Boring Portfolio

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Inside Job
Don't buy the book

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (Oct. 6, 1999) -- An interesting coincidence took place today. I've been staying at the home of Drip Port co-meister Brian Graney and I raided his bookshelf for something interesting to read, as all my stuff is in a storage place somewhere in suburban Virginia. I picked up Inside Job: The Looting of America's S&Ls. I thought "Hmm, this looks interesting." Good reviews from respected publications on the cover, it looked like a serious and substantial book, and it was a bestseller. There must be some redeeming value in it.

Well, I don't want to totally judge the thing before I finish it, but I have to say that any book on the subject of the S&L failures that mentions the concept of "goodwill" only once in a footnote isn't going to give a serious treatment of the entire subject. Instead, the book so far posits that the failures were due to shady characters -- con men, organized crime, the CIA, Iran-Contra figures -- in general, people out with the direct intention to plunder the newly deregulated industry. Now I can't put down this so-far terrible, People magazine/Geraldo Rivera-esque account, not because I'm fascinated by it, but because I don't want to totally indict it before reading it through to its conclusion. However, a book isn't adequately explaining the S&L crisis if it doesn't discuss:

1. How S&Ls were allowed to use "supervisory goodwill" in taking over insolvent thrifts after the huge credit crunch of 1981-1982.
2. How the 1989 disallowance of supervisory goodwill in the calculation of regulatory capital crushed owners' equity in these institutions, forcing the liquidation of balance sheets into a real estate market that had already taken huge hits after the institution of the Tax Act of 1986.
3. How real estate values were further crushed by provisions of the Financial Institutions Reform, Recovery & Enforcement Act (FIRREA) of 1989.

The coincidence is that someone mentioned to me an article in the October 11, 1999 Business Week that tells the story of Jerry Barton, real estate developer and S&L executive. The following quote sums up my exact problem with this best-selling account of the S&L crisis:

"There is a lingering popular perception that the mess was perpetrated by crooked operators who turned S&Ls into their personal piggybanks. The escapades of such S&L high rollers as Charles H. Keating Jr., David Paul, and Don Dixon received lots of press attention. But all the available evidence suggests that fraud was only a minor cause of the thrift debacle. In 1993, a commission appointed by Congress found that fraud accounted for no more than 15% of the cost of the S&L bailout. Most other estimates are much lower, 3% to 5%."

If you have the chance, check out this story about how substantial businesspeople got screwed in the whole S&L mess and how government deregulation of the industry and re-regulation led to that. Granted, there were a lot of people in the S&L industry doing really bozo deals in the 1980s, and the supervisory goodwill was being used to support a lot of bozo activities. But that doesn't change the fact that there is a huge hole in our national perception of what the S&L problem was all about. I've yet to see any analyses that really assess the net positives to national wealth that came from the deregulation of the industry.

Finally, check out this tender offer made a couple years ago on a now-OTC-traded company called Landmark Land, which was run by Barton. Search the part of the document headed "CERTAIN INFORMATION CONCERNING THE COMPANY." Then using your knowledge of securities analysis, try coming up with an argument on how it was just shady operators, and not poor regulatory decision-making, that sank the S&L industry. It's fascinating stuff and I hope it leads you to better analyses of the S&L problem than the one I'm currently reading.

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