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The most effective way to rob a bank is to own one. Mobsters, white collar criminals, and brokers of every kind learned this during the 1980s, when the Savings & Loan industry was largely deregulated with federal insurance against loss of deposits. Upon passage of the bill deregulating the S&L industry, criminals moved in immediately to take advantage of the one regulation left: federal deposit insurance of up to $100,000 per account. Money began to flow from New York investment firms into local thrifts that could pay high interest rates. With hundreds of millions of dollars in deposits being poured into Savings & Loan institutions, thrifts padded their balance sheets with reserves that could be loaned out. No loan was too big, no real estate project too overvalued, no excuse for personal profit at the expense of the business too egregious. But just as with the subprime mortgage industry, no one had an interest in the success or failure of a particular loan. Banks gave mortgages, personal loans, and lines of credit to cronies who would never be able to pay them back, and the amount of money stolen from thrifts threatened the whole industry. Relatively little was ever recovered from the gangsters and criminals who looted the thrifts for over half a decade, as most presidents and recipients of loans had moved the money offshore. Even when government agencies attempted to go after stolen assets, the thieves usually just declared bankruptcy and made off with their fraudulent gains. Upon the inauguration of President George H. W. Bush in 1989, the S&L crisis had to be addressed. Hundreds of thrifts had failed with thousands more at risk of failure, and politicians, businessmen, and regulators were implicated in the covering up of the scandal. The bill that was passed and signed into law was the Financial Institutions Reform, Recovery, and Enforcement Act, which re-regulated much of the S&L industry. But most importantly, and most relevant to the subprime mortgage meltdown, the Act created a huge new bureaucracy to sell the assets of insolvent thrifts. Part of this bureaucracy was the Resolution Trust Corporation (RTC), similar in many aspects to the Troubled Assets Relief Program (TARP), designed to invest taxpayer money in insolvent mortgage securities. The RTC was expected to handle nearly 300,000 properties (many of which had been overvalued to begin with) and $400 billion in failed S&L assets (including loans which were taken out never intending to be paid back). While the RTC took over nearly half a trillion dollars in toxic loans, bad mortgages, junk bonds, unfinished condo and development projects, and undeveloped land, the program became another excuse for the same people who had looted the industry to begin with to launder their money back into these same devalued assets. Criminals who had received huge loans from S&Ls on overvalued properties pocketed the difference, usually with offshore bank accounts that were never confiscated by the government. When the RTC took over the assets of these failed S&Ls, the government wanted to liquidate the assets for whatever it could get. The looters of the thrifts, then, were able to use the dirty money they had obtained by defaulting on S&L loans to purchase insolvent S&L assets. In fact, the Resolution Trust Corporation did not even ask questions about buyers if cash was offered. Thus, as Stephen Pizzo, Mary Fricker, and Paul Muolo conclude in their 1991 book Inside Job: The Looting of America's Saving & Loans, "Clearly, the RTC was offering a way not only to repatriate their offshore money but to parlay it into further gain as they bought government-owned assets at bargain basement prices." The RTC used taxpayer money to clean up failed thrifts and then, instead of prosecuting the people responsible for bankrupting the industry, rewarded them by allowing the criminals to use their stolen money to buy back assets they had helped inflate at depressed prices. Also with the RTC throwing hundreds of thousands of properties on the market at once, real estate prices could not help but drop, making the deals even better. And now, with the TARP beginning to ramp up its activities, the government will be doing essentially the same thing: using taxpayer money to buy inflated securities at higher prices and then sell them later on. Officials state that the government may actually make money from the program, but it is difficult to see how currently troubled assets will be more valuable than future worthless assets as the economy continues to deteriorate. The parallels between the current housing market bust and the Savings & Loan crisis of the late 1980s are almost too numerous to count: small lending institutions flooded with federally-insured Wall Street money, rampant overvaluations and looting, a Bush in the White House, and the government finally taking over the failed assets of a bankrupted industry.
Nick writes articles to provide foreclosure advice to homeowners. Visit his site to more about how to avoid a sheriff sale and more: www.yousaveforeclosure.com
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