Wild-out-of control spending:


1991 style, via the S&L real estate loans :  A number of thrifts were soon expanding at the rate of 1,200 per cent a year or more simply by taking in deposits from the growing legion of deposit brokers – who would, for a fee, match thrifts with savers like pension funds and other institutions wanting to put their money to work at the highest interest rate available. The thrift would then loan out the funds, ‘mostly on speculative property deals’ … Don Ray Dixon of Vernon Savings took his wife by private jet and Rolls-Royce on a ‘market study’ of French Michelin three-star restaurants … He also bought half a dozen jets, a vintage car dealership, and the sister ship to President Roosevelt’s yacht. Edwin ‘fast Eddy’ McBirny of Sunbelt Savings, fed his guests at his north Dallas home on lion meat and antelope, while presiding over the festivities dressed as Henry VIII with dry ice billowing around him…

Thomas Spiegel and his family made at least four trips to Europe ; he bought guns and accessories totaling $91,000, resort villas and other real estate…Any reader of Business Week knew what to do :

Start an S&L. Offer a premium interest rate and watch the deposits roll in.Your depositors are insured by Uncle Sam, so they don’t care what you do with their money. And in states like California, you can do almost anything you want with it. Add enormous leverage – you can pile $100 of assets on every $3 of capital – and you’ve built a speculators’ dream machine.

‘Casino Society’, Business Week, 1985

The list of thrifts looted was practically endless…”

Extract from The Secret of life of Real Estate and Banking, page 283.

Enticing borrowers with more money than they needed…..

Late 1980’s style: “Soon some thrifts were even adding the interest payable on the loan to the loan itself. If a borrower wanted, say, a $5 m loan, the thrift would loan him or her $5.4m and account for the difference by putting it to a reserve, out of which the next several years worth of interest would be made as and when it was due, usually monthly. This meant that the loan would always appear ‘current’ on the books and not in arrears, regardless of the true state of the project or the whereabouts of the borrower.”

Extract  from The Secret of life of Real Estate and Banking, page 411.

Doctoring Loan Documents:

EMPIRE S&L in Texas grew 17-fold in the two years after the 1982 deregulation of the thrift industry. Later regulators at the FSLIC would allege that the officers and management at Empire, amongst them Texas real estate developer Danny Faulkner, would sell land back and forth amongst themselves or associates so that it would appear to be increasing in value. This was used to justify ever larger loans for the hundreds of apartment projects developers were building along Interstate 30, east of Dallas. The value of one section of 117 acres increased from $5m to $47m in just a few weeks….. Faulkner and his partners would organise the land selling (called flips) over weekend brunches at Wise’s Circle Grill in the Interstate-30 corridor. Invited guests included officials from Empire Savings and Loan, investors, appraisers, and, increasingly, politicians, who drew huge campaign contributions from the events. Properties quickly changed hands over breakfast, and millions of dollars of phony profits were made in a few hours.

Extract from The Secret of life of Real Estate and Banking, page 409.

The drop in prices :

There is a regular 18-20 year cycle. As a rule, in the bust, commercial property values drop about 40 %, raw land prices 60 % and more.

1991, Texas: “office properties selling for $100 to $120 per square foot in 1985 sold for $25 to $35 per square foot in 1992; apartment buildings that sold for $25,000 to $30,000 per unit in 1985 were selling for $7,000 to $10,000 per unit in 1991, and zoned office land that sold in 1985 for $25 to $30 per building square foot (with approved site development permits) sold for only $4 to $5 per square foot in 1992/3. The city of Boston suffered its ‘worst commercial real estate crash’ in that city’s entire history.

Extract from The Secret of life of Real Estate and Banking, page 295.

But Texas and the US recovered, though at the time all the economic forecasters said there would be a depression.

Finally, each real estate led downturn is always believed to be the worst ever:

1991 cycle: “Perhaps the most significant financial crisis in this nations history”

GAO director Harold Valentine, describing the bank and thrift fraud to a Senate Committee on banking, Finance and Urban Affairs, Sub-committee on consumer and regulatory affairs

1974 cycle: “Luck more than anything’” said Federal Reserve Board Chairman Arthur Burns, talking to a Newsday reporter in late 1974 after being questioned how the financial meltdown was averted following all the poor real estate lending by the banks.  ”We were sitting on a volcano.  People were concerned in this country, but they were really scared abroad.  We can’t let it happen again, because we might not be so lucky next time.”

1893 cycle: “It is probably safe to say that in no civilized country in this century, not actually in the throes of war or open insurrection, has society been so disorganized as it was in the United States during the first half of 1984; never was human life held so cheap; never did the constituted authorities appear so incompetent to enforce the respect for law.

H.P Robinson, editor of The Railroad Age

1873 cycle: “Famine and bankruptcy stare the nation in the face.  Want is beginning to press all classes and will come more threateningly as the winter closes.”

Albany New York Argus, October 28, 1873

1857 cycle: “Such is the outline of the most extraordinary, violent and destructive financial panic ever experienced in this country.”

J.S Gibbons, The Banks of New York, Their Dealers, The Clearing House, and The Panic of 1857