S&L Crisis: A Deep Dive into Alleged Control Fraud

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S&L Crisis A Deep Dive into Alleged Control Fraud​

The S&L crisis cost taxpayers $124-132 billion dollars, or ~$500 billion in 1990 dollars. This is a potential case of rigged economy theft, where crony capitalists, sometimes with the help of corrupt officials, unethically profit off of us, the American public. We simply wish to present you with the best information, so you can come to your own conclusions and, perhaps, help educate the public with your own findings. 

In the first part (The Savings and Loan Crisis:) of our exploration of the S&L crisis, we provided an overview of what led to what was, at the time, the biggest financial crisis since the Great Depression. In this article, the Zero Theft Movement will be delving deeper into the alleged schemes of fraud and corruption that economist William K. Black details in his book The Best Way to Rob a Bank is to Own One.  

The Best Way to Rob a Bank is to Own One

William K. Black is a former bank regulator and developed the concept of ‘control fraud’—when a business or national executive (ab)uses the entity they control as a ‘weapon’ to commit fraud. 

Black’s book goes in-depth to unearth and explain the alleged underhanded dealings that not only caused but also exacerbated the S&L crisis. Much of the evidence presented in this article comes directly from Black’s research.

Creating ‘Blow-up’ Commercial Loans


  • Does Black’s book claim that S&L institutions created ‘blow-up’ commercial loans? 
  • Were asset appraisal firms (ab)used to fix valuations and unethically profit? 
  • Did independent auditors end up being the victims of false and misleading information from thrifts?

Blow-up commercial loans refer to loans that have an abnormally high ratio due to unethical reasons and do not get paid back. In an ethical economy, assets (in this case, property) should be sold to cover most or nearly all of the losses. 

The main reasons why commercial real estate would be preferred over residential are (1) that the appraisal fee is larger and (2) is greater in absolute size for more expensive than for less expensive properties. S&L loans were insured by the FSLIC—meaning, if the institution could not pay back a loan (i.e. reached insolvency), the federal government (i.e. the taxpayer) would have to foot much of the bill. Thus, the bigger the insured losses, the more money there was to be unethically made.

The question is: did crony capitalists profit unethically by manufacturing big losses when assets were sold far below their loan values?  

High-reward, seemingly high-risk investments

“The most common fraud mechanism was to have Hermann K. Beebe fund the purchase of an S&L. Beebe was a control fraud, a convicted felon running a Louisiana insurance company. He was an associate of the New Orleans mob. Beebe helped scores of control frauds acquire S&Ls and banks in the Southwest. Beebe would loan the money to buy the S&L. The buyer would, in turn, cause his S&L to make far larger loans to Beebe’s straws. The straws, of course, would not repay the loans. Beebe won, the S&L owner won, and the taxpayers lost.” 

From pg.38 of The Best Way to Rob a Bank is to Own One

The Zero Theft Movement unites citizens in fight against the rigged layer of the economy. See how much crony capitalists and corrupt officials are ripping off from us, according to the public.

Asset appraiser collusion

“The S&L loan officer calls the appraiser and asks him for a favor. The loan officer has to make a recommendation on a proposed $60 million loan in two weeks. Could the appraiser please give him a preliminary, oral estimate of value as soon as possible, before completing the written appraisal report? (Note that the loan officer has communicated the size of the loan to the appraiser). The S&L can’t make the loan without violating Bank Board rules if the appraiser does not come back with a value of at least $60 million. The appraiser calls with a preliminary estimate of value. If it is at least $60 million, the loan officer tells him to finalize the written appraisal, pays his full fee, and uses him in the future. If he comes back under $60 million, the loan officer thanks him effusively, says that there is no need to complete the written appraisal given the inadequate value of the property, pays a reduced fee, and the S&L never uses the appraiser again. Functionally paying an appraiser a fee to value property (that is, say, really worth $35 million at over $60 million) is equivalent to a bribe. But it is a ‘perfect crime,’ impossible to prosecute. Control frauds know that they only need a tiny group of appraisers to inflate property values; there is no need to suborn the entire profession. The thing that most people don’t understand is that this whole process can (and typically was) done in a way that a transcript of the conversation could appear on the front page of the local newspaper without embarrassing the appraiser or the loan officer. Shopping for an accommodating auditor involves a similar process. The dynamics differ because control frauds virtually always use top-tier audit firms, whereas appraisers are often sole proprietors.”

From pg.39 The Best Way to Rob a Bank is to Own One

FHLBB’s Assessment

“…the FHLBB [Federal Home Loan Bank Board] cited fraud and insider abuse as the most pernicious of all factors leading to thrift insolvency. Collusion by management with borrowers and appraisers often concealed losses and liabilities. In certain criminal cases currently in the courts, management is alleged to have falsified delinquent loan and thrift records and misappropriated assets for their own use and benefit. The extent of fraudulent activities was so far-reaching that Congress passed a $65 million increase in the Department of Justice’s budget to investigate and prosecute crimes against thrifts, as well as imposing stiff civil penalties. Rep. Carroll Hubbard (KY) aptly noted that in many cases independent auditors of S&Ls were ‘victims’ because they received false and misleading information from the institutions they audited.” 

From “The S&L Crisis – putting things in perspective” published in the CPA Journal

Congress Involvement in the Savings and Loan Scandal


  • Does Black’s book claim the FHLBB and Congress sold out the American public by not just ignoring the transgressions but helping commit them? 
  • Did leadership in the government know about the consequences beforehand and have opportunities to resolve the problem prior to it becoming disastrous?

“A cover-up works by grossly inflating net worth and net income, but to close an S&L the regulator often needs to show insolvency. This can make it very hard to close control frauds prior to their failing catastrophically (e.g. losses exceeding 30 percent of liabilities).”

From pg.10 of The Best Way to Rob a Bank is to Own One

“The industry lobb[ied] regulators, the administration, and Congress to aid the cover-up by endorsing accounting abuses and minimizing takeovers of insolvents.”

From pg.16 

“[FHLBB Chairman] Pratt never identified and put out of business a control fraud and never identified the wave of control frauds entering the industry. He praised them as entrepreneurs. Pratt disdained traditional S&L CEOs and considered them the problem.”

From pg. 14

“Some critics claim that Pratt expressly encouraged S&Ls to grow out their problems. Pratt was generally careful to avoid going that far. Nevertheless, he gave the industry the ability to grow massively, and he took no action to stop the large number of S&Ls that began to grow rapidly.”

From pg. 47

Changing of the guard


  • Did a management change in the FHLBB mark a shift to actually regulating and cracking down on potentially unethical behavior related to S&Ls?

“Ed Gray emerged as the most unlikely of heroes. President Reagan made him Bank Board chairman because he supported greater deregulation. Within four months, however, Gray began his transformation into the great regulator and became the bane of the S&L control frauds and their allies.”

From XVII (preface) of The Best Way to Rob a Bank is to Own One

“Reagan testified that while Gray warned of the coming crisis, he, Reagan, ignored the warning. Not only did President Reagan never request a briefing from Gray about the debacle, but they never discussed it personally after Reagan appointed Gray.”

From pg. 262

Federal Investigations? 


  • Does Black’s book claim that federal investigations into S&L fraud got stopped? 
  • Why would Congress want to let the control fraud continue?
  • What does the book put forth as the most damaging scheme?

“S&L control frauds consistently showed the ability to deceive uninsured private creditors and shareholders. Elliot Levitas, one of the commissioners appointed to investigate the causes of the debacle as part of the National Commission on Financial Institution Reform, Recovery and Enforcement (NCFIRRE), emphasized this point in 1993, but no economist took him seriously. The current wave of control frauds has proved his point conclusively.”

From XIV (preface) of The Best Way to Rob a Bank is to Own One 

“Bank board virtually never made criminal referrals when it found fraud, and the Justice Department rarely prosecuted. The Bank Board had no formal criminal referral system.”

From pg. 18 

“Congress supported the cover-up because the alternative was to cut popular social programs. The cover-up optimized the industry for control fraud in several ways. The most direct contribution was abusive accounting.”

From pg. 19-20

“The largest accounting abuse came from GAAP’s failure to recognize market-value losses caused by interest rate changes. GAAP did not recognize the $150 billion loss in market value caused by interest rate increases.”

From pg. 39-

The Keating Five


  • Were the Keating Five, five congressmen on the S&L Congressional Subcommittee, accused of contributing to the crisis?

The Keating Five refers to five senators who were, per Wikipedia, “accused of improperly intervening in 1987 on behalf of Charles H. Keating, Jr., Chairman of the Lincoln Savings and Loan Association, which was the target of a regulatory investigation by the Federal Home Loan Bank Board (FHLBB). The FHLBB subsequently backed off taking action against Lincoln.” 

Lincoln Savings and Loan Association collapsed at a cost of $3.4 billion to the federal government (i.e. taxpayers). 

“A letter from audit firm Arthur Young & Co. bolstered Keating’s case that the government investigation was taking a long time. Keating now wanted the five senators to intervene with the FHLBB on his behalf.”

“Keating was hit with a $1.1 billion fraud and racketeering action, filed against him by the regulators. In talking to reporters in April, Keating said, ‘One question among many raised in recent weeks, had to do with whether my financial support in any way influenced several political figures to take up my cause. I want to say in the most forceful way I can: I certainly hope so.”

“In the wake of the Lincoln failure, former FHLBB chair Gray went public all five of the senators’ assistance to Keating in a May 21, 1989, front-page story by John Dougherty in the Dayton Daily News, saying that in the APril 1987 meetings the senators had sought ‘to directly subvert the regulatory process’ to benefit Keating. Press attention to the senators began to pick up, with a July 1989 Los Angeles Times article about Cranston’s role. Within a couple of months, Arizona Republic and Washington Post reporters were investigating McCain’s personal relationships with Keating.”

From the Wikipedia article on the Keating Five

So, is the S&L Crisis Theft? 

With the information presented to you in our two-part exploration, it is now up to you to decide: do you consider the actions leading up to the fallout and the subsequent bailout by taxpayers theft

If you are still undecided, your fellow citizens have investigated the issue and presented their own cases.

Feel like you have a good grasp of the matter? Go and vote on citizen investigations explaining why or why not the alleged actions of S&L institutions and government officials should be viewed as theft. We all have a say, as a proper democracy promotes. Your votes empower the American public because we will have proof to show exactly where economic rigging has occurred and is occurring in our economy.  

Eradicate the Rigged Layer with the Zero Theft Movement 

Crony capitalists and corrupt officials have created a rigged layer of the economy that enables them to unethically profit off of the everyday American. This corruption has led to the 50 years of wage suppression, 50 years of price fixing and anti-competitive markets, and 50 years of legislators and regulators who work to satisfy moneyed interests, not our interests. 

It’s about time we fought for what’s ours. We cannot do it without you. 

View how much is being stolen, according to the public

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The success of our movement rests in your hands, the leaders willing to dedicate time to conduct investigations into potentially rigged areas of the economy. With your valuable work, the movement has no solid ground to stand on, no foundations, no proof, to actually hold those corrupting our system accountable for their actions.

Commitment to nonpartisanship

The rigged layer causes all of us to suffer, regardless of our political allegiances. If we are to eliminate rigged economy theft, we have to set aside our differences and band together against crony capitalists and corrupt officials. 

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Standard Disclaimer

The ZeroTheft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.   

Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.