Bill Seidman: The Enforcer

According to Bill Seidman, the federal janitor hired to mop up the 1980s SL scandal, the Enron debacle will ultimately benefit the marketplace. Here, the author of “Full Faith and Credit” draws parallels, points fingers, and offers advice for enforcers to come.

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.”

While he is critical of the “free-market zealots” in the Reagan administration who defanged S&L overseers, Seidman is intensely ambivalent over instituting the kind of reforms that will rein in future Enrons. On the one hand, he insists that the Enron scandal will ultimately benefit the marketplace. “A free market only works with a lot of government supervision, and Enron will ensure that government oversight of the energy industry will improve markedly. Supervision will get better. We’ll have greater transparency. The information that investors get will improve.”

Then again, his hard-won experience with the S&Ls has pushed Seidman to conclude that politicians and regulators tend to overreact. “The biggest challenge to those who would reform the energy-trading industry is to set up a structure that will let the free market work. My greatest fear is, they’ll get it so heavily regulated that it won’t operate as a free market.”

Show Me the Money

The most striking similarity between the S&Ls and Enron, says Seidman, starts with the huge campaign contributions that were made to both political parties. In Seidman’s experience, Charles Keating was the most adept at paying for access to political power. At least Keating, unlike former Enron chairman Kenneth Lay, was forthright about it. When asked whether his large contributions assured him influence over politicians, Keating famously replied, “I certainly hope so.”


Five senators — four Democrats and one Republican — received large sums from Keating. They were later branded the Keating Five. In Full Faith and Credit, Seidman recalls a meeting between the five senators and Ed Gray, the Federal Home Loan Bank board chairman, concerning recommendations from Gray’s examiners that Keating’s S&L should be closed down. It was highly unusual for five senators to meet with a regulator over one specific case, with no staff present.

Seidman was amazed that five such “astute politicians” failed to realize how the meeting would be replayed in public, as it eventually was. A decade later, he was equally surprised when Enron started contributing heavily to scores of politicians and no one raised a red flag. “When you see the CEO of a major corporation spending most of his time spreading money around Washington, it’s time to get worried.”

Seidman was struck by another parallel between the S&Ls and Enron: the contract professionals — lawyers, accountants, appraisers, business consultants — who lost their impartiality and failed to do their jobs. One particularly egregious example from the S&Ls: Minutes after the accounting firm Arthur Young & Co. gave Keating’s S&L a clean bill of health, its lead auditor resigned from the firm and joined Keating at four times his former salary. That audit eventually cost Arthur Young a $400 million settlement with the federal government.

Which brings us full circle to the Enron scandal. “Enron is still an unfolding story,” says Seidman, “but it’s already clear that people used the system in a way that might have technically complied with the law but still violated the spirit of the law. Andersen went along with it and gave Enron’s activities a prima facie legality. But clearly, it was wrong.”

Enforcer to the Rescue

As head of the RTC, Seidman shotgunned an organization that included 8,000 employees and thousands of independent contractors. The RTC employed more than 1,500 people in its legal division, which prosecuted more than 150,000 lawsuits. It hired more than a thousand outside law firms; its legal bill alone approached more than $1 billion a year. The RTC eventually sold off billions in assets from failed banks and S&Ls, forcing one of the greatest transfers of wealth in U.S. history.

There’s no RTC in the Enron scandal — no single organization that will ride into town and root out the bad guys. The federal government was the single biggest loser in the S&L debacle; it was up to the government (through the RTC) to clean up the mess. But with Enron, the largest corporate bankruptcy in U.S. history, there are many, many losers — all of whom will fight in the bankruptcy courts over Enron’s carcass.


“Enron has more collectible defendants that any scandal we’ve ever seen,” says Seidman. “We’ve got Enron’s directors, its insurers, Andersen, major investment banks — this thing stretches out over the entire world. Everywhere you look you find deep pockets, and it’s all going to end up at the plaintiff’s bar and in the bankruptcy courts.”

Seidman was a reluctant enforcer. He says he never sought the FDIC or the RTC chairmanships — jobs that made him many enemies. Chief among them was John Sununu, the former New Hampshire governor who headed up the first President Bush’s staff. Seidman says he “got crossways” with Sununu soon after the 1988 election. One day, Sununu walked into a White House staff meeting and floated a proposal for curing the banking crisis: Charge bank and S&L depositors a fee when they opened a savings account. The proceeds would be used to pay for deposit insurance losses.

“The Washington Post asked me about it,” recalls Seidman. “I remarked brightly that we used to get a toaster when we opened up an account, but now we’ll get a tax. I guess we should call it ‘the toaster tax.’ The idea was literally laughed out of town. That infuriated Sununu.”

Seidman’s glib remark reverberated throughout the remainder of his tenure as chairman of the FDIC and the RTC. Sununu pressured Seidman to resign, but Seidman resisted. “I said I wouldn’t go. The president would have to fire me for cause.” When Sununu himself was forced to resign (his exceptionally abrasive manner led to his demise), someone remarked to Seidman, “Poor John was his own worst enemy.” Seidman’s reply: “Not while I’m alive.”

Recalling his battles with Sununu and others, Seidman says he’s delighted that he doesn’t have a starring role in S&L Part II. Which begs the question, Who will seize the enforcer’s mantle and hold Enron — and future Enrons — accountable?

Bill Breen ( is a Fast Company senior editor.