UNIT 1:VENTURES AND FISCAL PRUDENCE

Date: 2015-10-07; view: 427.

Text 1. S&L failure

The town of Vernon, Texas (population 12,500) is located on the northern edge of the state, about fifteen miles south of the Oklahoma border. Like other towns its size in rural America, it had a savings and loan association. But the Vernon S&L was different from the usual small-town firm. It owned a fleet of three airplanes; three automobile dealerships in La Jolla, California (one that sold Rolls-Royces, one that sold Ferraris, and one that sold "classic cars"); a $1.8 million beach house in Del Mar, California; and a subsidiary in Switzerland. The Vernon S&L had acquired all that in the six years after it was purchased by Don R. Dixon, a Dallas real estate developer in 1982. One wonders what else he would have bought with other people's money if federal bank regulators had not ousted him in 1987 and seized the S&L a few months later, with 96 percent of its loans in default. Although the S&L had no money to pay back its depositors, virtually no investors lost money because their deposits were federally insured. However, the bill to taxpayers for the Vernon S&L's losses was estimated at $1.3 billion dollars. At the end of 1990, Don R. Dixon was the seventy-first person convicted of bank fraud in Texas in three years of investigations by a government task force.

Although Texas was hardest hit by S&L failures (due to its collapsing real estate market), it did not have a monopoly on S&L fraud or mismanagement. Consider the First Network Savings Bank in Los Angeles, founded in 1983 by Carl M. Rheuban, a real estate developer with no prior experience running an S&L. Rheuban started without any tellers to collect money over the counter. Instead, he advertised high interest rates and obtained funds by mail, investing those funds in complicated and risky real estate deals. By 1988, First Network listed $517 million in assets. Rheuban, who owned 97 percent of the S&L, paid himself $11 million in dividends over six years. An amateur magician, Rheuban also spent $850,000 of the firm's money for a "museum of magic" and hired one of the world's top magicians as curator. When federal regulators took over his failed institution in 1990, they estimated its losses at $110 million. Again, the bill was passed on to taxpayers.

The eventual size of the government's bailout of the S&L industry is still unknown. At the end of 1989, there were approximately 2,900 S&Ls in the United States. By mid-1990, the government's Resolution Trust Corporation (RTC), formed to salvage the industry, had taken over 330 S&Ls in thirty-nine states and had closed 93. By early 1991, the RTC had spent $70 billion and asked Congress for an additional $80 billion to bail out 225 more associations. If the RTC gets its money and completes its plan for 1991, it will have closed, transferred, or sold more than 20 percent of the entire industry. Unfortunately, hundreds more S&Ls are not healthy and may have to be taken over. The cost of the bailout defies comprehension. Including interest on funds that the government must borrow to finance the RTC, estimates have centered on $500 billion. That's about twice the cost of the Vietnam War and amounts to $2,000 for every person in the United States. Or think of it as $2,000 additional in taxes that you will have to pay to cover S&L deposits stolen by fraud or wasted by mismanagement. Republican Representative Jim Leach of Iowa called the S&L fiasco "the single most grievous legislative error of judgment this century."

This "error" began, however, with the desire to save the S&L industry, which suffered from the inflation of the 1970s. Known as "thrift" institutions, S&Ls held long-term home mortgages that paid low returns, and management was limited in the rates they could pay and the loans they could make. As their depositors withdrew funds to invest in higher-yielding possibilities, Congress took three key steps to revitalize the industry. In 1980, it allowed S&Ls to pay much higher interest rates. Congress then permitted investors to open multiple accounts, each insured up to $100,000. And later it deregulated management, allowing the thrift industry to invest in virtually anything—car dealerships, tanning parlors, and other high-return but risky deals. Giving the S&L industry freedom to fly high fit perfectly with President Ronald Reagan's free-market philosophy. When he signed the deregulation act in 1982, he said, "I think we've hit the jackpot.

Although S&Ls began making riskier loans, the Reagan administration denied a request by Edwin J. Gray, chairman of the Federal Home Loan Bank Board, to increase the number of bank examiners, believing the request inconsistent with administration philosophy. Gray got little help from Congress in controlling the developing mess, for S&L executives were pouring money into the pockets of key members in both parties. Jim Wright, Speaker of the House, and Tony Coelho, majority whip, were both forced to resign due to contacts with S&L operators, and the "Keat-ing Five"—Senators Alan Cranston, Dennis DeConcini, John Glenn, John McCain, and Donald Riegle—were charged with hampering federal regulators who were trying to curtail the risky loans made by Charles Keating's Lincoln Savings and Loan. Later, the media were criticized for neglecting the developing debacle because it was a complicated and boring "numbers" story, not a titillating "people" story. So there was plenty of blame to share in this failure of economic policy.

In light of the S&L disaster, how much "free enterprise" should be allowed in financial markets and what is the proper role of government in regulating the economy? Apart from regulation, what can government do to control the economy? What effects do government taxing and spending policies have on the economy and on economic equality? We grapple with these and other questions in the economics of public policy.

(from “The Challenge of Democracy”)

Tasks:

do the phonetic reading and written literary translation of

a) the second passage of the text;

b) the third passage of the text;

put 8 questions to the text;

give the summary of the text;

retell the text as if you were:

1) an independent expert;

2) a manager of S&L guilty of mismanagement;

3) a federal regulator;

4) a person from the administration wanting to save S&L industry;

5) an average tax-payer dissatisfied with boosting taxes;

6) a depositor of S&L;

7) a curator of the museum of magic.