Bill Seidman: The Enforcer

A headline-grabbing scandal. Congressional hearings. Criminal charges on the horizon. It's happening now with Enron, but Bill Seidman has seen this movie before. Seidman played a starring role in one of the biggest scandals to ever hit corporate America: the savings-and-loan disaster of the 1980s and early 1990s.

The dramatic collapse of the country's S&L industry was arguably the largest U.S. economic catastrophe since the Great Depression. More than 800 S&Ls were declared insolvent, at a cost to U.S. taxpayers of nearly a quarter-trillion dollars. The S&L debacle pushed several states into a near depression, including Florida, Massachusetts, and California. The hardest hit was Enron country. In Texas, 9 out of the 10 largest banks failed. Apprises Seidman, who isn't prone to hyperbole: "The savings-and-loan disaster nearly destroyed the U.S. financial system."

A burly, avuncular man who was known in Washington for his blunt talk and rare independent streak, Seidman wore the white hat in the S& L shoot-out -- he played the role of the enforcer. As chairman of the Federal Deposit Insurance Corp. (FDIC) under President Reagan and the elder President George Bush, Seidman was tapped to head up a newly created federal agency called the Resolution Trust Corp. (RTC), which landed the mammoth task of cleaning up the S&L mess.

Arrayed against Seidman and the RTC were the black hats, featuring the notorious Lincoln Savings and Loan operator Charles Keating and the junk-bond king Michael Milken. They were the star villains among a cast of thousands -- cowboy real-estate speculators, greedy bankers, inept directors, and members of organized crime -- who together ran roughshod over two-thirds of the nation's S&Ls.

These days, Seidman roams the country as a chief commentator for CNBC, an assignment that has given him a close-up view of the fallout from Enron. With its long legacy of financial shenanigans and too-cozy relations with Washington lawmakers, the Enron scandal is like a rerun of the S&L debacle, says Seidman. He calls Enron "S&L, Part II."

Except for one critical difference. The S&L scandal was essentially an old-time fraud. Enron is very much a scandal for the 21st century. "If the S&Ls were bank robbers, these Enron guys were high-tech robbers who didn't need a gun," says Seidman. "Their weapon was their deep knowledge of accounting rules, which enabled them to game the system. Enron only went astray when it hedged its trading bets with its own companies. When the hedges went wrong, Enron lacked a third party to absorb the loss. That's when it all blew up in their faces."

Routing the Regulators

At the epicenter of both the Enron and the S&L scandals was a sustained lobbying effort to deregulate the nation's energy and banking industries. "While the S&Ls fought to get free of regulations, Enron campaigned so that no regulation would ever be put in place," says Seidman. "Enron was essentially unregulated and fought very hard to keep it that way, whereas the S&Ls were in a highly regulated industry. But that industry got into trouble when its constituency gained control of the regulators. Eventually, the S&Ls had incredibly ineffectual supervision."

In his book, Full Faith and Credit: The Great S&L Debacle and Other Washington Sagas (Times Books, 1993), Seidman reports that the lobbying arm of the S&Ls, the U.S. League of Savings Institutions, drew up a detailed plan to ensure that every member of Congress had a good friend and campaign contributor among S&L executives. "There was already great enthusiasm in the Reagan Administration to deregulate the S&L industry," writes Seidman. "The attitude of Reagan officials was that all the S&L executives needed was freedom to run their businesses."

The savings-and-loans collapse was caused by a painful convergence of poorly conceived Reagan-era rules that were aimed at deregulating S&Ls and a breathtaking rise in interest rates that approached 20%. S&Ls were allowed to raise CD rates to compete for deposits, but they still had to earn money from the mostly fixed-rate 3% mortgages on their books. That mismatch -- pay a premium for deposits, receive little for loans -- forced many S&Ls to take many bigger risks. At the same time, regulators were ordered to get off the backs of the S&Ls. As a result, not only were investment and accounting rules relaxed, but supervision was as well.

"When interest rates took off, the S&L industry was permitted to move into unfamiliar territory, diversify its investments, and attempt to earn its way out of the dilemma," says Seidman. "Almost 25% of the industry went into anything and everything it could lend money on: Wall Street exotica such as junk bonds, futures, and options -- as well as windmill farms, porno libraries, art collections, antique cars, and much more."