President George Bush gives a press conference announcing a plan to rescue the Savings & Loan loan industry, February 06, 1989. Photo Credit: Rick Maiman / Contributor

By David Kurlander

On March 27th, President Trump signed a $2 trillion economic stimulus package to offset widespread unemployment and stock market losses related to the coronavirus pandemic. Republicans in Congress secured a $500 billion corporate bailout fund within the bill, to be administered in part by Treasury Secretary Steven Mnuchin. Fears linger that the fund will be used for nepotistic and partisan ends, even after Congress barred Trump-affiliated properties from receiving aid and a team of Inspectors General led by DOJ veteran Glenn Fine formed to investigate fund receipts. Anxiety over the fund’s neutrality is enhanced by the continued controversy over revelations that several Senators sold off significant amounts of stock following COVID-19 briefings in late January.

The George H.W. Bush administration was also ensnared in family drama and alleged Senatorial profiteering surrounding a bailout—the $293.3 billion rescue of Savings & Loan banks, so-called “thrifts” that tended to offer good deals on mortgage loans. Throughout the heady 1980s, S&Ls gave out risky loans, their customers defaulted, and almost 300 of the 3,000 banks became insolvent and collapsed. By decade’s end, Bush was forced to put together a stimulus to pay back depositors. The crisis was long in coming and had a number of overlapping macroeconomic causes, including: higher interest rates related to 1970s inflation, Reagan’s aggressive deregulation, and widespread refusal by the Federal Home Loan Bank Board to single out S&Ls that were in danger of failing. The price tag for the rescue was greater than the three largest prior industry-specific bailouts combined (Lockheed, Penn Central, New York City).  The FDIC offers an oddly compelling book-length explanation of the meltdown available for free on their site. It’s pretty complicated and pretty sad.

In February 1989, just three weeks into his presidency, Bush went on TV to announce FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989). The law proposed closing the remaining insolvent banks (some 800 of them), offered $40 billion to address the carnage already underway, and put up another $33 billion for failures down the line. Taxpayers would foot much of the bill. Bush ended his national address with a populist promise: “I want to just say a word to the small savers of America. Across this great land families and individuals work and save and we hope to encourage even greater rates of savings to promote a brighter future for our children. Your government has stood behind the safety of insured deposits before, it does today, and it will do so at all times in the future.” 

Bush and his allies fought for FIRREA through the end of the Summer. The new president praised the law’s fierceness at otherwise ceremonial Senate luncheons. Federal Reserve Chairman Alan Greenspan defended the package through a March Congressional grilling. And, perhaps most impressively, the administration managed to keep the bill moving amid incredible distractions, from the failed nomination of John Tower as Secretary of Defense, to continued fallout from the Iran-Contra scandal, to seismic events in China and the crumbling Soviet Union. In June, FIRREA passed both the House and the Senate convincingly.

Even as FIRREA moved toward Bush’s desk, regulators grumbled about the entrenchment of S&L lobbyists and bankers within the Washington establishment. Budget Director Dick Darman acknowledged that the long-term economic forecasts included in the law were holdovers from the euphoric Reagan years, while SEC Commissioner Joseph Grundfest eviscerated the U.S. League of Savings Institutions, the powerful industry lobbying arm.

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These concerns burst onto the front pages in the character of a particularly corrupt S&L president, Lincoln Savings and Loans’ Charles Keating. The Arizona-based Keating, a longtime hotelier and homebuilder, had been a political force for four decades, financing anti-pornography initiatives and almost becoming President Reagan’s Ambassador to the Bahamas.

In 1987, Lincoln Savings had come under audit for its increasingly risky investments in junk bonds, all financed by its depositors. Five particularly powerful Senators—the beloved astronaut John Glenn, the war hero John McCain, the idealistic 1984 presidential contender Alan Cranston, the Panama Canal Treaty negotiator Dennis DeConcini, and Senate Banking Committee Chairman and eventual FIRREA co-architect Don Riegle—came to Keating’s aid, hosting meetings with top S&L regulator Ed Gray to encourage a quick end to the investigation. The press covered with some interest the cozy financial relationship between the Senators and Keating, who had contributed a collective $1.4 million to their reelection campaigns over the 12 months preceding the conclusion of the audit. The story receded until Lincoln Savings collapsed in April 1989, leaving a $2.6 billion government cleanup effort in its wake. 

By the time Bush signed FIRREA in early August 1989, the story of the “Keating Five” had become the face of the bailout—would taxpayer money really be spent to fix an institution this corrupt? Keating was called before the House Banking, Finance, and Urban Affairs Committee in November, where a young Chuck Schumer passionately called him “a financial Blackbeard” and said, “Every time he had an opportunity to pervert or destroy our regulatory system, he took it. I hope he is brought to justice.” A panel of Keating’s devastated investors sat nearby. Keating would eventually spend ten years in prison on 17 counts of racketeering, fraud, and conspiracy. The five Senators vigorously defended themselves through a Senate Ethics Investigation during most of 1990, avoiding formal charges. Only Glenn and McCain ran for re-election.

The unintended political consequences of the bailout reached Bush’s family in May 1990. The president’s son, Neil Bush, had served on the Board of Directors of a failed Denver-based thrift, Silverado Savings & Loan, that had improperly hidden its defaulted loans in various real-estate quid pro quos and “loan pools,” costing taxpayers another $1 billion. Bush, only 30 and without banking experience when elected to the Board in 1985, was brought before the same committee as Keating, where he was dramatically excoriated by a fellow dynastic son, Joseph P. Kennedy II. While never criminally charged, Neil Bush had to pay $50,000 to the FDIC and acknowledge his conflicts of interest in continuing to profit from the failing bank. The controversy surrounding Neil devastated the President. Bush biographer Jon Meacham wrote in his magisterial Destiny and Power that Bush “blamed himself for the pain the allegations must have been causing his son.” In one diary entry Meacham tracked down, the president even considered abandoning running for a second term to spare more pain: “[I’m]…worried about Neil…wondering in my heart of hearts, given what’s happened to Neil, whether I really want to do this after I serve this term.”

The controversies sparked by the S&L crisis eventually passed. Bush did, of course, run (albeit unsuccessfully) for reelection in 1992. John McCain ran for president twice and enhanced his reputation for independence and bipartisanship. And the economy boomed through the 1990s.

Still, history tells us that we should steel ourselves for a collective loss of innocence—and a fair deal of scandal—as we wade through the current stimulus package and the broader economic disclosures of this devastating pandemic.

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