In “Lessons Not Learned” Mr. Nocera says the S.&L. crisis could have helped us avoid the financial crisis. File this under “No shit, Sherlock.” He also managed to write the history without the name “McCain,” one of the Keating 5. Ms. Collins looks at “Gift Horses Gone Wild” and has a question: Who’s been following the trial of Bob McDonnell in Virginia and knows what FLOVA means? Here’s Mr. Nocera:
The death of Fernand St Germain last week, at the age of 86, got me thinking about the financial calamity that he was long associated with: the savings and loan crisis of the late 1980s. There are things it could have — and should have — taught us as we spiraled toward the financial crisis less than two decades later.
“Freddie” St Germain was the sort of congressman you don’t see much anymore: the lovable rogue, a backslapping, deal-making legislator who saw nothing particularly wrong with taking advantage of his position to feather his own nest. As The Times pointed out in its obituary, he liked to joke that he didn’t put a period after “St” because he was hardly a saint. Entering Congress in 1961, when he was 32 years old, he steadily climbed the seniority ladder until he was the chairman of the House Committee on Banking, Finance and Urban Affairs in 1981.
It was a terrible time for the nation’s 4,600 or so S.&L.’s. Inflation was raging, and interest rates spiked as high as 21.5 percent. But the interest rate that S.&L.’s could offer their depositors was fixed at 5.25 percent, an amount established by government regulation. As consumers realized that the value of their deposits was being eroded by inflation, they began to move their money to a newfangled financial device being offered by mutual fund companies: the money market fund, which paid competitive rates of interest.
It was Congress’s view — and it was certainly St Germain’s view — that the S.&L. industry was vital to the American dream of homeownership. Indeed, back then, the only loans the industry was allowed to make were mortgages. Thus, in 1982, Congress passed the Garn-St Germain Depository Institutions Act — which St Germain wrote with Edwin “Jake” Garn, the Republican senator from Utah — which essentially deregulated the industry, allowing S.&L.’s not only to pay market interest rates, but to make loans far afield from home mortgages.
The idea was that S.&L.’s needed to be able to make more profitable loans since they were going to be paying much higher interest rates to gain deposits. What nobody seemed to realize was that financial deregulation was bound to have unintended consequences. S.&L.’s went from being the most cautious of financial institutions to the most heedless. S.&L. operators dove into all kinds of exotic areas. By the late 1980s, it had all come a cropper; ultimately more than 1,000 S.&L.’s — one out of every three still operating in 1988 — went under. The industry’s collapse cost the taxpayers nearly $125 billion.
In some ways, the legislators who deregulated the S.&L. industry felt that they had no choice — if they didn’t act, the S.&L.’s would have been in terrible trouble, just of a different kind. Seventeen years later, when Congress repealed the Glass-Steagall Act — thus deregulating the entire financial services industry — it didn’t have that excuse. The drive to abolish Glass-Steagall was ideologically inspired, the core belief being that the market would keep the industry honest. But the S.&L. crisis had proved that wasn’t true.
Rather, bankers were only too happy to privatize profits and socialize losses. During the S.&L. crisis, bankers fueled an unsustainable commercial real estate bubble, sold bonds to customers that turned out to be worthless, and, generally, used shoddy business practices to enrich themselves. In the years leading up to the 2008 financial crisis, bankers handed out mortgages to millions of people who lacked the ability to repay them, and then bundled those mortgages into toxic subprime mortgage bonds. It was just a variation on a theme.
There is another lesson from the S.&L. crisis. In its aftermath, there were somewhere around 1,100 prosecutions, the most famous of which was that of Charles Keating, the chairman of the Lincoln Savings and Loan Association, an institution that cost the government $3.4 billion when it collapsed. A few years ago, I asked someone who had been involved in prosecuting S.&L. operators why the government had been so intent on putting them in prison. “Because the country demanded it,” he said.
In the wake of the financial crisis, the Department of Justice also set up a task force to root out the wrongdoing that led to the financial crisis. But it has mostly been a joke. The prosecutions have been mostly small-time stuff: homeowners who lied on liar loans, for instance. Meanwhile, not one single employee of Countrywide Financial has been prosecuted, even though Countrywide loans were at the very heart of the financial crisis.
Earlier this week, Bank of America agreed to pay $16.65 billion to settle a handful of government investigations. Bank of America, of course, bought Countrywide in 2008, and the huge sum it was paying was the government’s way of showing that it was tough on financial crime after all.
But it’s not the same as prosecuting those responsible. After all, the country is still demanding it.
Now here’s Ms. Collins:
It’s a tribute to the level of terrible news we’ve been inundated with this summer that the corruption trial of ex-Virginia Gov. Bob McDonnell may qualify as a feel-good story. Unless, of course, you are McDonnell.
The former governor and his wife, Maureen, took about $177,000 in gifts and loans from Jonnie Williams, the maker of Anatabloc, a dietary supplement that was recently withdrawn from the market under pressure from a deeply unenthusiastic Food and Drug Administration. But back at the time of the gift-giving, Williams, who touts Anatabloc as the best thing since penicillin, was hoping the McDonnells would help him promote it. (We are already feeling cheery, realizing that this is not going to be the sort of alleged misdeed that requires us to say: “There but for the grace of God …”)
McDonnell used to be regarded as a Republican rising star, and Mitt Romney invited the then-governor and his wife on a campaign bus ride during veep-hunting season. We learned during the trial that while they were driving around, Maureen McDonnell tried to convince Ann Romney that Anatabloc would be good for her multiple sclerosis.
Romney picked Paul Ryan. We do not know if there was any connection.
The McDonnells, who hosted a launch party for Anatabloc in the governor’s mansion, most definitely took a pile of presents from Williams. However, it turns out that’s totally legal in Virginia. As long as an elected official reports gifts and there’s no quid pro quo, he can accept a bar of gold from a lobbyist every day. Virginians have always believed that their political culture was too upright to require ethics laws. Because, you know, George Washington and Thomas Jefferson.
When it comes to lessons learned from the McDonnell debacle, No. 1 is: Do not work under the assumption that your officials will do the right thing because you live in a very honest state. This is probably not a problem you need to worry about if you are in, say, New York or Illinois.
Bob McDonnell has told the jury a lot about his firmness in rejecting some of the goodies that Maureen wanted — like a designer dress for the inaugural. However, he seems to have been far less resolute when Jonnie Williams was doling out things he liked: a luxury vacation, or the use of a private jet. McDonnell told his sons to give back expensive golf clubs (the sons ignored him), but then he accepted a custom golf bag for himself.
The defense is taking the interesting line that Williams could not have gotten any direct benefit from his largess because the McDonnell marriage was too much of a mess for the couple to deliver. They never talked. Maureen was a harridan who ranted at her staff. Plus, she had a crush on Jonnie Williams, to whom she texted after an earthquake: “I just felt the earth move and I wasn’t having sex!!!!”
Bob McDonnell, who turned down a prosecution offer to let him save his wife from trial by pleading guilty to one felony count, has moved out of the family house and is bunking in the rectory with his parish priest. He offered up an email he had sent Maureen describing his “great heartache” over their discord, although he did praise her for doing well on the “FLOVA job.”
FLOVA means First Lady of Virginia. It’s a take on FLOTUS, which is a term for Michelle Obama. It made me wonder if other states do that. Is the wife of the governor of Ohio FLOOH? New York’s would be FLONY, except, of course, we don’t have one since our governor is divorced and living with a celebrity cookbook writer.
Which seems, in this context, like a real selling point for Andrew Cuomo. Another lesson from the trial is that you should never vote for somebody because his family looks nice. When McDonnell ran for governor his campaign aired ads showing the candidate in front of his home, high-fiving the kids and hugging his wife. Now, Virginians could point out the sons who took the golf clubs, the daughter who got $15,000 for her wedding catering, and, of course, the wife who spent way, way more time on the phone with the diet supplement salesman than with her husband.
Both spouses agree that Bob McDonnell was almost never around. This was due, the governor said, both to the demands of his job and the fact that he was committed to raising $55 million for the Republican Governors Association.
I think I speak for many of us when I say that it would be one thing to have your husband absent for days on end because the state was in a budget crisis, and another to have him ditch you because he had to collect donations for the Republican governors.
Maybe our final lesson is: Do not marry a politician.
Or never consort with Republicans…