Is the mortgage crisis act 2 of the 80's S&L scandal?

[starroute]

The S&L scandal has come up recently as a possible precedent for a government bailout -- but I got to wondering if there might be a closer relationship. So I googled around a bit and came up with a long but interesting 1998 article on the S&L scandal. After explaining that the S&L industry was originally created during the New Deal to provide affordable mortgages to homebuyers, fell under strain during the financial dislocations of the late 70's and early 80's, and was then subverted by Reagan administration deregulation, the article gets into the case of Silverado Bank as its prime example of everything that went wrong:

http://findarticles.com/p/articles/mi_m0254/is_4_57/ai_53449306/pg_8

Silverado banking, savings and loan association (hereafter referred to as Silverado Bank) began in 1956 as Mile High Savings and Loan Association, a bank chartered by the State of Colorado. It was a typically unnoteworthy savings and loan, solid but unimpressive in its growth as a home mortgage lender until the mid-1980s, when it became Silverado Bank and began showing explosive growth in assets and investments. Yet, only two years after posting significant growth, Silverado collapsed, and by the end of 1988 Federal regulators closed the bank. How did such an impressive success story turn so quickly into a disaster? ...

Colorado's economy was booming, primarily due to the oil industry, and real estate development projects grew rapidly. Deregulation now allowed S&L institutions like Silverado to enter real estate speculation and commercial development projects that were previously inaccessible to them. ... Coupled with Silverado's aggressive venture into real estate development projects was Silverado's foray into a new and complex investment tool: residual interests in real estate mortgage investment conduits (REMICs). REMICs are pooled mortgages that are sold to investors. The pool contains a hierarchy of tranches, with each tranch containing its own risk level and relative yield: high-risk tranches offered high yields. Silverado invested in the "residual" tranches - those that remained when all other tranches had been sold. These residual tranches were the highest-risk tranches in the pool, offering the highest return on investment - often as high as 18 percent return when Silverado purchased them. Like junk bonds, these high-risk tranches offered an attractive potential to earn vast amounts of money to help close the gap between high interest deposit payouts and low interest mortgage receipts. But, like junk bonds, the risk was great for a huge loss. ...

In addition to the questionable practice of pooling loans, Silverado Bank approved several loans that raised questions of conflicts of interest, particularly between board member Neil Bush and two borrowers who also happened to be his business partners ... Federal regulators rejected Bush's characterization, citing his relationship with Good and Walters as a conflict of interest. But they imposed the mildest possible penalty against Bush in what amounted to a "cease and desist" order that he not engage in such activities in the future ... Bush refused to agree to the order, threatening a long, expensive, and protracted set of law suits (U.S. Congress: House, 1990b, p. 5). The U.S. government backed away from the threatened struggle, and instead imposed the mildest of sanctions against the son of the President of the United States.

[havocmom]

1. . (mark for later)

[NYC]

2. Thank you for posting this.

I'll be back later to read the link in its entirety.

Silverado = Neil Bush.

Try to get people to recommend this thread. I have to go out now.

http://www.allbusiness.com/personal-finance/real-estate-mortgage-loans/282011-1.html

...Silverado was further exploited by the presence of Neil Bush, the president's youngest son. As a member of the board of directors, the 29-year-old Bush gave Silverado first-family connections and social prestige. In the end, the Bush name attracted national headlines and congressional investigations, and, as a result, Silverado became synonymous with the entire S&L fiasco.

Watching it all unfold was Denver Post reporter Steven Wilmsen, who was nominated for a Pulitzer Prize for his investigative reports on the high-flying S&L. His story, based on extensive research involving legal depositions, congressional testimony and regulatory records, documents the malfeasance that ultimately shut the institution down.

This short and entertaining book depicts a brash breed of wheeler-dealers with a penchant for "go-go banking." The setting is in the wild west of Denver - then an oil boom town. If there ever was a perfect setting for a television series, this was it - as Wilmsen notably points out. "Dynasty," it seems now, was what these financial executives wished to recreate for themselves.

Encouraged by the bravado of Silverado CEO Michael Wise, real estate tycoon Bill Walters, dubbed "the Donald Trump of Denver," and mega-developer Ken Good pumped boatloads of capital into Silverado in a complex web of real-estate-for-loan swaps that would confuse even Rubik.

[flashl]

3. K&R n/t

[AngryAmish]

4. I didn't read the article but I think Reagan era tax law changes screwed the SNLs

People were buying real estate partnerships for the tax loss - lots of office buildings in the suburbs. Anyway, the tax dodge went away, the reason to own the real estate went away, the vbalue of the real estate declined, SNLs holding the bag...BOOM. At least this is how I remember it from the time.

[mopinko]

7. pretty much what they wanted you to think.

c'mon. there were bushes involved. and henry hyde. you think they would have tanked their buddies? c'mon. you aren't cynical enough yet.

[lonestarnot]

5. Steal kill, steal kill, steal kill and then lie. Repiglicons have the act down.

[bleever]

6. "...imposed the mildest of sanctions against the son of the President of the United States."

A mere "cease and desist", while the common folk took the losses and absorbed the cost.

[earth mom]

8. Same sh*t, different day.

:puke:

[jazzjunkysue]

9. Nope. Part II was the airline bailout. Part three was the insurance bailout.

This would be part 4, but I loose count....