The Loan Rangers : OVERDRAWN;...

By now, the story line of the savings-and-loan debacle is well established: In the late 1970s, thrift institutions found themselves lending at fixed rates but competing for deposits with new money-market mutual funds, which could pay market rates. In keeping with the spirit of the times, the solution was deregulation.

First, savings and loans were permitted to pay market interest rates on their deposits (which increased their costs of money). By the early 1980s, they were also allowed to be far more speculative in their own investments.

Lax regulation then allowed tiny S&Ls; to pay premium rates to attract brokered deposits; by relying on this “hot” money, they could grow into multibillion-dollar creatures almost overnight. To finance the exorbitant interest rates they paid, S&Ls; then pursued ever more speculative investments.

This new environment attracted a new type of swashbuckler to an industry that had been a model of dull probity. In this splendid test of the free-market model, Congress neglected just one detail: Congress failed to repeal federal deposit insurance. On the contrary, they increased it to $100,000. So all of this “free market” speculation was financed with taxpayer-insured dollars.

The expensive end-game of this story has emphasized the political corruption--efforts by the “Keating Five” and others to keep regulators from belatedly cracking down. This deferred the day of reckoning, prolonged the rickety game and upped the cost of the eventual bailout.

There are two strategies for making sense of this saga, which is a broader morality tale of the high-flying 1980s. The first is to examine one epic case, in all its sordid detail. The other is to look at the big picture, as a policy dilemma as well as a story of hubris.

If the first approach is to your taste, you will love Michael A. Robinson’s “Overdrawn: The Collapse of American Savings.” The American Savings referred to is the name of a particular S&L;, but the other meaning is also apt. For the savings system of America collapsed along with the S&L; disaster.

Robinson, who has covered finance for AP, UPI and most recently for The American Banker, concentrates on the spectacular collapse of California’s and the nation’s largest S&L.; Right from his very first sentence, the reader is aware that Robinson is both a diligent reporter and a frustrated novelist: “A hard rain pelted the windshield of his rented subcompact as Ed Gray drove down a slick French highway on a secret mission.”

Robinson is no Tom Wolfe, but fortunately such over-novelized sentences are the exception--and very careful, solid reporting is the rule. The story really does read like a novel, and this is not a bad strategy for making arcane financial details come to life--in the pumping adrenaline of big-time deals and the cops-and-robbers excitement of the Feds trying to keep up with the high rollers.

The basic story here is that in the early 1980s, one of the nation’s most solidly managed S&Ls;, American Savings, was head by an 81-year-old patriarch, Mark Taper, who wanted to cash out and retire. In the indulgent regulatory climate of the time, American was allowed to be purchased by Charles Knapp, a consummate wheeler-dealer whose own S&L; was both smaller and shakier. Regulators held their collective breath, hoping that the strong institution would hold up the weak one. Of course, precisely the reverse happened, and that is what occurred throughout the industry.

As Robinson shows, Knapp ran his parent holding company, Financial Corp. of America, like a gambler, bending or breaking federal rules, hyping his company’s stock, and at one point even contemplating a takeover of American Express.

Robinson also nicely explains the nuances of why it took so long for regulators to stop the game. One nuance was that as long as the game went on, the deposit-insurance fund would not have to pay up, and everyone could keep praying that rising real-estate values would make the system whole. Robinson also gets Ed Gray, the former chief S&L; regulator and self-proclaimed Paul Revere, just about right. Gray comes off as part wheeler-dealer himself, and part genuine hero.

Robinson takes the story through FCA’s first collapse and the belated ouster of Knapp (with a cool $2 million in separation pay), but that is only half the story. Equally scandalous is the aftermath, in which clumsy regulators kept the insolvent institutions on life-supports, at taxpayer expense, while a new generation of doomed high rollers attempted to rebuild. In the end, even junk-bond king Mike Milken--he’s involved, too, in a cameo role--can’t save either FCA, or the entire S&L; culture.

Robinson captures the entire scene nicely. One can fault him for peopling his story with too many minor characters, which makes it occasionally confusing, and for using a third-person-omniscient narrative style, which sometimes strains credulity. He reconstructs long, unsourced, purportedly verbatim conversations that cannot have happened exactly as he recounts them. For the most part, though, his minor lapses into poetic license do not impeach his broader story.

Martin Mayer’s “The Greatest-Ever Bank Robbery” is a more systematic treatment by one of the journalistic masters of the art of making arcane worlds accessible. If, as George Bernard Shaw had it, every profession is a conspiracy against the laity, Mayer is the layman’s Baedecker. Having previously taken on builders, lawyers and commercial bankers, Mayer is ideally suited to illuminate S&Ls.;

Where Robinson tells one story, Mayer tells lots of small stories. The two reach about the same general conclusions. Mayer has found the time to do a great deal of reporting, and to weave together the common elements. “The S&L; crisis,” he writes, “became a scandal of these dimensions mostly because nobody wanted to hear about it--not regulators, academics, congressmen or the White House, not accountants, lawyers, newspaper and magazine editors, or TV producers . . . and not the American public.”

The gathering disaster simply contradicted the prevailing ethic of the roaring ‘80s--liberate the market, and enrich thyself. In this respect, Mayer goes deeper on the interplay of ideology (deregulation), politics (campaign finance) and simple buck-passing. “The government, confronted with a difficult problem, found a false solution that made the problem worse. This false solution then acquired a supporting constituency that remained vigorous and effective for almost five years after everybody with the slightest expertise in the subject knew that terrible things were happening everywhere.”

The false solution was allowing more speculation, more merger of healthy S&Ls; into unhealthy ones, prolonging deregulation and financial hemorrhage. In the end, the Republican administration, still believing in the genius of entrepreneurship, managed to acquire S&L; assets at the peak of the market, and sell them at fire-sale prices back to the private sector--often to the same sleazy, speculative crowd whose casinos had created the damage.

Mayer’s style is almost breezy, and the book is as compelling a read as Robinson’s. Mayer is rather better at explaining the S&L; calamity as a failure of policy and ideology; at walking the reader through the evolving schema of deregulation and the interplay of economics and politics behind the serial decisions that produced the eventual disaster.

He challenges the conventional view that S&Ls; were done in mainly by the climate of inflation and rising interest rates. One key change--allowing S&Ls; to shift from nonprofit mutuals to profit-making companies--virtually invited unscrupulous players to make off with accumulated S&L; reserves. Robinson makes much more sense if you also read Mayer.

A shorter, more schematic but very useful treatment is Michael Waldman’s “Who Robbed America? A Citizen’s Guide to the Savings and Loan Scandal.” Waldman, who works for Ralph Nader, makes up in analytic clarity what his book lacks in length or novelistic color. This “citizen’s guide” is packed with useful explanations of technical terms (as is Mayer’s book), as well as charts, tables and even capsule summaries of relevant laws and voting records. And, of the three, Waldman is clearest about first principles and remedies.

He places the blame squarely on the ideology of deregulation, the greed of S&L; executives and the bribery of Congress. He also is extremely critical of the Resolution Trust Corp., the government’s bailout agency, for playing essentially the same free-market game in a fiduciary industry that inherently demands regulation. Waldman’s reform agenda also is the most explicit, and the most populist: Pay for the bailout through a surtax on the wealthy; halt the fire sale; restore regulation; reclaim S&Ls; as the community-oriented, quasi-public utilities that they once were. And get Congress off the take through campaign-finance reform.

Mayer, for his part, also is critical of the fire-sale phase of the S&L; mop-up. He offers a closely grained critique both of the premises of the current bail-out operation and its actual administration. And, despite his instincts as a modern, sophisticated student of finance, Mayer has a soft spot for the old-fashioned notion that a sheltered thrift industry, dedicated to the financing of local homeownership, is not a bad thing to have around.

Notwithstanding all of the post-mortems on the 1980s--and these three are among the best--the danger is that the big questions will be ignored; that the forest will be missed in the attempt to understand a wilderness of exotic trees.

In 1991, the Bush Administration and Congress will attempt to “reform” the banking industry. Its proposals, intended to help commercial banks recover their dwindling profitability, look uncannily like what Congress offered the S&Ls; a decade ago--more opportunity to pursue inherently speculative investments; less regulation.

In all the hand-wringing over the S&L; affair, we are in danger of losing sight of the most fundamental of fundamentals--that the financial part of the economy exists to serve the real economy, not vice versa. And, as Mayer sagely observes: “One of the lessons of the 1980s is that the linkage between the money system and the real economy is a lot more complicated than we thought.”