ACORN has become a formidable vehicle for mobilizing the poor and working class for economic justice and political reform.
ACORN is trying to lead us in the correct direction.
Today ACORN announced that on Tuesday it will picket Federal Reserve Banks and financial institutions in 40 cities to protest the failure of the Bush administration and the Federal Reserve to include lifelines for American Homeowners facing foreclosures in its big bank bailout bill.
“Secretary Paulson’s plan calls for spending a trillion dollars of taxpayer funds to bailout out his former colleagues on Wall Street, but does not devote a single penny to rescue American homeowners who were victimized by the predatory lending of these same institutions,” said Maude Hurd, president of ACORN. “We urge Congress to protect the millions of American homeowners facing foreclosure before they bailout the shareholders of big banks.”
ACORN called on leaders of Congress to include homeowner rescue provisions in any Wall Street bailout, including:
1. Bulk restructuring of mortgages for distressed homeowners. Any financial institution that participates in the federal bailout must be required to extend affordable mortgage restructuring to homeowners facing foreclosure. The modification program recently enacted by the FDIC and the depression-era Home Ownership Loan Corporation should be the models. This provision would apply to any home mortgages, either wholly owned or included in securities owned by the institution. If the Bush administration could change the short selling rules of the financial markets overnight to protect banks from the perceived threat of short sellers, then surely they can change the rules governing failed financial instruments to protect American homeowners from the real threat of foreclosure.
2. Bankruptcy shelter for homeowners. Congress should amend the bankruptcy bill to allow homeowners to restructure their home mortgages in bankruptcy and save their homes.
3. Outlaw remaining predatory lending practices. Cap at 36 percent the interest rate on small loans charged by payday lenders and other predators.
4. Expand unemployment benefits, food stamps, and heating assistance for families in need.
5. Extend the Community Reinvestment Act (CRA) to investment banks and insurance companies. Any financial institution that benefits from the bailout must in return provide public benefit by investing in low- and moderate-income communities under the provisions of the CRA.
For progressives, the CRA extension to mortgage companies, insurance firms, and securities companies should be at the top of the progressive agenda. The CRA is one banking regulatory reform praised by housing experts, state regulatory agencies, and bankers alike. Since the New Deal, federal regulatory agencies, through deposit insurance and access to central bank credit, have ensured that depository banks were safe and profitable. The CRA requires banks to invest in neighborhoods where they take deposits consistent with safe and sound operations.
Dozens of other local and state groups, usually with the support of national networks such as ACORN, the Center for Community Change, National Peoples Action, and the National Community Reinvestment Coalition over the years have helped move $1 trillion in bank lending back into inner cities. Major national lenders have provided philanthropic funding support to pay for homeownership counseling and homebuilding programs, and worked with these groups to provide more affordable mortgage loans. ACORN was able to build on its CRA success and move on to other issues besides lending, addressing problems such as education, crime, voter registration, political campaign finance law, and living wages.
About the author more Â»
John Atlas is president and one of the founders of NHI. Atlas is the author of Seeds of Change: The Story of ACORN, America's Most Controversial Antipoverty Community Organizing Group (Vanderbilt University Press, 2010), a story about one groupâ€™s efforts to reduce inequality. Atlas lives in Montclair, NJ, and is working on an upcoming theatrical documentary funded by the Sundance Institute, Tribeca Film Institute, and PBS.