The Banking Crisis, S&Ls, Virginia and McAuliffe

In September 1980, Harpers Magazine published a story by L.J. Davis titled, Chronicle of a Debacle Foretold. It was a comprehensive review of the events leading up to the S&L crisis and its aftermath.

A synopsis: S&L's were in trouble in the early '80s, so they sent their lobbyists to Washington. There, they found a newly receptive Democratic party and an ideologically friendly Regan administration. They lavished campaign donations on the Democratic leadership in Congress and courted a newly aggressive DCCC. In the end, they got more than they could have ever hoped for: an increase in FDIC insurance limits and an absolute evisceration of regulations that were designed to keep them trustworthy. The mother of all moral hazards was the result. In the most innocent cases, S&Ls made extremely aggressive (and stupid) bets with other people's money. When they lost, the tax-payer was left holding the bag. In many more cases, S&L owners simply looted the public treasury.

How did all of this happen?

Regulatory capture.

Here is an excerpt from Marjorie Williams' book Reputation: Portraits of Power:

In 1983 [McAuliffe] was hired by Tony Coelho, then a California congressman, to raise money for the Democratic Congressional Campaign Committee (DCCC).

This is where he began to have an impact on the party. Before Coelho, the DCCC had been a desultory little shop, wanly raising money at a single dinner each year. Together, Coelho and McAuliffe courted business money as never before. Their crucial insight was that corporations' political action committees could be sold, as a matter of simple business, on the advantages of supporting the incumbent party (or of, as fund-raisers like to say, "becoming part of the process"). They made the DCCC a powerful machine to perpetuate the party's control of the House, then the only part of government the Republicans had not won in Reagan's revolution. Just as the House Democrats were becoming the most important force in the party, McAuliffe and Coelho were making them more beholden to business than ever before.

More from Davis' article:

To take but one example, Vernon's Don Dixon [subsequently jailed for looting his S&L], for whom no excess was too wretched, purchased the sister ship of the presidential yacht Sequoia, named it High Spirits, anchored it in the Tidal Basin, and made it available to Congressman Tony Coelho of California, the majority whip and chairman of the Democratic Congressional Campaign Committee, who held fundraising events on the vessel eleven times in 1985 and 1986. But because Coelho's mind was evidently clouded by affairs of state, he seemed not to notice that Dixon and Vernon never billed him the $2,000 half-day charter fee; when the oversight was pointed out to him by [banking regulators], Coelho and the campaign committee reimbursed Vernon to the tune of $48,450.

From Wikipedia:

From 1985 to 1987, McAuliffe served as finance director of the Democratic Congressional Campaign Committee.

Just to make the point with a sledgehammer: Terry McAuliffe was the finance director of the DCCC that failed to notice a corrupt S&L owner had not billed for the use of a yacht the on which the committee hosted fund-raising parties.

(An aside: Coelho ended up resigning from Congress when it was discovered that he had received a sweetheart S&L loan and used it to purchase junk-bonds.)

But that's not even close to the end of McAuliffe's involvement with the S&L scandal.

More from the Davis article:

On the last night of California's 1982 legislative session, a bill named for a prominent Republican assemblyman, Pat Nolan, cleared its final hurdle and passes in twenty seconds with not a hint of debate. Under the Nolan bill a California-chartered thrift could invest 100 percent of its deposits in any venture it chose. A California thrift could purchase stocks and bonds; it could become a corporate raider and practice greenmail. It could buy mushroom farms and Antarctic real estate; it could invest in junk bonds and perpetual-motion machines. The California thrifts, in short, were permitted to become perfect venture capitalists - high fliers, indeed, but with full knowledge that beneath them spread the safety net of federal deposit insurance. The Nolan Bill was quickly copied in Texas and Florida...

Here's something from Businessweek, circa 1997:

Take his relationship with the International Brotherhood of Electrical Workers. In 1991, McAuliffe formed a partnership with a pension fund jointly operated by the IBEW and the National Electrical Contractors Assn., a management trade group.

Such funds are regulated under the Taft-Hartley Act, and contributions come from both unionized electrical workers and from their employers, electrical contractors.
The fund has co-chairmen-one from the union and one from management-and both labor and management employees are beneficiaries. The IBEW fund currently has $6 billion invested in stocks, bonds, and real estate.

In the 1991 deal that McAuliffe packaged and brought to the fund, the fund put up $38.7 million in cash for five apartment complexes and a rundown shopping center near St. Petersburg. McAuliffe got a 50% equity stake, even though the fund put up all the money.

No investment adviser was involved, says John M. Grau, co-chairman of the fund and executive vice-president of the National Electrical Contractors Assn. because McAuliffe's plan seemed like a slam-dunk: The pension plan was acquiring the properties at $10 million below their appraised price.

Why such a deal? Because the seller was the Resolution Trust Corp.,which had taken control of the properties from Orlando-based American Pioneer Savings Bank.

The RTC had rescued the S&L and placed it in receivership a year earlier-costing taxpayers $500 million. American Pioneer had been owned by Richard A. Swann, father of Dorothy Swann, McAuliffe's wife.

The elder Swann once presided over a $2 billion commercial empire. But it crashed when regulators declared the S&L insolvent. Swann filed for personal bankruptcy on Nov. 21, 1990.

Since then, Swann says, he acts as McAuliffe's attorney in business ventures and is paid fees for managing McAuliffe companies. McAuliffe says Swann is not a partner but is paid to "help with the management."

And finally, to complete the circle, more from Davis:

In the months and years to come, one can expect the Resolution Trust to make any number of sweetheart deals as it moves quickly to sell off the real estate accumulated by the busted thrifts. The government itself acknowledged earlier this summer that a certain amount of fraud is inevitable. That the buyers of these properties might number among them the very gentlemen who got the country in the mess in the first place should not be discounted, and already certain individuals with cash-filled suitcases have made their appearance. Who knows more about the true value of the properties the government intends to sell off than the developers and thrift owners who defaulted on the properties?

As I've gotten more involved in following the race for the Democratic nomination for Governor here in VA, I've been writing about McAuliffe's history. And I've taken some withering criticism from people I respect. The common refrain is that I'm jumping to conclusions and making much ado about things that have been already examined and found wanting. McAuliffe has never been indicted or charged with anything, let alone found guilty. This type of "attack" is without substance and distasteful. We should all strive for civility and keeping our primary race "positive".

Ugh.

As I've said before, a "positive" race works out very well for the politician with the longest trail of dirt stretching behind him. "Positive" is good when there isn't anything that needs to be vetted, but if there is... well, the primary is the place to do it.

And here, we have a mother-lode of negativity.

Terry McAuliffe simply will not address these concerns in any real way. He's hoping to smile and back-slap his way to primary victory. Of course, his millions of dollars in out of state donations - the money that has allowed him to hire 98 staffers - will certainly be useful to him as he waltzes toward the finish-line. What was that line? Something about how "Nothing empties the mind of inconvenient knowledge more quickly than if one's career depends upon it"? I'm thinking there may be a lot of that going on in Virginia these days, especially amongst the netroots.

What else explains the fact that Howard Dean's nemesis - the anti-thesis of "people-powered politics" - has captured so many former stalwarts of anti-establishment Democratic politics?

Just a year or two ago, the entire netroots pretty much sang with one voice: money-power and transaction-based politics had no place in the Democratic Party. We wanted proud progressives that demonstrated a willingness to stand up and fight against the lobbyists and corporate interests.

Finally, we in the netroots reserved special condemnation for the corrupt. We railed against Tom DeLay and Jack Abramoff and the K-Street project and the self-dealing and the money-fueled corrupt politics that characterized Washington DC for the entire life-span of the blogosphere. Of course, all of that time was marked by Republican rule, so maybe we didn't realize how bad things were under the Democratic leadership of the '80s and '90s. We can hardly be blamed for that; to the extent we had an internet in those years, it wasn't what it is today. If we could stomach it, we were forced to rely upon the MSM for our political news.
But... As the articles I've laid out demonstrate, it is possible to get a flavor for what was going on back then. And Terry McAuliffe was right in the middle of twenty years of a Democratic death-spiral from the mid-eighties until 2006. In fact, Democratic fortunes didn't change until McAuliffe left the scene.

Everything that was bad about democratic politics at the national level was exemplified by Terry McAuliffe's leadership. Here in Virginia, we consistently rate as one of the best governed states in the Union. Do you really want McAuliffe leading the Commonwealth?

Think about it. Please.

Comments

[mikep007]

I've never liked McAuliffe. He is what is wrong with politics. He is the cocktail party circuit politician that is looking for power- not change. Luckily the people of Virginia will see this and I am sure he will not be the nominee. We suffered our worst losses as Democrats under his failed DNC leadership. WHat can he bring to Virginia? Nothing!

[yellowhound]

MarionWatts, there is a native Virginian in the race: Creigh Deeds. His family's been in Bath County since 1750. Deeds was born in Richmond -- work's hard to find in Bath County, and his father was a Richmond cop before moving the family back home.

I'm leftwards of Deeds, but he's my anti-McAuliffe choice for two reasons:

1) PERSONALITY: Having met Deeds in person, I can tell you he's a manifestly warm, genuine, humble and down-to-earth feller, but has the fire to fight Republicans. (I've met McAuliffe several times as well -- he's not warm, but is very impressive if you haven't read Mike Stark.)

2) ELECTABILITY: When Deeds ran against Bob "Regency U." McDonnell for Attorney General, he came within 324 votes of beating him despite having been outspent 3 to 1 and despite Virginia's tendency to prefer Republicans for that office. New York McAuliffe and Massachusetts Moran may split the Northern Virginia vote in the primary, and neither may be electable state-wide, McAuliffe for the reasons Mike's been pointing out and Moran because he's "too liberal", a "come-here", and lives in NoVa.

Deeds' modest Richmond headquarters had its opening last night, but he couldn't make it: unlike Moran, who resigned his Delegate seat to permit an extra 45 days of fundraising, Deeds was busy doing the people's business. The Senate went into overtime sustaining 12 of Gov. Tim Kaine's 14 vetos.

To plagiarize another commentator, his motto should be "Deeds, not words."

[MarionWatts]

As an ex-patriot Virginian and a Democrat, I'd like to know why we cannot have a governor of our Commonwealth who's actually from our Commonwealth. Or are they all Republicans?

[joanVA]

I wonder about this. Your research needs to be verified and then published in local papers in Virginia. It would be better, as you say, if this comes out in the primary--not the general election. The trouble is the other 2 Democratic candidates don't seem to be very strong opponents for the Republican challenger. Where's another Mark Warner or Tim Kaine?

[historymatters]

I agree with you 100%. McAuliffe is not the guy Virginia needs. I think he's in for a tougher race than he expects.

[HST]

I wish someone would compile all the changes made to the banking and financial service regulations since the 1980's so we could then begin to roll them all back -preferably all in one legislative package called the bank safeguard act.

Since the S&L crisis, Enron and the current collaspe, whenever someone says the word "deregulation" we should all carefully hold on to our wallets.

[sundin]

Thanks for another informative article Mr. Stark.
I've been following your work in this series and I've been very impressed.
All I knew of McAulliffe, before his work with the Clinton campaign, was his disastrous stewardship of the DNC.
Your research has been eye-opening.
I live in Charlottesville, and I'm very excited to vote in this primary.

[Mintcondition]

Dear MoveOn member,
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The president knows that we can't trust the same folks who got us into this mess to help lead us out.


It's time to do the same for the banks. And the best way to start is by firing Bank of America CEO Ken Lewis. He's the worst of the worst.


Lewis's poor management helped ruin his company and our economy. Shareholders are calling him "reckless" and citing "disastrous missteps."1 Worse, Lewis accepted $45 billion in taxpayer bailout funds, but instead of using all the money to get the economy going again, he let $3.6 billion go to bonuses for top execs.2

There can't be real reform on Wall Street until the CEOs who brought down the banks we had to bail out are long gone.


Can you sign our petition asking Treasury Secretary Geithner replace the leadership at bailed out banks—starting with Ken Lewis? Clicking here adds your name:

http://pol.moveon.org/lewis//o.pl?id=15895-9193653-wJwPJMx&t=4

[deantv]

can you tell us more about his involvement with Global Crossing?

[bobwalters]

Thanks for this article. Wasn't McAuliffe ALSO one of the prime movers of formation and nurturance of the DLC, along with Robert Rubin, Larry Summers, et. al, leading up to its virtual seizure of the Democratic Party machinery leading up to the Clinton candidacy/­presidency­? Indeed, has he not been rather central to the subornation of the Democratic Party to the very corporate/Wall Street interests the nation is now suffering because of? The netroots needs to be a little more sensitive/­knowledgea­ble about history. McAuliffe & Co., including Rahm Emmanuel, were the principle opponents to Dr. Howard Dean's ascendency as a presidential candidate, and his leadership of the Democratic Party -- a nearly moribund group of insider sleaze-bags that Dean pushed aside, pursued a strategic vision for the 50-State strategy, and has delivered both the Congressional majorities and the Obama presidency...not to take away from the competent campaigns waged by those worthies, but to recognize Dean's pivotal role. One might profit from reading some of Walter Karp's & Lewis Lapham's historical analyses to get a feel for how corrupt, self-serving parties warp and distort politics -- and economics -- in our nation.

[go]

Wow, I am going back in time and something I felt back in 1982 is becoming clear. I worked on the Carter campaign in Iowa in 76 while still in high school it was one of the most exciting times in my life, I was even invited to the State of the Union address in 78 and still remember dancing in the White House to the Marine Band. That campaign was about issues there was still a whiff of Camelot in the air, that problems like poverty, nuclear arms and education could be solved. I went back to volunteer for the Democratic Party after college in 82 and all they talked about at campaign headquarters was
MONEY, they seemed bereft of solutions or ideas. I was stunned, it was like Zappa had said "Democrats are just Republicans with bad shoes" I had worked on campaigns since I was thirteen and I was left with such distaste I never worked on a campaign again. Thanks for clearing up what was going down.