Savings And Loan Debacle, Financial Crime, And State

By Author: Sherry Roberts
Total Articles: 81
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The savings and loan crisis of 1980 was the worst financial disaster of the 20th century. In 1980, US did experience the most serious banking crisis since 1930 (Pontell et al. 1997). The crisis did affect commercial banks, savings and loan associations, and the savings banks. The cost of the crisis to the US taxpayers over 30 years was more than $500 billion that included interest payments on the government bonds sold to finance the bailout of the industry. The estimate of the percentage of losses because of criminal wrongdoing ranged from 10% to 44%. During the crisis, there were numerous accounts of crime and most expensive insider or control frauds brought to light in the media accounts, academic research, and also government hearings. Pontell et al. (1997) indicates that there was three major white-collar crime that contributed to the savings and loan crisis. The crimes include collective embezzlement, unlawful risk-taking, and covering-up. The unlawful risk taking involved what people consider as gambling for resurrection whereby the thrift owners did struggle to turn their institutions around by making them profitable. ...
... During unlawful risk taking, the owners did break the law when doing so.
Covering-up, which is a category of thrift fraud, also involved the attempts of hiding both the thrift’s insolvency from regulators and fraudulent transactions led to the insolvency. Charles Keating was the king of covering-up where examiners discovered thousands of forged documents. Keating even flew his employees from Phoenix to Irvine so as to doctor more than a thousand pages of board meeting minutes extending over a 2-year period. Employees did forge signatures, fabricated information, and also shredded the original documents. The collective embezzlement or looting did involve siphoning off of funds for the personal gain. Collective embezzlement is the most costly category of thrift crime the perpetrators of collective embezzlement are those in charge of the organization (Snider & Pearce 1995). It involved a crime by an organization against an organization and in this case made possible by government insured deposits, tax regulations, and also transactions that involved other people’s money.
The structure of the thrift industry offers a particular opportune environment for collective embezzlement. The thrift managers did not need to produce anything in exchange for cash flow of their customers. Because of insuring deposits, it contributed to increased chances for embezzlement through raising the interest paid on the deposits.
According to Pontell et al. (1997) hot deals and looting had a large contribution to the crisis. The hot deals did provide the cash flow from which to siphon off funds and also the transactional medium in which to disguise it Pontell et al. (1997). The transactions involved in the hot deals included land flips, linked financing, nominee loans, and reciprocal lending. The land flips involved selling the property back and forth among two or more partners; thus, inflating the price every time and refinancing the property with every sale until the value increased. The thrift insiders were the collaborators in the flip, and they were sometimes business associated with the corrupt borrowers. Te officers in the nearby Empire Savings and Loan did finance the land flips so as to raise the value of the land and also provide the rationale for making the condo development loans. The nominee lending used a straw borrower in a circumventing loan to one borrower regulations. A costly nominee loan partnership involved Duayne Christensen and real estate broker Janet McKinzie in Santa Ana. Christensen considered opening a North American Savings and Loan in 1983. He used the thrift in making loans to his real estate projects and participated in multiple land flips.
The reciprocal lending was a way for circumventing restrictions on the insider borrowing. Rather than making a loan directly to oneself, two or more insiders in different thrifts made loans to each other (Snider & Pearce 1995). Making loans to one another is not illegal; however, making loans contingent on a reciprocal loan is the fraud. The chains did involve multiple participants and unraveling them took investigators far from the original institutions and also exposed the complex conspiratorial quality of thrift fraud (Pontell, 2005). Linked financing did involve depositing money in the thrift with the view that the depositor will receive a loan in return. The loan broker, Mario Renda specialized in setting of the linked financing deals.
 
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