America’s Housing and
Financial Frauds
Rodney Stich
2nd ed
Author of numerous books on government intrigue
Copyright December 2010 by Rodney Stich and Silverpeak Enterprises, a Nevada Corporation, PO Box 5, Alamo, CA 94507. All rights reserved. Short segments of this book may be reproduced by a newspaper, magazine, reviewer, or on the Internet, making reference to the book and the author. All of these books are available in print and e-book formats, including Kindle. Suggest ordering www.amazon.com.
Bisac code: / Federal Government see Government / National
/ Government / Legislative Branch
Library of Congress Catalog Card Number: pending
Stich, Rodney—Author
America’s Housing & Financial Frauds ISBN 978-0-932438-57-7
Other books by Rodney Stich with Print book ISBN numbers:
America’s Housing & Financial Frauds (978-0-932438-57-7)
Blowback, 9/11, and Cover-ups, 1st ed. (978-0-932438-15-7)
Congress and Other U.S. Cesspools (978-0-932438-29-4)
Crimes of the FBI-DOJ, and the Mafia (978-0-932438-26-3)
David Vs. Goliath: 9/11 & Other Tragedies (978-0-932438-25-6)
Defrauding America, 4th ed. Vol. One (978-0-932438-18-8)
Defrauding America, 4th ed. Vol. Two (978-0-932438-19-5)
Disavow: A CIA Saga of Betrayal (978-0-932438-17-1)
Drugging America, 2nd ed. (978-0-932438-11-9)
Explosive Secrets of Covert CIA Companies (978-0-932438-23-2)
FBI, CIA, the Mob, and Treachery (978-0-932438-24-9)
Iraq, Lies, Cover-ups, and Consequences, (978-0-932438-22-5)
Lawyers and Judge: American Trojan Horses (978-0-932438-16-4)
Lockerbie to 9/11: Massive Fraud & Conseq. (978-0-932438-67-6)
Subverting America, Vol. One (978-0-932438-20-1)
Subverting America, Vol. Two (978-0-932438-21-8)
Terrorism Against America, (978-0-932438-14-0)
Those Ugly Americans: 20th & 21st Centuries (978-0-932438-01-0)
World’s Greatest Financial Frauds: (978-0-932438-63-8)
Each book is available in E-book and print formats.
Books will be periodically revised and expanded.
This printing: January 10, 2010.
TABLE OF CONTENTS
Savings and Loan frauds
Looting HUD
Financial Frauds Involving CIA Assets
Shady Wall Street Culture
America’s Greatest Housing Frauds
Making of Financial Time Bomb
Greatest Financial Crisis Since 1930s Depression
Global Effects of U.S. Financial Frauds
Bailing Out Wall Street’s Greedy Operators
Ponzi: Granddaddy of Financial Frauds
Goldman Sachs and Related Government Regulators
Government Continuation of Subprime Recklessness
No Change of Conduct by Perpetrators
Predatory Banking Practices
Cosmetic Changes at Credit Rating Agencies
Responsibilities Compromised
Endless Series of Human Suffering
Continuing Corrupt Culture
Introduction
This is the detailed and documented story of greed and fraud that brought about the greatest crisis in the U.S. housing market since the great depression of the 1930s. These pages show the extension of the greed throughout the financial sectors, the cover-ups or actual complicity of it by members of Congress, and the cover ups by media people.
The book covers the period leading up to the crisis, the peak of the crisis, and what followed.
It is a story of greed and tragedy, of battered ordinary citizens, some of whom experienced the modern day version of “The Grapes of Wrath.” Instead of the good life depicted in credit card ads, it shows a culture of predatory lending and other financial abuses.
Behind the statistics are millions of ruined lives, men unable to support their families, watching their families starve, go without medical treatment, evicted from their homes, and for some, living in cars or under bridges. Sometimes, in cold or subfreezing temperatures. All the while being told about the multi-million-dollar pay packages for hundreds of people in the financial fields whose greed inflicted enormous financial and personal harm upon millions of people.
It is the story of private-equity groups that buy and destroy acquired companies, destroying jobs and peoples’ lives, and how the deck is stacked against the ordinary American. It is a story of the disconnect between the people and investors. It is an indictment of the cultured in the United States.
What is shown here is an extension of corruption in other areas of government, as described in some of the author’s other books.
America’s Housing and
Financial Frauds
2nd Edition
Rodney Stich
Author of Numerous Books
On Government Mischief
CHAPTER ONE
Savings and Loan Frauds
Congress and the Reagan Administration deregulated the savings and loan industry through the Garn-St Germain Act of 1982, which was signed into law by President Ronald Reagan on October 15, 1982. As he signed the far-reaching bill, Reagan announced that it was “the most important legislation for financial institutions in 50 years.” He added: “I think we’ve hit the jackpot.” If he meant the jackpot reference for a host of crooks, he was absolutely right. Even the famous bank robber, Willie Sutton, never envisioned such riches.
I had considerable real estate at that time,1 including motels, hotels, truck stops, golf courses, apartments, and land, and knew the financial frauds that would follow that form of deregulation. It didn’t take any great expertise to predict the consequences, and surely members of Congress and the industry recognized that fact.
Developers, Mafia figures and crooks, started buying small savings and loans in out-of-the-way-places, thereby gaining access to the treasury of the United States. They could now use government funds to engage in self-dealings, sham transactions, and massive fraud against the American taxpayer. Deregulation and the concurrent fraud were financially fabulous for many people, fueling massive growth in the real estate industry during the 1980s.
The public was, and is, saddled with the price tab of that great savings and loan fraud that was known for years by those who had a responsibility to act. Members of Congress participated in the cover-ups, including the Keating Five, of which Senator John McCain was still in office years later.
The losses from the savings and loan fraud, much of which was outright theft, reportedly exceeded the cost of World War II. Never in the history of the United States had such a massive financial debacle occurred, making the American taxpayer the victim of the biggest scam in the nation’s history. And making it all possible were members of Congress, beholden to the political bribes they received from lobbyists and financial institutions.
The crooks that held the controlling interests in savings and loan associations paid themselves extravagant salaries, with virtually unlimited expense accounts that bled their companies dry. They made loans to themselves or corporations they owned or controlled and had a fabulous lifestyle that couldn’t possibly be supported by the income of the savings and loans they acquired.
Warning Flags Presaging Deregulation
It was no secret to members of Congress what would happen if the savings and loans were deregulated. The consequences of relaxing safeguards were seen elsewhere. For instance, the danger of brokered deposits was evident when serious problems arose in California during the 1960s when these deposits were allowed to reach a high percentage of a financial institution’s deposits, threatening its solvency. Sudden withdrawal of such large sums of money deposited as a block could easily make the institution insolvent.
To correct this problem, regulators ordered a cap of five percent of an institution’s total brokered deposits. This restriction remained from 1963 until the limit on brokered deposits was removed in 1982 by the Depository Institutions Deregulation Committee, chaired by Treasury Secretary Donald Regan. This change was enormously profitable to financial institutions dealing in such deposits, including Regan’s prior employer before he joined the Reagan administration.
Brokered deposits consisted of blocks of $100,000 deposits from individual depositors, which was the limit for federal insurance guarantees.2 By dealing in brokered deposits the banks were able to increase their capital and engage in huge fraudulent schemes. The danger arose from the high interest rates and fees needed to acquire them, and these costs were greater than what could be earned by lending the money for safe real estate investments.
The Penn Square Bank Fraud
Just prior to voting for deregulating the savings and loans, the nation’s worst bank failure occurred, which was caused by eliminating safeguards and permitting brokered deposits. The Oklahoma City financial institution, Penn Square Bank, failed in 1982 and brought giant Continental Illinois National Bank and Trust Company in Chicago to the brink of failure, as well as other lending institutions that had placed large sums of money into Penn Square Bank.
The American taxpayers had to bail out Continental Illinois to the tune of $4.5 billion (plus the interest that is still being paid on the payout). This amount was in addition to the payments made to the insured depositors at Penn Square. It was the largest federal bailout in the nation’s history, and showed the dangers of deregulation and brokered deposits and what could be expected with the subsequent signing of the deregulation act.
Penn Square offered the deposit brokers higher interest rates and substantial brokerage commissions for funds placed with the financial institution, causing brokers to place millions of dollars into the bank on any given day. But the rates and the fees that Penn Square had to pay for these deposits required making loans on high-risk investments. Further, the continual losses due to high costs of the funds and the inadequacy of returns on these funds required a continuing infusion of money to continue the Ponzi-like scheme.
Common sense and the history of failures made obvious what would happen when members of Congress voted for deregulation. But many of those who voted for deregulating the savings and loans were recipients of large financial contributions.
With high-interest paid for brokered deposits, and the low interest rate charged borrowers for home loans, the spread was too much between the rate that homeowners could pay and the rate the savings and loans had to pay for the brokered funds. The financing of home loans suffered.
The primary problem of deregulation came when the lending institution engaged in self-dealing, land-flips, sham loans, and many other devices used to carry out the massive fraud. But the immediate financial benefits to those voting for deregulation, the law firms and public relations firms, easily took precedence over the harm inflicted upon the United States and the American people.
Every Common-sense Warning Sign Ignored
Some of the practices that could be expected to occur, and which did occur after deregulation, included:
Inflating the value of properties through land flips, whereby a parcel of land was “resold” numerous times, sometimes on the same day. Each time the new “buyer” paid a higher price. In that way, a borrower could indicate the land was worth far more than it actually was and obtain a larger loan than the property was worth. Oftentimes no payments would be made on the loan after receiving the loan proceeds, and the property allowed to go into foreclosure. The borrower then walked away with the difference between the purchase price of the property and the loan proceeds. In many cases this constituted millions of dollars
Making a loan to a controlled or a dummy corporation far beyond the value of the property, and then let the loan go into default, at which time it would be abandoned.
Making a loan that was not intended to be repaid to a controlled corporation. Then when the loan and interest payments are due, make a larger loan on the property to “pay off” the prior loan and accumulated interest, thus showing a sham profit. The loan would be shown as a performing loan on the books rather than a loan in default.
Swapping bad loans between cooperating financial institutions and showing the loans as performing loans on the books.
Spending lavishly on aircraft, vacation homes, trips, and other expensive life styles and charging it to business expenses. An honestly operated business would not incur such charges when the business was operating in the red.
Paying inordinately high salaries to themselves and providing themselves with bonuses when bad non-performing loans are renewed or traded for other bad loans with cooperating institutions.
Making sham loans on greatly overvalued real estate owned or controlled by the lending institution, with borrowers never intending to repay the loans.
Hiring former federal regulators at exorbitant salaries for their influence-peddling abilities and knowledge, to assist in circumventing regulatory protections.
Paying many millions of dollars in bribes to members of Congress to block actions by federal regulators, and block corrective legislation.
Financing the Looting
To generate the hundreds of millions of dollars to fund these scams, the parties operating savings and loans needed a steady supply of money, far more than could be expected from local depositors. The answer was in brokered deposits. Money brokers pooled $100,000 deposits from different sources and deposited the funds into whatever savings and loan offered the highest interest and paid the highest brokerage fee.
The deposited funds would either be used for high-risk loans or, as was often the case, to fund sham transactions in which there was no intention to repay the loans. The loss of several hundred billion dollars that will be paid by the American taxpayer required more than simply poor judgment. There was no risk to the con artists, as the American taxpayers were insuring the money.
Brokers would often offer deposits to a savings and loan on condition that the institution make one or more loans on a given piece of real estate. The loan amount would often be made in excess of the value of the property used for security, or made without any security. The institution making the loan may or may not realize that the loan would never be repaid.
The Expected Commenced Immediately
The expected consequences started happening immediately. Among the first was Vernon Savings and Loan in Texas, which failed in 1984, involving brokered deposits, land flips, inflated mortgages, and huge personal expenses billed to the financial institutions. Loans that would never have been made with the former safeguards were made to insiders and friends who scratched each other’s backs as they made themselves rich.
Members of Congress Blocked Corrective Actions
Ed Gray was sworn in on May 1, 1983, to head the Federal Home Loan Bank Board (FHLBB), and promptly discovered the seriousness of the massive fraud. He tried correcting the problem by returning the restriction on brokered deposits to the previous five percent, thereby halting the primary problem. But those who used the brokered deposits descended upon Congress, handing out money insured by the American taxpayer and succeeding in blocking this change. Treasury Secretary Regan, whose former employer profited by the brokered deposits, and many others, sought to discredit Gray as some sort of wacko.
Replacing Complainer with Congressional Aide
Finally, the discrediting campaign succeeded, and Gray was replaced by Danny Wall, an aide to Senator Jake Garn, Chairman of the Senate Banking Committee. Wall then obstructed corrective action to keep the massive fraud scheme in operation, while simultaneously keeping the money flowing to members of Congress that kept federal investigators at bay. Wall protected Lincoln Savings and Loan from the San Francisco regulatory board that had planned to shut down the corruption-plagued institution, removing Lincoln from the jurisdiction of the regulators who had uncovered the corruption.
In an unprecedented action, Wall transferred regulatory jurisdiction of Lincoln to Washington, and Lincoln continued its corrupt practices of looting assets of U.S. taxpayers and individual investors. One act was to offer bonds of bankrupted American Continental Corporation, Lincoln’s parent corporation, to its depositors, falsely claiming they were government-protected. Thousands of elderly people with no other source of income lost their life’s savings through this scheme, made possible by Washington and California politicians. These tactics also increased the immediate cost to the American taxpayer to approximately $2 billion plus the triple or so amount that will be paid in interest before the debt is paid off, if it ever is.
The Infamous “Keating-Five”
Among Other Members of Congress
Virtually everyone who played the game, who looked the other way, or who blocked corrective action, profited. Members of Congress, including the Keating-Five, received bribes for blocking corrective action by federal inspectors. The media received advertising dollars from large numbers of real estate developments built under a cloud of fraud. The crooks in the savings and loans and others acting with them profited. Everyone knew the American taxpayer would foot the bills. Another group of losers, given very little attention, were the stockholders. Many of them invested their life’s savings in the savings and loans, and these savings were usually lost.
Simultaneously, Lincoln’s President, Charles Keating,3paid $839,000 of taxpayer’s money to various election committees to reelect Cranston,4 and hundreds of thousands more to the senators known as the “Keating Five:” Senators Alan Cranston, senior member on the House Banking Committee; Dennis DeConcini; John McCain; John Glenn; and Donald Riegle. I had notified each of them of the criminal activities I had uncovered, and demanded they receive testimony and evidence that my CIA and DEA whistleblowers and I were ready to present. They refused to respond.
Members of Congress Fought to Continue the Cover-Up
Members of Congress fought to continue the cover-up to the end. In June 1989 Congress quietly rejected a request for $36.8 million to hire investigators to accelerate the investigation and prosecution of corrupt savings and loan officials. Simultaneously, significant amounts of the looted funds were given to members of Congress as political contributions. It was like paying off the cops to operate a criminal enterprise.
In 1986 the Keating-Five senators applied pressure upon Washington regulators to prevent government investigators from taking actions against Keating’s Lincoln Savings and Loan (after the group received huge financial donations from Keating). This Congressional obstruction of the regulatory function of the U.S. government increased the costs to taxpayers far in excess of two hundred billion dollars for the entire industry. The taxpayers also must pay for the bribes paid to politicians on the California and federal levels and to the former government officials who became high salaried employees of Lincoln.
California’s Senator Alan Cranston obstructed the actions of the regulators who sought to prevent others from losing money, including elderly and retired people who invested in the uninsured bonds issued by Keating’s enterprises. This obstructive action interrupted the regulatory process, delaying the government takeover of Lincoln Savings and Loan, as it continued selling worthless, uninsured securities to the public.
Even Alan Greenspan, then a private consultant and later chairman of the Federal Reserve Board, sent a letter seeking to block corrective actions, falsely claiming Lincoln was in good financial shape and had good lending practices. This was preposterous. Lincoln’s primary assets were grossly inflated desert land. Lincoln had a practice of lending money to closely related investors or their own real estate enterprises, often without any credit check and without collateral.
Eventually the losses were too great to ignore. A new agency was formed to clean up the mess. But the same parties who blocked prior corrective action wanted Wall installed as its head, fighting to retain the head of the regulatory agency that helped continue the escalating corruption. Senator Cranston and Representative Donald Riegle fought hard to have Danny Wall confirmed as head of the new agency without a confirmation hearing, avoiding senate questioning of the debacle that unfolded while he held responsibility to prevent such fraud.
Congress’ response to the nation’s greatest financial debacle consisted of carefully avoiding charging any of their members, including the Keating-Five, with any crimes. They wrung their hands trying to decide whether any of the senators who received huge amounts of money from the crooks, and who blocked corrective attempts by federal regulators, violated ethics. Using this standard on many people sent to federal prison for far less federal offenses would greatly reduce the prison population.
You Rat on Me and I’ll Rat on You
Cranston had earlier warned the entire United States Senate that, if the Ethics Committee moved to censure him for his role in the savings and loan scandal, he would blow the whistle on the role played by other senators in the savings and loan matter. As the “investigating” committee considered whether to censor Cranston for ethics violations, Senator Jeff Bingaman disqualified himself, requiring appointment of another senator, which in turn required weeks for the replacement to review the evidence.
Bingaman had disqualified himself after “suddenly” discovering, after three years, that a conflict of interest existed: his wife worked for a law firm that once represented two of Cranston‘s staff members whose legal bill had not been paid. That move took the heat off the ethics committee until media attention focused elsewhere.
Congress repeatedly refused to provide money to shut down the hemorrhaging savings and loans, which then permitted the looting to go on, as well as continuing the political contributions from the insolvent institutions. Congressman Gonzalez stated5 that the White House and federal officials could simply have placed the looted and failed “institutions under government conservatorship.”
But Congressman Gonzalez complained to federal regulators in late 1992 that “Regulators can put failing institutions under government conservatorship now, with or without any new funding. This should save the taxpayers the costs of further depletion of the institutions’ assets.” The refusal to shut down the fraud-racked savings and loans escalated the losses.
Usual Cover-Ups
Investigators, trying to blow the whistle on rampant corruption, testified to the House Banking Committee in October 1989 that Washington officials repeatedly overruled or restricted their investigation of corruption-riddled Lincoln Savings and Loan (as they had done after I started exposing hard-core government corruption in the aviation field starting in the mid-1960s).
Admitting to Paying for Influence
Keating admitted giving over five million dollars in political contributions to influence members of the U.S. House and the Senate and state politicians in California and Arizona. Cranston and the four other senators pressured regulators to back off from shutting down Lincoln Savings and Loan, inflicting even greater losses upon the American taxpayer. Keating wasn’t hesitant about stating the effects he expected when he paid bribes to members of Congress, stating several times to the press:
One question, among many raised in recent weeks, had to do with whether my financial support in any way influenced several political figures to take up my cause. I want to say in the most forceful way I can; I certainly hope so.6
Despite the huge losses incurred by these practices, Keating paid himself and his family over $34 million in the three years before its demise, even though losses during this time were destroying the corporation. Representative Henry Gonzalez of Texas initially protected the system by using his post as chairman of the House Banking Committee to obstruct an investigation into questionable banking practices in his home district. Gonzalez pushed an amendment to protect First National Bank of San Antonio and other financial subsidiaries from the regulatory actions of the Federal Deposit Insurance Corporation. But as the savings and loan scandal shot out from under the media blackout Gonzalez, head of the House committee7with oversight responsibilities for the savings and loan industry under the Office of Thrift Supervision (OTS),8 focused attention on the savings and loan problems.
“Honesty Doesn’t Pay.”
The Dallas Morning News reported a conversation by an anonymous Texas state legislator, who said he had to take bribes from the HUD and savings and loan crowd because he needed the money to maintain his life style on a legislator’s salary. He reportedly stated: “It’s hard to be pious because in all honesty I could use the money. Honesty doesn’t pay.”
My CIA contacts described a well-publicized area of the savings and loan corruption in Dallas apartment units along Interstate 30, running east to Lake Ray Hubbard. Hundreds of apartments were built for which there was no demand, no rentals, and no sales. Money was made through land flips and shoddy construction. Some apartment buildings were shown as completed even though the plumbing and other necessities had not been installed. Covert CIA proprietary operations were involved in this scheme that defrauded the American public.
California Involvement in Corruption
Corrupt California politics made the Lincoln debacle possible. The California General Services Department (and the California Department of Savings and Loans) obstructed the investigation of Lincoln’s corrupt practices, rendering administrative decisions resulting in the loss of almost a quarter billion dollars in savings of the elderly.
In California, Chapter 119 judicial corruption was especially acute. California was the state producing numerous lawyers and prosecutors that played a key role in some of the scandals described within these pages. The Justice Department’s scheme to silence me used California lawyers, law firms, and state judges, augmented by California-based U.S. district court judges and justices. In this way they joined the conspiracy of criminality I sought to expose.
Many on the Reagan-Bush team were from California, including Earl Brian (of Inslaw fame), Edwin Meese (the U.S. Attorney involved in many of the scandals described within these pages), J. Lowell Jensen (part of the Inslaw scandal yet to be described), and Senator Alan Cranston.
Numerous California officials and friends of California Governor George Deukmejian, mostly lawyers, were heavily involved in these scandals. A Keating enterprise, TCS, made political contributions totaling $48,000 to Deukmejian’s campaigns. Keating paid over $189,000 to Deukmejian, in addition to the nearly one million given to California Senator Cranston‘s interests.
Over 23,000 California investors were seriously harmed, as they purchased $250 million in uninsured bonds (most investors thought they were government insured) after California regulators approved their sales, knowing the corporation was insolvent. Many of these elderly people lost their life savings and their sole means of financial support.
In November 1984 Lawrence Taggart, while a California Savings and Loan Commissioner, rendered official decisions allowing Lincoln to continue its fraudulent schemes, causing thousands of investors to lose their life savings. On December 7, 1984, three days before a crucial deadline that nobody was supposed to know about except highest-level federal regulators, Taggart gave Lincoln approval to move almost a billion dollars to its subsidiaries.
Taggart then left to became a director of TCS. But records showed Taggart was already hired by TCS at that time. On January 1, 1985, Taggart left his California position, responsible for regulating savings and loans, to work full-time as TCS’s highest salaried executive. Additionally, he was to receive half of the after-tax profits earned by the consulting department he headed, and other perks. Three weeks later, Lincoln bought $2.89 million worth of TCS common stock.10
Barbara Thomas, a former SEC commissioner, reportedly called the SEC to act as a character witness for Keating during its investigation. Gonzalez said his staff’s investigation revealed that Ms. Thomas had received a $250,000 loan from Mr. Keating with unusual payback provisions, suggesting a quid pro quo arrangement.
Jack Atchison of the auditing firm of Arthur Young & Company was primarily responsible for auditing Lincoln Savings and Loan and submitting the reports to the government. Atchison sent several letters to three senators saying that Lincoln was a sound institution and that federal regulators were harassing Lincoln executives. Atchison then left his employment with the accounting firm and went to work for Lincoln at a salary exceeding $900,000 a year. The salary far exceeded what the position justified. It was surely another of hundreds of quid pro quo agreements in exchange for the sham report showing Lincoln as being solvent and in good financial condition, when actually it was not.
A California Department of Corporations lawyer-regulator issued a strong warning about uninsured bonds sold in Lincoln’s offices. But California officials kept the warning quiet, making possible the sale of worthless bonds to thousands of California investors.
California Assemblyman Patrick Nolan received large financial contributions from Keating after Nolan sponsored legislation removing investment restrictions on state-chartered institutions. More dirty California politics followed. In 1983 I notified Governor Deukmejian, California Attorney General Van De Camp, and numerous state legislators, of the involvement of state judges in seeking to silence my exposure of criminal activities. Instead of investigating the charges and taking corrective action, they protected the judges after I filed civil rights actions in federal court.
California officials denied state examiners and legislative investigators access to records, stating there was high danger of asbestos contamination where the records were stored. Possibly twenty years residence in the building might constitute a danger, but certainly not ten minutes to pick up the files! The building owner denied there was any danger:11 “They [the records] could have been picked up any time in the last 200 days. They knew there was no problem [of asbestos].”
Assemblywoman Delaine Eastin of the California House Banking Committee stated that subpoenas would be necessary in the Lincoln case to obtain the records from the California Department of Corporations and the California Department of Savings and Loans. Officials under Governor Deukmejian refused to turn over the records, knowing that they contained evidence of California politicians’ involvement in the savings and loan scandal. California and Arizona committees conducted interim hearings dealing mostly in trivia, in that way protecting California officials implicated in the savings and loan scandal.
Both U.S. senators from California, Alan Cranston and Pete Wilson, received money from Keating to block the actions by federal regulators. Wilson received over $75,000 from Keating and received large financial contributions within two months of his election to the U.S. Senate, holding the record for the amount of political contributions in 1990, according to the San Francisco Chronicle and San Francisco Examiner.
Part of the money, often the life’s savings and means of economic survival, lost by investors, went to bribe U.S. senators and representatives who were protecting the crooks in the savings and loans. Widows, retired persons, many of them elderly, testified before a House Banking Committee on November 14, 1989, that they lost their entire life’s savings, blaming California Senator Alan Cranston and other members of Congress for their losses. Many, unaware they were uninsured, invested their life’s savings in the over $300 million in junk bonds after Cranston and other members of Congress blocked the actions of government inspectors and regulators.
What should have been golden years for thousands of retirees, especially in California, turned into abject poverty, compliments of California regulators and members of Congress, who took bribes to prevent exposure and closure of the corrupt practices of Lincoln Savings and Loan, Keating, and others.
A Few Exceptions
There were a few members of Congress who spoke out on the rampant criminality in the deregulated savings and loan scandal. Representative Jim Leach told a panel of journalists (May 1989), “You have the opportunity to hold your Legislative Branch accountable, and perhaps bring it down.” Referring to the cover-up by the government regulatory agency that permitted the corruption to continue, Leach stated: “This Bank Board did the opposite of making timely warnings. It tried to put people to sleep while a fire was raging.”
Lawyer Joseph Cotchett of Burlingame, California, representing many of the elderly who were swindled in the Lincoln bonds, described the obstructionist tactics by California officials: “And now we have reached the 1,000th coincidence in this case.”
Can the Money be Recovered?
Federal Deposit Insurance Corporation’s Chairman L. William Seidman told of the hopelessness of recovering the huge losses. He warned that the amount of money recovered from anyone found guilty of self-dealing and other insider abuses would be small. “The money is long gone, spent,” Mr. Seidman said. “We cannot expect any substantial recovery from criminal abuse.”
Savings and Loan Scandals Reverberated Into 21st Century
The huge public debt brought about by the savings and loan fraud would be felt by Americans well into the 21st Century. In one case, a federal judge in San Francisco ordered the federal government to pay $381 million to San Francisco’s Golden State Bancorp, Inc. for breaking a promise of special regulatory treatment made during the savings and loan crisis of the 1980s.
Golden State has sought more than $1 billion from the federal government, which was one of over 100 similar suits, because the federal government retreated on a promise it made to encourage savings and loans to take over those that were failing.. In the lawsuit, Golden State argued that federal regulators let Glendale create “supervisory good will” as a paper asset that could count as case in the government’s evaluation of the firm’s capital requirement and then later canceling this, causing Golden State to be declared insolvent or to sell assets.
Members of Congress Hide Another Cost From
Savings and Loan Fraud That They Made Possible
Conveniently kept hidden by Congress and most of the media from the public was the sudden cost escalation of the savings and loan fraud upon them. A New York Times article (November 22, 1998) described how the costs would increase by many billions as the United States would be required to reimburse over 100 existing and failed savings and loans, and their investors, what was estimated to be as much as $50 billion dollars.
These costs arose when the Congress passed legislation in 1990 that violated contractual agreements made during the 1980s between the government and certain savings and loans that provided for financially solvent savings and loans to take over those with a negative net worth. This takeover of financially insolvent savings and loans was later overturned by congress, causing major financial losses for certain overtaking savings and loans, and caused some of them to go out of business. By breaking its contracts with the savings and loan institutions that assumed these massive debts, the government committed an actionable tort.
The rule allowed the buyers of insolvent savings and loans and assumption of their debts to count as an asset of the taking institution. The move converted liabilities into capital that would satisfy regulatory requirements. This would be like requiring a business to take over another company and its debts, giving them certain record-keeping benefits, and then later, refusing to recognize the compensation for assuming these liabilities and causing the companies to go out of business.
Properly seeking redress in the courts, several savings and loans, initially the Winstar Corporation, the Statesman Group, and Glendale Federal, filed suit against the government in July 1996. The lawsuit resulted in a massive judgment against the United States, adding to the staggering debt from the failed savings and loans that the younger generation will someday have to pay when foreign governments stop funding the huge American debt.
Members of Congress Hid the Cost From the Public
Seeking to keep this bad news from the public, Congress had no debate on the matter and avoided news coverage by burying the costs in the appropriations legislation that covers all federal spending, two paragraphs giving the Administration the authority to spend as much money as may be necessary to pay claims arising out of the breach by the government of the contract with the savings and loans, including those who were no longer in operation.
As described earlier, the subprime mortgage scam that started early into the 21st Century was simply a continuation of the prior financial frauds that had risen from the culture and the aiding and abetting of the checks and balances.
Quick Summary of Some of the Financial Scams
Affecting the “Natives” During the Last 30 Years
Among the most memorable financial losses, most of which are debts yet to be paid by the American people, were:
Savings and loan frauds of the 1980s. After the Reagan administration removed safeguards from the savings and loans, the expected fraud occurred, resulting in the multi-billion dollar savings and loan scandals.
HUD fraud of the 1980s.
The $200 billion meltdown brought about by Michael Milken of Drexel Burnham Lambert with his junk bonds in 1989.
The collapse of Long-Term Capital Management in 1994, managed by Bear Stearns, that included among its management the Nobel prizewinners Myron Scholes and Robert Merton.
$5 billion in losses by hedge funds in 1998 when the Russian debt crisis occurred.
The dot-com collapse in 2000, following huge prices paid for technology concerns that had no profits. NASDAQ fell 34% in a month.
CHAPTER TWO
Looting HUD
As my activities became known, I started winning the friendship and confidence of present and former employees and assets of the Central Intelligence Agency, the Drug Enforcement Administration, the FBI, and other government entities. During literally thousands of hours of deposition-like questioning, they provided me details and documentation on government corruption that expanded on what I had already discovered while a government and private investigator and as a victim. For various reasons these people either volunteered the information to me, or they were willing to answer my questions relating to activities in which they actually participated or that they knew about.
A scheme that defrauded the American public of many billions of dollars had its roots in the Department of Housing and Urban Development (HUD). This scheme involved influence peddling and self-dealing by government officials, bribes by corporations, over-billing, political payoffs, fraud, favoritism, kickbacks, and work that was never performed. This area of criminality cost the American taxpayer many billions of dollars in the 1970s and 1980s. The Wall Street Journal called the corruption a “system of spoils and favoritism.” To carry out the looting of government funds, former government regulators were hired for their insider connections to obtain contracts that could otherwise not be obtained. That was the HUD scandal.
The HUD program was legislated to fund the rehabilitation of housing, especially for the elderly. Hundreds of millions of dollars, if not billions, were looted through the HUD program. In the 1980s, during the Reagan-Bush administrations, the fraud in the HUD program was epidemic and is continuing to some extent today. The American taxpayers must pay billions of dollars to support the criminal activities in the HUD program.
A major segment of the HUD fraud was centered in the Denver area and committed by a group of closely related people and companies, who had close ties to the Reagan and Bush administrations. Numerous HUD officials left government to work for the Denver group that defrauded the American people of billions of dollars, much of which is hidden away in either off-shore financial institutions or in secret locations throughout the United States. Philip Winn was one of the kingpins in the Denver group. He was a former HUD Assistant Secretary who joined the MDC group in Denver and became a key player in the HUD and savings and loan scandals.
Numerous HUD officials left government service and received high paying jobs with an interrelated group in Denver. This group included, among others: MDC Holdings; Richmond Homes; Silverado Bank Savings & Loan; Aurora Bank; M & L Business Machines; Leonard Millman; Larry Mizel; David Mandarich (president of MDC Holdings); Ken Good; Bill Walters; Neil Bush; Silverado's President Michael Wise; James Metz, major stockholder in Silverado; and dozens of subsidiaries and related companies, limited partnerships, trusts.
It was learned that Leonard Millman, Larry Mizel, and Philip Winn, all members of the ADL, were partners in these schemes, as was Philip Abrams, former HUD under-secretaries.
Federal regulators involved in the HUD scam included HUD Secretary Samuel Pierce, former Assistant Secretary Thomas Demery; Deborah Gore Dean and Lance Wilson, former executive assistants to Pierce. All except Pierce have been indicted. A number of former HUD officials pleaded guilty to various federal crimes. Dean, an executive assistant to the Reagan Administration's Housing Secretary, was indicted on 13 criminal charges of fraud, perjury, submitting false statements to Congress, and conspiring to steer valuable housing grants to favored developers and consultants.
The group made huge financial contributions to various politicians, including the Reagan-Bush team and the Bill Clinton group. One of the key participants in the fraud, Philip Winn, used part of the money looted from the HUD and savings and loan programs to bribe politicians, especially in the Reagan-Bush presidencies. In return, Winn was appointed U.S. Ambassador to Switzerland and got the protection of the Justice Department through U.S. Attorney Michael Norton, who had secret participation in several of the Denver area real estate projects.
Justice Department officials, with their thousands of investigators throughout the United States, knew of the corruption and did very little. What little they did was usually to prosecute either innocent people or those who played a minor role in the massive criminality. Attorneys, developers, banks, members of the Senate and House were the recipients of the money defrauded from HUD. Consultants, for instance, with political connections, reaped huge fees of as much as $400,000 for a few phone calls or visits to HUD officials or phone calls to powerful members of Congress.
Rampant political favoritism and influence peddling were part of the HUD scandal, combined with payment of millions of dollars for improvements that were never made. Former HUD personnel acted in collusion with present HUD officials in the fraudulent activities. One of the schemes was buying HUD properties for no-money-down, placing second loans on them for improvements that were never made, and then defaulting on the loans while receiving the rental income.
In 1982, the HUD inspector general made a report to Congress, reporting that insiders, including former HUD officials, were defrauding HUD of hundreds of millions of dollars, especially in the Section 8, and particularly sections 224D, 223F, and 202 elderly housing. Congress did not act until six years later when media publicity forced it to conduct an investigation.
In 1988, Arlen Adams was appointed Special Prosecutor for HUD, and during subsequent investigations confirmed that developers with the aid of present and former HUD officials were receiving Section 8 rehabilitation units, grossly overcharging the government, often billing for work that was never accomplished. Simultaneously, the group bilking the government was contributing heavily to the Reagan-Bush team. In March 1989, HUD hearings were triggered by exposure of huge financial donations by the Winn Group and Richmond Homes in Denver.
Turning Prosecution over to the Bad Guys
In November 1989, Congress asked U.S. Attorney General Richard Thornburgh to recommend to the Court of Appeals in Washington the appointment of a Special Prosecutor. He stalled until March 1990, when Congressional pressure forced him to act. Thornburgh had already blocked the appointment of a Special Prosecutor into Inslaw, October Surprise, and eventually BCCI and BNL. U.S. Attorney Generals Edwin Meese, Richard Thornburgh, and William Barr knew about each of the criminal activities described within these pages, and either aided and abetted them directly, or indirectly, by blocking investigation and prosecution. A corollary to that would be the Mafia controlling the highest law enforcement agency in this country.
Statute of Limitations
One of the reasons for stalling prosecution was to allow the statute of limitations to expire, protecting the widespread criminality in the Denver area HUD and savings and loan corruption, and in turn protecting the part played by the Justice Department, the CIA, and many federal and White House officials.
In another investigation, a report was issued by the Committee on Government Operations stating, “The Winn Group did not obtain units from HUD on merit alone, but rather from inside favoritism at HUD.”
Political Payoffs
Key figures in the Denver-based HUD and savings and loan group, Winn and Mizel, contributed heavily to California Congressman's Tom Lantos' Congressional race in 1982. (I had repeatedly reported the corruption that I found to Congressman Lantos, and in typical fashion, he verbally addressed the problem while simultaneously protecting it.)
Part of the Taxpayer Liabilities
Congressional staff investigators discovered thousands of apartments were obtained by the group for rehabilitation, costing the American taxpayer over $100,000 each, when the cost for comparable privately financed units would be approximately $20,000. Congressional investigators discovered that U.S. Attorney Michael Norton owned five large apartment complexes with the Winn Group being investigated.
It was discovered that former FBI Special Agent in charge, Bob Pence, who retired in 1992, had been receiving bribes, along with U.S. Attorney Michael Norton and the head of the Internal Revenue Service's CID unit. Some of these bribes were laundered through M&L Business Machine Company in Denver.
Standard Congressional Cover-up
When the scandal exposed California Congressman Tony Coelho and Texas Congressman Jim Wright, they took early retirement, defusing the pending investigations. The media and the public did not address the huge losses inflicted upon the American taxpayer. Instead, after key Congressmen such as Wright of Texas and Coelho of California were forced to retire so as to discontinue further investigation, their constituents showed little concern about the criminality and huge financial losses to be paid by taxpayers. Their concern was the loss of a powerful Congressman who produced pork barrel benefits for their constituents. Little was said of the huge multi-billion dollar debt inflicted upon the public. If it had been left to the constituents of Congressmen Jim Wright or Coelho, the enormous financial losses would be ignored as long as the voters received benefits from their corrupt Congressmen.
California Representative Tom Lantos (D-Cal.) led a Congressional investigation into the HUD matter, calling it “Influence-peddling of the tawdriest kind. The scandal at HUD is one of the most complex national scandals that we have seen in decades. There is a degree of mismanagement, fraud, abuse, waste, influence-peddling that we have just barely begun to touch.”
Representative Charles Schumer, a subcommittee member, said: “Like picking up a large stone only to discover that bugs and slime have grown in the darkness. This investigation has exposed the corruption which flourished unchecked under Secretary Pierce's HUD.”
In addition to causing Wright and Coelho to resign (with liberal retirement benefits), Congress tried to stonewall an investigation into HUD by blocking confirmation of HUD appointees expressing intent to expose the HUD scandal. After Jack Kemp took over HUD and stated his intent to prosecute those involved, Congress blocked confirmation of Kemp's management team. When the Department of Justice started an investigation into HUD, members of Congress then investigated the Justice Department, threatening to cut back its funding. The Justice Department investigation stopped.
Referring to Congressman Wright’s blocking of an investigation into HUD corruption, a Wall Street Journal editorial (April 17, 1989) stated:
What is most disturbing...is the obvious pattern of so many violations extending over so many years....the brazenness is amazing. Obviously, Mr. Wright felt assured there was no prospect that he ever would be called to account for his actions....When Congress is so powerful it can intimidate the Justice Department from another Abscam case, who should be surprised at corruption?
Shades of the Savings and Loan Debacle
Investigations showed that House speaker Jim Wright obstructed investigation of the HUD corruption while accepting $145,000 in unreported gifts. The House Committee investigating Wright's dealings with the HUD scandal quickly dropped the investigation after some House members reminded them that an investigation would implicate many other members of Congress. After pressuring Jim Wright to resign on the relatively minor charge of ethics violations, the media attention to the HUD scandal ended. The guilty parties went free; the missing billions of dollars of looted money were never found; and the stage was set for more looting of the American taxpayer.
Justice Department Stonewalling
In typical fashion, after congressional members asked the politically-appointed U.S. Attorney General to investigate their allegations, Thornburgh accused them of introducing partisan politics into the HUD investigations. Representative Charles Schumer of New York replied at a news conference:
There's ample evidence of wrongdoing at HUD, but there's stonewalling at the top. And the only way to get to the bottom of the mess at HUD is through the appointment of an independent counsel. Instead of attacking us, the Attorney General should be focusing on making sure that high-ranking officials at HUD don't get away with breaking the law.
Representative Schumer characterized the attorney general's objections as a “political response.” A more correct characterization would probably be felony cover-up, obstruction of justice, and misprision of felonies.
Another time-honored way that Congress (and the Justice Department) stonewalls sensitive investigations is to withhold funding needed to conduct the investigation. Congress threatens to withhold funding from the Justice Department to dissuade Justice officials from investigating their members. Justice Department officials stonewalled the investigation of Chapter 11 judicial corruption, as it stonewalled every scandal I can think of for the last 50 years. It was also done to halt further FBI investigations of Congressional wrongdoings in Abscam.
As the FBI's continuing investigations into the conduct of Congressmen became too threatening, members of Congress responded by dragging Justice Department officials in for grueling oversight hearings. It became clear to Justice Department officials that the budget for the Justice Department was in danger if the probes into Congressional wrongdoings did not cease.
Congress Finally Conducted an “Investigation”
Eventually, Congress was forced to conduct an “investigation.” A House committee stated in a report that the Department of Housing and Urban Development was “enveloped by influence-peddling, favoritism, abuse, greed, fraud, embezzlement and theft.”
Samuel Pierce, Secretary of HUD from 1981 to 1988, refused to cooperate in the HUD investigation, repeatedly invoking his Fifth Amendment privilege against self-incrimination. The House Committee report stated that Pierce gave misleading testimony and that he probably “lied and committed perjury during his testimony on May 25, 1989.”
Appointing an Independent Prosecutor
After Congress covered up the HUD scandal, an independent prosecutor was appointed, who then had to set up an office and hire attorneys to investigate, many of whom had no investigative experience.
The Independent Prosecutor found that HUD officials unlawfully allocated federal funds to developers and consultants with whom they had private financial relations, receiving bribes, and other favors. Silvio J. DeBartolomeis, a former deputy Assistant Secretary of HUD, pled guilty to three criminal charges,12 including conspiring to mislead Congress and HUD's own regional offices concerning a HUD rent subsidy program; and to receiving an illegal salary supplement consisting of a $20,000 loan arranged by developer Phillip Winn. DeBartolomeis was charged with defrauding HUD's Section 8 rehabilitation program, which enriched developers based in the Denver area.
Indicting the Small Fry
Media attention forced Justice Department prosecutors to file charges in the HUD corruption, years after the criminal acts were known. But the indictments were selective. The power brokers with whom U.S. Attorney Michael Norton was in partnership escaped prosecution, or were charged with minor offenses, and evidence was conveniently lost. Federal judges dismissed some charges before the jury could begin deliberation.
The indictments omitted charging the Denver area developers who donated large sums of money to political figures, who had close ties with the CIA, and who contributed large financial contributions or bribes to White House officials and other politicians.
Among the HUD officials who were directly involved in the looting of HUD was HUD Deputy Assistant Secretary, DuBois Gilliam, who pleaded guilty (May 1989) to receiving over $100,000 in payoffs and gifts to approve HUD grants for various developers.
During the investigation, it was disclosed that HUD Secretary Samuel Pierce received over 1,700 formal requests from congressmen and senators requesting support for specific projects. These same members of Congress were receiving political contributions from individuals for whom they sought HUD favoritism.
Eventually, Winn pled guilty to preparing a false receipt for another HUD official that was submitted to HUD investigators. But these charges were chicken feed compared to what Winn and his buddies actually perpetrated. My inside sources stated that over $167 million paid by HUD to the Winn group for rehabilitating HUD housing was never spent for that purpose, and money sequestered in secret locations.
A nine-count felony indictment was made against a former assistant to ex-Senator Edward Brooke13 for allegedly lying to the FBI and a federal grand jury, which were looking into Brooke's role in the HUD influence-peddling scandal. Charges against Deborah Gore Dean included improperly steering funds to clients of former Attorney General John Mitchell after Mitchell was released from his Watergate prison term.
A federal jury in Washington, D.C. on October 26, 1993, convicted former HUD aide Deborah Dean, a central figure in the HUD scandal, of being instrumental in funneling millions of dollars to housing projects that enriched politically connected Republicans.
Group of HUD Whistleblowers
I became a confidant to several former CIA operatives, private investigators, and insiders, who were heavily involved in the Denver-area operations, and through them, discovered some of the inner workings of the corrupt operations. One of the investigators and insiders, Stewart Webb, was a former son-in-law of Leonard Millman. During four years of marriage from 1981 to 1985, Webb became privy to many of the procedures used to loot billions of dollars from the HUD and savings and loan programs in the Denver area.
Following the divorce, Webb expanded on what he had learned as an insider. Through aggressive investigations, Webb discovered the paper trail of the looted money, including thousands of documents he obtained in recorders' offices throughout the United States. Webb was able to document major schemes implicating the Denver group in various financial scandals. Webb discovered the trail to offshore bank accounts and trusts, and their secret locations.
Describing some of the key players in the Denver area looting of HUD and the savings and loans, Webb stated that among the top players were nationally known and politically connected powerhouses such as Carl Lindner, Larry Mizel, Philip Winn, Albert Rose, George Riter and many others. He described how many HUD officials left Washington and joined the Denver-based group, and how their prior Washington connections made the looting possible.
Other insiders, including high-ranking covert CIA personnel, gave additional data to me. Gunther Russbacher, for instance, operated numerous CIA proprietaries having secret dealings with the Denver group, including money laundering, looting of the HUD and savings and loan programs, and other activities.
Webb initially contacted me on September 17, 1991, advising me of corrupt dealings in the HUD and savings and loan program by his former father-in-law and many of the people and groups that worked with him, including MDC Holdings and dozens of limited partnerships, trusts, and subsidiaries. Webb also told me about the large numbers of federal officials who were in the schemes.
Webb appeared as guest on numerous radio shows, some with investigative reporter Margie Sloan, naming the corporations, the complex paper trail, and the individuals involved. He discovered that the U.S. attorney in Denver, Michael Norton, was deeply implicated with the group, sharing secret ownership of valuable properties. Webb discovered that the corrupt Denver group gave large financial contributions to Norton when Norton ran for Congress in the early 1980s. This discovery helped explain one of the reasons why Justice Department officials never prosecuted the key figures in the HUD and savings and loan debacle.
Webb reported that he found that the Winn and MDC group owned over 10,000 units in Colorado, Utah, Nevada, Oklahoma, South Dakota, North Dakota, and another 10,000 units in the area controlled by the Texas regional office of HUD.
Webb and IRS agent Walker in the Denver office frequently exchanged information that they found in HUD-related crimes. In June 1991, Walker told Webb that he could no longer talk to him about the matter, and when Webb asked, “Is [President] Bush covering this thing up?” Walker replied, “Yes,” and then hung up.
Webb stated that his investigation showed that U.S. Attorney Michael Norton was connected to Mizel, a major player in the Denver-area HUD and savings and loan corruption, and that Mizel was Finance Chairman for Norton's unsuccessful Congressional campaign.
Without success, Webb tried to have a Colorado District Attorney in Denver and the U.S. Attorney in Colorado receive his evidence, but they refused.
Protect Their Flanks
Despite the large sums donated to Michael Norton’s campaign for a senate seat, he lost. But the Reagan-Bush team appointed Norton U.S. Attorney in Denver, thereby protecting White House and other federal officials from investigation and prosecution in the HUD corruption.
Justice Department Retaliation
Webb’s appearances on many radio talk shows were apparently causing concern in the Justice Department and in the Denver area. Working with Webb's former father-in-law, U.S. Attorney Michael Norton charged Webb with making harassing and threatening phone calls to his former father-in-law, Leonard Millman. Although the language could have been cleaner, the threats were nothing more than a determination to expose the HUD and savings and loan corruption in which his former father-in-law was involved, which threatened to expose the U.S. Attorney's involvement in the criminal activities.
After Webb heard of the warrant for his arrest, he went underground for the next year, surfacing only to appear as a guest on radio shows in Denver and throughout the United States. For some of the shows he called me collect, and I would then relay his call to the radio station. I had no knowledge of Webb's whereabouts, and didn't want to know.
Arresting an Irritating Whistleblower
In September 1992, shortly after Webb had talked to Ross Perot by phone and revealed his location in Houston, the FBI arrested Webb. Justice Department prosecutors demanded that Webb be denied release pending trial, an almost unheard of demand in a case involving harassing phone calls. Justice Department officials were trying to silence Webb and keep him off talk shows, especially before the 1992 presidential elections.
I advised Webb that he had the opportunity to get additional information on the HUD and savings and loan scandal by talking to other inmates at the federal prison who were former CIA operatives and insiders in the HUD and savings and loan scandal. It was and is standard practice of Justice Department officials to cause the imprisonment of these people in order to silence or discredit them. By entering prison, a writer or investigator has an inside track to information that he would not otherwise have. Sure enough, Webb did discover numerous inmates who gave him additional information, helping to fill in the gaps. While detained in the Federal Correctional Institution at Littleton, near Denver, Webb made contact with a group of former CIA contract agents who were deeply involved with the Denver area group.
Another Source of Information
One of these contacts was a former CIA operative named Trenton Parker, who played key roles in numerous covert CIA operations from 1964 until he fell from grace in the late 1980s. Webb and Trenton shared a prison cell in December 1992, until Parker was released pending trial, which was to start in April 1993. Parker had seen some of the material I had sent to Webb and contacted me after being released. This relationship produced secret and sensitive material and added to the mosaic establishing the complex intrigue and corruption described in these pages.
The confidential status report establishing Trenton's highly secret status in the intelligence community prevented Justice Department and CIA personnel from denying his high rank and status. Additionally, Parker gave me information, including briefs that he filed in the U.S. District Court in Denver that depicted criminal activities by the CIA.