Booknotes

MARTIN MAYER, AUTHOR, "THE GREATEST-EVER BANK ROBBERY: THE COLLAPSE OF THE SAVINGS AND LOAN INDUSTRY": Well, I then gave a list of little favors that have been done to people in this context since all of this scandal came out. One would think that they would stop. We have an example recently of the Federal National Mortgage Association putting into the Department of Housing and Urban Development a request to do something with a bunch of S&Ls, which would have involved these S&Ls getting some cash money up front, which the owners could put in their pockets, and taking a loss on the sale of paper which they wouldn't have to show as a loss on their books but which they could show as a loss in their return to the IRS. Very cleverly designed. Designed by an agency of the federal government, really -- I mean, partly. It's privately owned, but there are five directors appointed by the president, and it's supposed to have a social purpose.

So here you've got an agency of the government, in effect, doing something which is legal. It's legal -- we've got some very dumb laws, still -- but which is directly contrary to the public policy of the S&L bailout bill. Bad as that bill may be in its part, there was an intent in that bill, and here is an effort by the Federal National Mortgage Association to circumvent the intent of that bill, to encourage, once again, fraudulent bookkeeping at S&Ls. This is now more than a year after, presumably, there was a bailout. Incidentally, the letter of submission to HUD said that this should be kept completely secret and not even available through Freedom of Information Act requests, because it had proprietary data that might be of value to competitors. I mean, this sort of sleaze -- sleaze from an agency of the government -- I don't know how you stop it.

Now, Kemp stopped it, by the way. Kemp wouldn't give it to them. Kemp is the regulator. But it's constant. This place sells influence. It sells ways to get around the law. It writes the laws, and then sells ways to get around them. That's what's really disturbing to me about this whole story, is the involvement of people who are presumably leaders in their profession, leaders in their occupation, in finding ways in which you could help crooks find a corner of the law in which you could say that what they were doing was not against the law. We're dealing with people who lead great law firms -- 400, 500, 600-lawyer law firms -- great accounting firms, thousands of accountants, who will work with a crook, a man that they know to be a crook. That they would help this guy because he was willing to pay their fees, which were enormous fees, and because they could find a way that what he wanted to do could maybe be on the penumbra of legal, that's disgusting.

That's the worst part of the story. Not that there were cowboys who stole money, not that they were Congressmen who took money, but that people in Wall Street and investment houses and law firms and the accounting firms made themselves unindictable co-conspirators because there was money in it for them. And not only that, used every ounce of political influence they had to prevent Congress from cleaning up the mess that had been made in '81-'82 when the government was trying to solve a problem, took the wrong step, and then because so many people were making money out of the government's mistake, you couldn't change it, year after year after year. That's what's shocking about it.

MAYER: That's probably roughly right.

MAYER: That's probably right, yes. Including I've helped people write memoirs. My name isn't on them, because they are responsible for them and I'm not, but I've not been an invisible ghost. I've been thanked for help. Rudolf Bing of the Metropolitan Opera and Saul Linowitz here and George Moore, who was the first head of Citicorp, I worked with them on memoirs. You know, that's what I do for a living -- I write.

MAYER: Oh, yes. I'm trained in economics, and as far as this book is concerned, I wrote a book called "The Bankers" in 1975. I wrote a book called "The Builders" in 1978. David Stockman read them. And when the Reagan team came in, they asked me to join the national housing commission they were setting up to investigate housing programs. You know, we were suckered. The aim of this was to cut the housing budget, and we all thought we were going to design a new housing program. There were very decent guys on this thing. I think they were all Republicans except me.

But they were all people who wanted to do something about housing, whereas the people who had put us up to this really just wanted to cut the budget, and they succeeded. I mean, they really gutted the housing program. So we were suckered, but I was there when these regs on the S&Ls were first being written, and I was conscious that there was a problem from the beginning, but it never occurred to me that our system was so inflexible -- that having made these mistakes, we would be unable to correct them.

MAYER: I'm a registered Democrat. I had been a registered Independent. I may have been a registered Independent when they put me on the housing commission. My wife died, I remarried. I remarried an ardent Democrat, so I registered Democrat. I don't think she would have married me if I wasn't a registered Democrat.

MAYER: No. I consider myself to be -- particularly in this book -- I think I'm pretty thoroughly non-partisan. You can't prefer one party over the other in this story. They both misbehaved abominably. That's one of the reasons it never became a political issue, because each of them was scared of what the other one would be able to say about them if they made it a political issue.

MAYER: Yes. Richard Pratt is the most able man who was ever chairman of the Federal Home Loan Bank Board. He came into the Federal Home Loan Bank Board, which was the body that chartered S&Ls and also owned and operated the Federal Savings and Loan Insurance Corporation, which insured people's deposits in S&Ls. He came into it at a time when the industry had a terrible problem. He very cleverly designed a number of accounting devices -- he and his friend, his general counsel Tom Vartanian, and some of the accountants around the Bank Board. They designed a system by which this industry could pretend it was making money when it was losing money.

This was done while I was hanging around here, and a lot of these regs came over my desk, and as early as December '81 -- I print it in the book -- I wrote a slightly disjointed piece for a magazine called Financier in which I said, "We are encouraging all these guys to lie about the condition of their institutions. Given that the interest rates are up to 16, 17 percent, it may be necessary to do that now. If they tell the truth about their institutions -- and they'll be the only people who do that; if the interest rates stay there, we're all broke anyway -- so, there may be some excuse, but let's remember what we did." It was going to be very costly. In retrospect, this was a bad idea off the top. If you were going to do it, you should have sunset all of these regs and had them end at a time certain so that you weren't piling up, exponentiating, the losses in this industry. But even so, in fairness to the world, Pratt left full of the odor of accomplishment. Dick is a very good guy. I'm sure he's furious with me.

MAYER: Right. He was the chairman of the Federal Home Loan Bank Board. Had been a professor at the University of Utah.

MAYER: 1981-1982. Into the spring of '83.

MAYER: Three.

MAYER: The President.

MAYER: No. It was put out of business by FIRREA, the Financial Institutions Reorganization and Regulation Enforcement Agency -- something like that -- the act that was passed in August of 1989. There is now something called an Office of Thrift Supervision, which is part of the Treasury Department, just as the Office of the Comptroller of the Currency is part of the Treasury Department. The Office of Thrift Supervision charters and regulates savings and loans. The Office of the Comptroller of the Currency charters and regulates banks.

MAYER: Yes, hoping to bring people, if not up to speed, up to cruising in these waters, anyway.

MAYER: Yes, indeed.

MAYER: It was an independent agency of government, like the Federal Deposit Insurance Corporation, and it owned the Federal Savings and Loan Insurance Corporation. The three directors of that, the three board members of that, were the three members of the Federal Home Loan Bank Board, and it also owned the Federal Home Loan Mortgage Corporation which packaged mortgages into pass-throughs and sold them through. These were all under the Bank Board.

MAYER: The President appointed them.

MAYER: They had to be approved by the Congress.

MAYER: It goes back to the Roosevelt era, and I guess it's '34 was the first appointment of the Federal Home Loan Bank Board. It grew out of the Home Owners Loan Corporation and various ways to try to keep the lenders to housing alive during the early years of the Depression.

MAYER: That's right.

MAYER: That was called FSLIC.

MAYER: FSLIC got its money by a premium charge on the savings and loans themselves. It also had a line of credit of $750 million at the Treasury if it ever had to borrow money. In theory, that was all the resources it had. When I was on the Housing Commission and the S&Ls were losing money, we got very scared and we went to Congress and we said, "We'd better have people believe in this, so let's get a bill through saying that the full faith and credit of the United States is pledged to the insurance of these deposits because, in fact, it is, and we don't want people to get scared." And we got a sense-of-the-Congress resolution to that effect; we did not get a law. But it had begun insuring deposits up to $2,500. In early 1980, the ceiling was $40,000. On March 31, 1980, the Congress passed a law which raised that to $100,000, and one of the interesting aspects of that law is that that raise in the insured deposit maximum was not in either the House or the Senate bill coming into conference. It was added in conference at the motion of Alan Cranston and the California S&Ls.

MAYER: Let's take a look at a universe of banking and S&Ls without deposit insurance. When a guy begins to go under, anybody with any brains who knows anything gets his money out of that institution. Before 1980, even with deposit insurance, any institution that got in trouble would get smaller because a) there'd be people who had money in it over the deposit insurance maximum who would be in danger and would take it out, and b) there'd be people who'd say, "This is a failing bank. I don't want to have my money in a failing bank even if the government will pay me back." In the case of S&Ls, it wasn't an immediate payback either, so you even had a financial reason, even though you're going to get your money.

The government controlled the interest rates that these guys could pay to get deposits, so that if an institution began to go bad, it would get smaller. There was a kind of immune system to the banks and the S&Ls that when a guy got sick, he got smaller, and therefore the threat to the deposit insurance fund was limited. You went in 1980 and 1982, and you freed up the interest rates that they could offer you. They could offer any interest rate, and the government would pay it. If other people were paying 7 percent, and you said, "I'll pay 9 percent," you could get money from them. You could get money from the public easily. You could also pay a commission to a broker to bring it in.

MAYER: Twice -- 1980, 1982. The first was the Depository Institutions Deregulation and Monetary Control Act in 1980 ...

MAYER: Oh, yes, Congress did it. The second was the Garn-St. Germain Act in 1982. The first of them said that we are going to decontrol interest rates, set up a committee of regulators to do it gradually over seven years. The second of them said, "Do it now. Just free 'em up."

MAYER: Yes. Chairman of the Senate Banking Committee at that time.

MAYER: Yes.

MAYER: Right.

MAYER: Well, because he had taken advantage of his position as chairman of the Banking Committee to make himself quite a rich man on interest-free loans from people who had banks, who were regulated by regulators who were subject to Freddy St. Germain's authority. There were a number of stories in the Wall Street Journal. The House Ethics Committee investigated. They gave him a slap on the wrist, but the people of his district decided they were sick of it, and he was one of the few Congressmen in recent years to lose. One of the stories that is told about this, which I tell in the book, is that when he knew he was a loser, when the polls came in saying that he was a loser, he pulled all of his television commercials for the last week of the campaign and kept the money, because he was one of those guys elected before 1980 who could do that legally.

MAYER: Garn's a decent guy, to the best of my knowledge. The thing that they say about Garn around the Senate -- he's the space Senator. He cared about that. He's the one who went up in the space shuttle. Some of the people who work for him say he never came down. He's a slightly spacy Senator. We have others. There's no harm in having slightly spacy Senators. If you read through the record of the various hearings in which Garn has participated, what you see is a guy who is, in fact, pure in heart, whose understanding of these matters is not that great but there's worse, and who wound up sponsoring things which he later did not wish to believe had made the trouble they made. When you talk about Congressmen taking money and doing things, Garn didn't do that. But you talk about some of these other guys.

I'm a part- time music critic, and years ago Sol Hurok used to send all of the music critics two little two-ounce jars of caviar at Christmas and a bottle of vodka. Martin Feinstein, who runs the Washington Opera now -- a good, old friend -- was then Hurok's press guy, and he said to Hurok once, "Mr. Hurok, do you really think that you can buy a good review with two little two-ounce jars of caviar?" And Hurok said, "Of course not, of course not. But there's two ways to write a bad review." And that's right. So, people make gifts to Congressmen. It doesn't mean that they're going to buy their support, but it does mean that they're going to get a different kind of hearing when they come in with a problem. So now you get the S&L situation, and you get them buying the best accounting firms to certify dishonest books -- let's be blunt about it -- at the S&Ls, to apply accounting practices which the American Institute of Certified Public Accountants has said okay, but the Financial Accounting Standards Board has said, "No way. This is a dishonest presentation."

There are people who are leaders. You would think they would follow what the Standards Board said. But if they didn't have to, if the practice contradicted the theory and the practice benefitted a Charlie Keating or a David Paul or a Michael Wise or a Tom Spiegel, they would go along with them. So then a Spiegel or a Wise or a Keating or a Paul would come to the Congressman and he would say, "The regulators are picking on me, and here Arthur Young or Ernst & Whinney or Arthur Andersen or Coopers & Lybrand or Touche Ross" -- all of these are implicated firms. I mean, I give chapter and verse in the book of the institutions that they certified.

MAYER: The great accounting firms of the world, not just of this country. So, this swindler would come in with a statement certified by a Big Eight accounting firm. He would be represented by one of the nation's great law firms, paying the guy involved $400 an hour to do it, and he says to this Congressman to whom he's making a contribution, "These stupid regulators are misinterpreting the law and pushing me around. You've got to help me." Now, later when it turns out the regulators were right and these guys were crooks, the Congressman is in terrible trouble. But if you move him back to that moment in time, and if you read the transcript of the meeting of the Keating Five with the San Francisco people, you have DeConcini, for whom I have no sympathy, because DeConcini later on did things to Keating which are disgraceful, but at that moment he said, "We have this statement from Arthur Young, this letter from Arthur Young's senior accountant in Phoenix, saying that all of this is okay. How do you account for that? Would a great accounting firm prostitute itself?"

And Mike Patriarca from the San Francisco Home Loan Bank said, "They do it every day." But for a Congressman or a Senator to realize that these people whose names he respects, and years ago would have been right to respect, are prostituting themselves. Judge Sporkin castigated the law firm of Kaye Scholer from the bench here. Keating had sued to get his S&L back -- I mean that joke lawsuit. And Sporkin took it all seriously, being a man of a sense of humor, and heard all the evidence and then at the end he ruled that, of course, this improvidently run and essentially crooked S&L was properly seized by the government. But at every step in the way, this 400-plus lawyer law firm -- nationwide, headquartered in New York, very distinguished people in it -- had counseled Keating, had helped him do all of this, and Sporkin excoriated them from the bench. A spokesman for this law firm said, not to me -- this is something I took out of the papers, but I'll assume the papers are accurate -- "We did only what the client asked us to do." Whores are not allowed to make that defense. Why should a great law firm think that that is a defense for having done what they did?

MAYER: Right.

MAYER: Subsequently chairman of Merrill Lynch Mortgage Capital. Moved on.

MAYER: Moved on and made a lot of money, yes.

MAYER: Ed Gray succeeded Pratt in the spring of '83.

MAYER: Danny Wall.

MAYER: Well, Danny Wall became the first head of the Office of Thrift Super vision when the system was reorganized and was then forced out, essentially, by the House Banking Committee. There's a man named Timothy Ryan who is now the head of the Office of Thrift Supervision.

MAYER: I say, if you're looking for any one person to blame more than any other one person, it's got to be Pratt.

MAYER: Because he wrote the regulations. In other words, the basic position of this book is that all of this was facilitated by the change in the accounting procedures of this industry, which Pratt instituted in 1981 and 1982.

MAYER: Of the savings and loan industry, plus other things. For example, when Pratt came in, to get a deposit insurance charter you had to have -- or you'd either be a mutual institution -- at least 400 shareholders, and nobody could control more than 25 percent of the stock. Pratt removed that restriction. When Pratt came in, you couldn't have more than 5 percent of your deposits as broker deposits. You had to have them coming in from real people at teller windows. Pratt removed that restriction. You couldn't play in the options and futures markets before Pratt came in. Pratt wrote regulations which permitted these guys to play in the options and the futures market. I list them.

The best list is in a book by a guy named Ed Kane, who is a professor at Ohio State, a book published by the Urban Institute, who has page after page of the change in the regulations which eliminated the immune system of the industry. What Pratt will say is that, you know, these were regulations; they could have been changed later. We never intended this to be permanent. He just testified before the House Banking Committee and said, "We never intended these changes to be permanent. When the interest rates came down, they were all to go away." But the fact of the matter is that when Gray did try to change them, Pratt led the charge against the changes, because he was then working with Merrill Lynch, and Merrill Lynch was making a fortune out of the S&Ls.

MAYER: Ed Gray says and the people around Gray say and Pratt doesn't quite deny that at one particular crisis moment when American Savings and Loan of Stockton, which was the nation's largest S&L -- $30 billion, a big institution -- was going to go under and they really had to raise money to pay back the people who wanted their money out, Pratt agreed to put a billion dollars of Merrill Lynch customers' money into American Savings and Loan CDs, and after talking to Don Regan, he backed away from it. I do not know this as a fact. But there's no question that Merrill Lynch had been expected to put in the money, that Merrill Lynch backed away at the last minute in a phone call from Pratt to Gray, and that the Bank Board then had to reach George Ball at Prudential-Bache in Spain, where he was on vacation, to get a billion dollars of Prudential-Bache money in there.

There's a book coming out by a nice guy named Michael Robinson who was the American Bank of San Francisco man, which is a story of American Savings and Loan. It isn't out yet. He tells this story in some detail. I tell it in a page or two here. I believe that Don Regan probably did interfere at that mo ment, and then -- he was then Secretary of the Treasury -- later on when he became Reagan's chief of staff, there's no question that he belligerently interfered with the operations of the Bank Board and tried to prevent the Bank Board from withdrawing the regulations out of which these guys were making so much money.

MAYER: Yes, I guess that's right.

MAYER: "The Bankers" was a Book-of-the-Month Club main selection.

MAYER: 1975. They distributed 160,000 copies, and about 80,000 sold in the bookstores. Then Ballantine brought it out in paper, and it sold half a million. That's the one that sold the best. The one that sold the best in the bookstores alone was "The Lawyers" in 1967.

MAYER: I mentioned I was a part-time music critic. I remember when Colon Davis, who had been a horn player, first became the conductor of the BBC Symphony -- I knew him a little -- and I interviewed him for a column I was then writing in Esquire magazine. He said he was going to do the four Brahms symphonies, which he'd never done. He had been playing in an opera house orchestra. I said, "Do you like the Brahms symphonies?" And he said to me, "That's your business. I play them. You decide whether you like them or not."

I write for a living. I enjoy writing most of the time. I enjoy the information-gathering and the analysis even more, really. This book is unique for me, though, because I've never come out of a book with the emotional feelings about what I was writing about that I have with this one. This is a great disgrace. It says things about my country that I don't like to believe. It says things about people whom I would like to respect that I don't want to believe. I think this story is a terrible story about the way we run this country.

MAYER: I'm worried. That's right. Worried, I guess, is also correct. I have kids in two generations. I have kids who are 35, 32, nine and six. The nine and six year olds are going to be paying for this, and my grandchildren are going to be paying for this -- and it was totally unnecessary. It was because of the piggishness of people who should have some feeling of responsibility for this society. I don't blame the cowboys. Cowboys are cowboys, you know. Jerry Goodman, "Adam Smith," has a piece of film that shows a grizzled Texan with a big Texas hat, and he's saying, "Look. You get a fox in the henhouse, you get a lot of dead chickens. That doesn't mean that's a bad fox. That's what a fox is going to do in a henhouse. You should have somebody keep the fox out of the henhouse."

You let a builder own an S&L, he'll cover the Earth with buildings. He doesn't care if they sell. He needs financing so he can build. You set the world up so he has free financing from the S&L he owns, and there's no end to the building. But I don't blame him. He's not a bad man. That's what he does. We're supposed to have regulations that keep these guys from owning these things, and that's true. So that when you complain about the Don Dixons of this world or even the Charlie Knapps, all of the -- Keating's a separate story. That's a different game. But a lot of these guys who cost the public a lot of money, that was their nature. I don't blame them. Some of the things that happened in Congress, that's the way the world works. I don't blame them. But people who are professional people, who presumably have a code that says you're supposed to behave better than mere legality, their collaboration and cooperation, that's what scandalizes and shocks me.

MAYER: New York.

MAYER: Yes. My father was a lawyer. My father started life in one of the big Wall Street firms. I wrote a biography of the guy who was his first boss at the request of Felix Frankfurter, who had been this guy's best friend. It was always true that there were feet of clay in a lot of these idols, and a lot of guys who were senior partners of Wall Street houses in the '10s and '20s and '30s did things they shouldn't have done. But, nevertheless, the judgment leadership in the profession was whether somebody embodied the ideal of that profession and spoke to what people wanted to think of themselves as members of that profession. You were a leader. You had an obligation to set standards. Today you get to be a leader in a profession by having the highest fees. That's a terrible loss to this country, terrible loss.

MAYER: I went to Harvard.

MAYER: Economics. I was there in the great days. I had courses with Joseph Schumpeter, and Wassily Leontief was my tutor. But I got out very early. I didn't like education terribly much, and I finished Harvard before my 19th birthday.

MAYER: Yes -- hah, that's a good question! No, I was in trouble, and it wasn't until I was about 20 that I actually got my diploma. I had finished the full program, except I hadn't passed my language requirement yet. I went out and learned Italian in order to get a degree. But I did not actually graduate until the spring of '48, I guess, when I was 20. But I finished in January of '47, just before my 19th birthday. I took my last exam at Harvard, other than the language.

MAYER: Well, I wrote a couple of novels that nobody published, and a good thing, too. I'd be pretty embarrassed. The first books came out in '55. There was a novel called "The Experts," and there was a book called "Wall Street Men and Money," which was kept in print for another 18 years by Collier Books. Boy, was it out of date when they finally junked it. It was a great title. It wasn't my title, it was Tom Morgan's title.

MAYER: Well, I guess so. I mean, I began writing -- a good friend of mine and I, in fourth grade, put out a newspaper on my father's mimeograph machine. I was always editing the school papers, and I was on -- well, it was the Harvard Service News when I was first there, but then the Harvard Crimson again toward the end of my time. My first job out of school was for the New York Journal of Commerce, which was going to combine the economics and the writing. I had thought for a while that I was going to be an economist, but Professor Leontief said to me one day, "You don't use mathematics to solve problems." I said, "What do you mean?" He said, "You decide what you want to say, and then you find equations that say it." I said, "Of course. Does anybody do anything else?" He said, "Yes. What you're supposed to do is set up the problem mathematically and solve it mathematically." That had never occurred to me. I suddenly realized I couldn't do that. I've been very lucky. There were things that I was tempted to do where somebody pointed out to me, "You're no good," so I didn't do them.

MAYER: Yes.

MAYER: I was a commissioner. It was a one-year thing. We met in the year. Counting the sub-committees and the finance committees and such things, I suppose I put in a total of 40 days. Then I wrote the executive summary. That's a Washington story. You got paid $200 a day for the time actually spent in meetings. I mean, the reading that you did and other things that you might do in connection with the commission, you didn't get paid for. It was not a good investment of time, but I wanted to do it. It was an interesting and useful experience, and one thought one was being helpful to one's country.

MAYER: No. I'd been a member of the President's Panel on Educational Research and Development in the Kennedy and Johnson administration, when I was working in education. That was for five years, and that was the first Monday and Tuesday of every month. I've also been on Office of Technology assessment panels. I've been in and out. I've testified, but this was a little different. Anyway, so, Bill McKenna, who was the chairman, came to me at one of the last meetings and said, "You know, we'd like people to be able to read the executive summary. We don't want it done in bureaucratese. It's about 50 pages. Would you write it for us?"

I said, "Yes, but if I'm going to do that, somebody has to pay me for it, because I just can't afford it. I've got," then, "one little kid, and I cannot give you an enormous amount of writing time, and that's at least a month's work, a 50-page executive summary, but I tell you what I'll do. I'll go to a foundation so that the government doesn't have to pay it, and I'll have the foundation give the money to the Department of Housing and Urban Development to pay to me for writing the 50-page summary, as a professional job." You know what he said? "Commissioners are not supposed to be paid for their work on the commission." I said to him, "Bill, you're an S&L lawyer. Morrie Mann is with Merrill Lynch Mortgage Capital. Pete Herder is a realtor with the National Association of Realtors," and I ran down all of the other people on the commission.

"Every one of you guys has parti pris here. Every one of you is representing clients or building his own business or working in this, and I haven't seen anybody give up his own side of this in any of these meetings. I'm the only guy here who does not make any money out of this industry and who does not have any stake whatever in what this commission says, and you tell me it's a conflict of interest for me to get paid by a foundation for my time to write the executive summary?" Bill was a very decent guy whose father was a man who worked in the sewers. He's not one of these Rockefeller types who thinks everybody has enough money all the time. He thought about it, and he said, "You're right. In this case, we could waive that."

MAYER: I think I got $7,000. It went through the Smith Richardson Foundation, which was very acceptable to the Reagan administration. They had been people who were interested, with the Sloan Foundation, in sponsoring a possible television series for me which had died, and so I knew them. I knew the people there, and I called them. I said, "This is a job that they want me to do, and I really can't afford to give this time away. Would you be willing to make a grant to HUD for HUD to pay me?" And they said, "Sure." They made the grant to HUD. It took HUD eight months to pay me, mind you, but they did pay. I think it was either $7,000 or $7,500. It was not that bad. It was not that bad a payment, for the time.

MAYER: You know, I sort of like the Constitution. I think it could work a lot better than it's now working. Somebody asked me a while ago, if I could reform the government, what's the first thing I would do? I said, sort of one third as a joke, but two-thirds not, "I would repeal the Unified Budget Act of 1921." There was no unified budget in this country until 1921. The departments of government submitted their requests separately to the Congress, and the Congress had to make a budget out of them. We came out of the First World War when that hadn't worked terribly well. The President's involvement was as commander-in-chief. He submitted the budgets for the armed forces. But for all the other departments of government, they did it themselves, and then Congress made a budget out of it. That's what Congress is paid to do.

You moved from the Budget Bureau to the Office of Management and Budget to the present situation where the executive branch is trying to make all these decisions and considers itself not just one of the players, but the prime player. That's not the way our Constitution is written. The Constitution is written that money bills originate in the House, budgets are to be made in the House. The House becomes irresponsible, the government becomes irresponsible, when parts of it slough off to other parts what their constitutional responsibilities are. In the S&L scandal, I blame the media a lot, to be honest with you. If this story had been covered -- when an S&L goes under, a big S&L, with some degree of scandal -- if the press published the name of their lawyers, if the press published the name of their accountants -- you know, sunshine remains the best disinfectant. That's one of the reasons I have all these names in this book. I think you have to be responsible for what you do. I sign what I do. With all that's wrong with my profession -- it isn't a profession, it's a trade -- I sign it. I get my scars on the front of my face.

MAYER: That's it.

MAYER: Number 26. Maupassant used to say if you write three pages a day, it's a thousand pages a year. Now, he was better than I am. But 26 books sounds like a lot of books, but there's a year or two in each of them.

MAYER: I signed the contract in '88. It was about two years.

MAYER: Well, the afterword was written in July. There's a 12-page section at the end which they gave me a chance to write at the end, to comment about what had been happening. Otherwise, it was written, I guess, in March.

MAYER: Because I'm dealing with the systemic problem here, or at least I hope I am.

MAYER: I'm saying, to begin with -- the simplest way to tell what happened here is to say the government in '81-'82 had a very bad problem connected with the financing of housing. We had a lot of institutions that had long-term mortgages that were yielding 6, 7, 8, 9 percent at a time when these institutions had to pay for new money, anyway, 11, 12, 13 percent. A decision was made that these institutions could grow out of this problem. They could add enough very highyielding assets so that they could pay on the marginal money enough that they could make money at the end of it. So, they had a certain amount of money that was still an endowment of 5.5 percent passbook savings.

If you structured the world so that they could get more money because they could advertise higher interest rates, they could then make new loans at even higher interest rates and make enough money so they could make up for what they were losing on the old mortgages. The industry could, in general, grow out of it, and when interest rates came down a bit, it would be profitable and strong. This was a mistake. I am not going to criticize the people who made the mistake. It was a desperate time. I remember sitting around in these meetings. We were counting the number of months until the whole industry went bust and you couldn't save it anymore. So, these accounting regs that Pratt put in were for the purpose of enabling people to hang on until they could grow out of it.

MAYER: But this was a mistake, because the basic problem in the S&L industry was over-capacity. When we sat on the Housing Commission, we looked at how you finance housing. I was on the Finance Committee. One of the things that jumped out of the historical record is that in the 1920s, and, indeed, right after World War II, 20 percent-plus of home mortgages in the United States were held by life insurance companies. By 1980, they held no mortgages. Meanwhile, the savings of the country were moving from a depository chassis -- that is, from deposits in banks and S&Ls -- to a contract chassis -- that is, payments to pension funds, life insurance companies, mutual funds. These recipients of household savings were not buying mortgages. So we said we have to design instruments that will help the contract thrifts, as we called them, begin to get into housing finance. This will provide more money for housing -- remember, we're a housing commission; we have a parochial view -- and it will provide that at lower cost, which everybody wants. The American people will be able to get better housing cheaper.

Two things were not in our minds. One was that we were going to be putting pressure on what the S&Ls could earn because there'd be competitors for buying mortgages, and, therefore, the spread between the cost of money and what mortgages got, the spread between what corporations had to pay in bonds and what people who bought homes had to pay in mortgages would be reduced, and the long-term viability of the industry would diminish because it would have more competitors for its own business. The second thing we didn't think about was that we were structuring very complicated instruments to bring in these guys, and the Wall Street houses would screw around with those instruments for their own benefit, so that some of it would be junk, and they would sell the junk to the S&Ls. They would trade bits of glass with the natives to their own immense profit, which is what the Wall Street houses did. They would broker in the funds, they'd get paid big commissions for brokering in the funds, and then they'd sell them the Collateralized Mortgage Obligations and different tranches, and you don't want to know the details. I give as little as I can in the book because I think people have to understand some of this to understand what happened, but it's a very complicated story.

So those things happened. Meanwhile, we had an industry that had $700 billion of deposits. Its social function was shrinking because others were going to provide a lot of the mortgages, and we said, "You can grow out of it." We grew it up to $1.4 trillion. We're lucky that the losses are only one $170 billion. It was a mistake. You should not have tried to grow this industry out of its problems. It had to shrink. You had to take some losses and shrink it. We went entirely the wrong way. In a capitalist system, you couldn't grow an industry that was failing. But we don't have a capitalist system in banking. We have a government-guaranteed system through deposit insurance.

Therefore, the government could structure things so that these guys could grow by saying that we will guarantee whatever interest you promised they could grow, so the government set this up. The market would have killed these guys if there'd been a free market. S&Ls would have failed, money would have fled the industry and the industry would have shrunk willy-nilly, with possibly great damage to the society. The job was to shrink it without damage. Instead, we grew it with immense cost. By 1984, it was pretty clear that this is what was happening. You could see the losses building. To the credit of Ed Gray, who was Pratt's successor at the bank board -- and if you measured IQs is well below Dick Pratt, but he's a decent guy with a certain amount of common sense and he cared about his job. He felt responsible for what was happening.

MAYER: He had said he would serve two years, and he went out to make money.

MAYER: Ed Gray had been Ronald Reagan's press secretary when he was governor of California, and he had worked in the Reagan campaign. When Reagan became President, he became the first director of the Domestic Policy Group at the White House. Then he went back to California because his wife hated Washington, and he got a job with Great American Savings and Loan. Gordon Luce was a friend of the President's. They wanted somebody who would not make waves or disturb things to become the head of the Bank Board after Pratt, and who would keep all the Pratt "reforms" in being, and they reached out for Ed. Ed was a little flattered. He had been a reporter for the United Press, he'd been a radio guy, he'd been a speechwriter. This was going to be a chance to have executive authority in a big job. He took the job, and he did the very best he could with it, and I admire Ed Gray.

MAYER: He had never had experience with running -- no, he'd worked for an S&L. He'd worked in the press department of an S&L.

MAYER: He stayed his full term of four years. He tried hard.

MAYER: He'd never run anything, you understand. I mean, that was part of the problem also. He had to organize something for a new set of tasks. He had trouble doing that. He didn't have Pratt's understanding of this industry, though Ed grew in that job. I respect and I like Ed Gray.

MAYER: Ed is an honest man. A lot of people don't like Ed. When the Wall Street Journal said I was working on this book, a lot of people who used to work at the Bank Board -- about six of them -- got hold of me and said, "Don't let Ed Gray rewrite history." But the fact is that Gray began shouting that there were troubles when it was very unpopular to do so. He tried to make changes. He didn't know which changes he wanted to make. He didn't handle it well in some ways, but he tried and he was an honest man and I think he deserves a lot of credit. He's getting it now, for once. It took a long time.

MAYER: No. Nobody says the loss is $500 billion, present value. Present value is maybe -- I say a $150 billion, I think. Seaman's is handling the bailout so badly, it's now up to $170 billion, and if we continue running the Resolution Trust Corporation the way we are, we'll get to $200 billion. Very soon, too. And maybe $220 billion.

MAYER: If you tax people to pay it out now, it would be, let's say, $170 billion. That's a lot of money. But if you're going to borrow to take care of it, then you've got to add in the interest that you pay on the borrowing, so then let's assume it's 8 percent interest that you're going to pay. In nine years it doubles. In 18 years it quadruples, by the rule of 72. So that it's a question of what time are you going to pay it back on, how much interest are you going to pay? You can get to $500 billion very easily. If you want to look at the year 2020, you can get it up to $600 billion. The present value of the losses, what has been lost -- not what you're going to pay interest on later, but what has been lost -- is probably somewhere between $150 billion and $200 billion, though it may get worse.

MAYER: I do, indeed.

MAYER: The public knowledge was that the Federal Home Loan Bank Board had decided that direct investment by S&Ls was dangerous. The San Francisco people who supervised Lincoln Savings and Loan had found that Mr. Keating had put far more than the legal maximum into a fight for the control of Gulf Broadcasting, that he had put money into Ivan Boesky, that he had stopped writing home mortgages though he had said he was going to. The S&L he had bought was the largest supplier of mortgages to the black and Hispanic populations of Southern California. He had withdrawn from that business. He had closed his branches in lowermiddle class neighborhoods, and he was putting money into very risky things -- his own developments, Gulf Broadcasting, Boesky, a lot of Mike Milken stuff for Drexel- Burnham.

The Bank Board was concerned about him and was trying to rein him in. His lawyer then was Arthur Liman, who would presently become the lawyer for the Senate in the Iran-Contra Affair, and he recruited, before Liman, Professor George Benston of the University of Rochester to do an academic dissertation on why direct investment was right and Keating should be left alone. This was considered by Mr. Liman to be insufficient to persuade the feds. Mr. Liman went and paid Alan Greenspan, who was then a private consultant, $40,000, essentially to write a letter in Keating's support to the Federal Home Loan Bank of San Francisco. It would have been possible -- I would say fairly easy -- to deter mine that a number of the statements in that letter were false at that time.

MAYER: And a very competent one, I would say. I disagree with this and that, but Alan is not a bad guy. The problem in this book is not the people who were bad guys. That doesn't bother me. You always get bad guys. It's what the good guys did, because the standards were lowered.

MAYER: He was then a private consultant whose services were for sale, but presumably he was an honest man. He writes a very sad letter. Do it. Let's hear it.

MAYER: All false. All false.

MAYER: Because he believed what his client told him. Because he didn't look. That's what's so troublesome.

MAYER: Keating, I think, is going to wind up in jail.

MAYER: He's a great con man. Forty million dollars moved out through Banker's Trust to parts unknown in Europe and the Caribbean.

MAYER: I think so.

MAYER: Because he doesn't want to admit he's got it. I mean, nobody knows where that money went. Nobody's subpoenaed Banker's Trust records. The Federal Reserve Board would have a bleeding hemorrhage if anybody did, but we should. Charlie Keating has been indicted now for swindling these old people in California. He will be indicted again on federal charges. I think Keating will eventually go to jail. I think he should go to jail.

MAYER: He had all the big accounting firms working for him.

MAYER: Arthur Andersen did file stuffing for Keating. That's a matter of public record.

MAYER: That's the question the books asks in the end.

MAYER: Well, my favorite line in my own book -- one always has a favorite line in one's own book; we don't have a favorite book, but one has a favorite line -- is that "the 1980s were a time when the government conspired so that the pigs could get what used to be the lion's share." I'm a believer in capitalist economies. I'm a believer in markets. It was Jim Tobin of Yale who first described it, I believe, as "socializing the losses and privatizing the gains." The only standard of judgment we seemed to have by the time the '80s were halfway through was how much money did he make. There's been an erosion of moral fiber and ethical sense in this country. How you reverse it, I don't know. But that's what's so disturbing about it. Why did it happen?

MAYER: You know, I was active in education in the '60s, and there was all this stuff about "never trust anybody over 30." I used to say to these kids when I would travel around -- I traveled around for the Sloan Foundation and for some others visiting colleges on various studies that I would do -- and I would say to them, "You're right, but you don't seem to understand why." The generation that came out of World War II, the people who had lived through the Depression and then World War II, felt they were going to get theirs after the war. They structured the world on what is a very unfair basis intergenerationally.

The kids who were in college in the '60s, the kids of the baby boom, have been cheated, really. They're not going to get the Social Security that their parents got. They're not going to get a lot of other things. The whole way the seniority systems were set up in the unions, the way everybody protected himself, and this came out of -- we're talking things far beyond economics here -- came out of, I think, the experiences of the generation that ran the country finally in the '80s. The people who turned the age where they were in authority had been brought up in an atmosphere of graspingness in the '50s. I think that we have to blame that more than anything else.

The question is, how do you turn it around? How do you restore some notion of citizenship in a country like this one? I would hope the book does well enough I'll have some time to try to think about it, and maybe I'll have something worth hearing on it when it's over. Anything's possible. I'm not sure I have anything worth hearing on it now. But it's a serious problem. I chewed out some academics the other day, that the kids come out of the business schools now with so little sense of what constitutes standards of behavior. How much time do we have? Got two minutes for a story?

MAYER: This is about a guy who said to me that when he went to work on Wall Street, sometimes people would say to him, "We don't do that. That's a deal we don't do." He said, "It's been 20 years since I've heard anybody say, 'We don't do that.'" We've got to get back to a sense of "for my self-respect, I don't do that. Maybe you can find somebody else to do it. Maybe it isn't illegal, but I don't do it. I have too much pride to do it." Losing that is the really dangerous thing, and that's really what this is about.

MAYER: Thank you.