It should be noted that the same sort of scam can be carried out in a period when the real estate market is relatively stable. Properties can be purposely sold back and forth between corporations or individuals in an effort to leave a plausible but totally artificial inflationary sales track record for the property. For example, Individual # 1 can sell a piece of real estate with a current market value of $10 million to Individual # 2 for $20 million. Individual # 2 then sells the same piece of property to Individual # 3 for $30 million.

Then after the value of the property has been sufficiently pumped up through artificial sales, the S&L owner or bank manager, who is also in on the scam, either buys the property or issues a mortgage on the property as if the property were worth $30 million. So now the bank depositors in effect own the unrealistically overvalued property! After all, it is the mortgage payments that are used as money to pay the depositors' interest, and it is the sale of the overvalued properties that is used to pay back the depositors' principal. Needless to say, the true market value is still only $10 million! The $20 million difference is then split amongst the S&L owner and his associates. When the S&L has been milked sufficiently using this or other scams involving leveraged buyouts and junk bonds, it is cast aside for the taxpayers to bailout the exploited depositors.

Don't be fooled into thinking your money is automatically safe, just because it is in the bank. The phrase "safe as a bank" is an anachronism.

In 1937 a record number of banks went bankrupt, and that record number lasted as an unbroken record for almost a half century until 1984! The number of bank failures since then is as follows: 79 in 1984, 120 in 1985, 138 in 1986, 184 in 1987 and finally 200 in 1988!!! Furthermore, the Federal Deposit Insurance Corporation disclosed that in 1986 there were 1484 banks around the country which it officially listed as "problem banks". In 1988 this number had declined by 69 to 1415. Normally this news would be good news providing one doesn't take into account the number of banks that failed in the same period. {B69}

And don't forget, these figures are for banks only! The figures for "problem" and "failed" Savings and Loan thrift institutions are even much worse.

You also ought to be aware that, thanks to Emergency Banking Regulations, your bank deposits can be frozen and dribbled back to you on a fixed limit per month if your bank's doors get locked some day for a liquidation party. Don't assume you will automatically have access to your safety deposit box, because you probably won't, not unless you are wealthy enough to pull the right strings.

The reason that owners of banks and thrifts can afford to gamble in this way and risk having their own bank go bankrupt, is that they only have to cover the depositors money by 4%, and 3% respectively of their own capital; and that money itself could no doubt have been borrowed for the investment, and this can be debt equity.

So what did the thrift owners lose? Practically nothing. As paltry as the 4% and 3% amounts may seem for the privilege of gambling with depositors' money, much owner equity was in the form of business "goodwill"!! The balance sheet intangible called "Goodwill" is being used increasingly as just another tax avoidance loophole. Because goodwill has to be amortized over thirty years, earnings, (i.e. profits) can be artificially reduced to zero with a sufficiently large "goodwill". When Philip Morris bought out Kraft foods, $11.6 billion, or 90% of the purchase price of $12.9 billion was "goodwill". In the process, Kraft passed on the valuable profit-reducing "goodwill" to Philip Morris. Although theoretically its profits and therefore its taxes will be reduced substantially, (it may even run at a loss) its dividends paid to stockholders may not be affected at all. The mania for mergers and acquisitions is fueled by tax avoidance opportunities. In other words, some bank and thrift owners risked practically none of their own money. {B70} The abuse of depositor's savings could virtually be eliminated if banks could only take in deposits equal to say twice the value of their own shareholders' participatory equity, not just a ridiculous 4 percent. The safety and value of all bank depositors' money has been seriously undermined.

Not only have the life savings of many unsuspecting bank depositors provided gamblers with their gambling capital, to add insult to injury, in the process the real estate values for the whole community have been artificially pumped up to the extent that, for an increasingly large number of modern day workers, the prospect of owning a home is becoming only a pipe dream. Many young couples now have difficulty even saving the 10 percent down payment necessary to qualify for a lifetime of mortgage payments.

But the consolidation of real estate ownership is not a new phenomenon, it has been going on relentlessly since the 50's. Mr. Joseph Minarik of the Urban Institute shed plenty of light on the issue. He pointed out that a typical 30 year-old purchasing the median-price home under typical mortgage terms would have incurred carrying costs equal to 14% of his pretax income in 1949, 15% in 1959, 21% in 1973, and 44% in 1983. {B71} Needless to say, this trend has worsened significantly since the start of the 80's. In fact, the Joint Center for Housing Studies at Harvard University have disclosed that between 1980 and 1987, there has been close to an 8% decrease in home ownership for the 25-34 age group. {B72}

Whitewashing and Hiding the Rip-offs

In the headlong rush for quick profits, owners of banks and S&L thrifts that won, won big ...(millions and hundreds of millions). Those that lost, simply walked away and made the taxpayer pick up their gambling debts. At present, the government's official estimate (from the General Accounting Office) is that the thrift bailout will cost $285 billion over 30 years (no doubt a gross underestimation).

While the effects of the S&L bailout will certainly be felt by the bottom 90%, neither the President nor the Congress is keen on the topic being too visible to Americans or the rest of the world for that matter, so the initial 50 billion of bailout money will not even be part of the government's budget. Instead, the Gramm-Rudman deficit cutting law will be purposely avoided by taking $20 billion from this year's already budgeted and allocated money, and by having the remaining $30 billion borrowed not "on budget" by the Treasury, but "off-budget" by a newly formed government agency called Refcorp which will sell bonds which pay higher rates of interest than normal treasury bonds. Because the revenue from the sale of Refcorp bonds are treated as budgetary receipts, the S&L bail-out will appear to actually generate revenue this year!

As Charles Bowsher, the Comptroller-General of the United States put it,

"By conventional wisdom, the U.S. federal budget deficit in 1990 will meet the Gramm-Rudman-Hollings target of $100 billion. Why, then, will the federal debt rise during the same year by about $280 billion? Because the federal government has cooked the books. The American public is being led to believe that the deficit is falling when it is actually rising"

Mr. Bowsher also pointed out that Bush's S&L plan will cost the taxpayer tens of billions in extra, unnecessary interest, just to hide the S&L losses "off budget". {B73} This practice of hiding deficits "off budget" is done strictly for political public relations, and therefore is blatantly meant to deceive and manipulate the public.

Just as the bailout of the Federal Savings & Loan Insurance Corp. (FSLIC) will cost the taxpayer nearly $300 billion, so the following organizations are potential bombs that have the autonomy to borrow money without government approval, but whose debt does not get added into the Federal Budget deficit, and whose debt is not therefore subject to Gramm-Rudman constraints: The Farm Credit System; The Federal Home Loan Mortgage Corp.; the Federal National Mortgage Assn.; and the Student Loan Marketing Assn. {B74}

While the government's formally recognized debt amounts to $2.6 trillion dollars, the "off budget" hidden deficits such as government credit, insurance and loan-guarantee commitments have grown in the last 20 years from $400 billion to more than $5 trillion - nearly twice the national debt, and five times the annual level of federal spending! {B75} The general public has been successfully kept in the dark regarding the future hardships that these off-budget deficits will cause. {B76}

Congress is responsible for going along with this type of deceit. Says Lee Hamilton (D-Ind.), Chairman of the Joint Economic Committee, "We have developed considerable skill and sophistication in meeting deficit-reducing targets ...without reducing the deficit.

Corporations and Insurance Companies

For the purposes of insight and perspective, it is relevant to point out the similarities that exist between corporations and banks. In many respects, corporations can act as banks. Effectively, their "depositors", so to speak, are their shareholders and those people who buy their corporate bonds. Their investment departments can get involved in many of the same type of real estate speculation as banks. In fact, the convoluted transactions that can occur between parent and subsidiary companies within a corporation make "following a bank's audit trail" appear like a kindergarten exercise compared to their own.

Don't be fooled into thinking that when a corporation fails, some big player has lost a fortune. In the corporate version of the S&L scam previously described, corporations, which more often than not are holding companies, can purposely set up a separate subsidiary investment company to go bankrupt if the gamble fails.

Insurance companies too have speculated in real estate with their policy holders' funds, in the same way that S&L thrift owners and the investment departments of corporations have speculated.

{B69} "FDIC believes tide has turned after record number of failures" American Banker (Jan 5 1989): p
{B70} "Spent thrifts, contd" The Economist (Jun 17 1989): p15
{B71} "You can't buy a house anymore..." Financial World (Dec 13 1988): p42
{B72} "Priced out of house and home" Insight (Mar 13 1989): p10
{B73} From article by Mr Bowsher for the Los Angeles Times
{B74} "Burned" BusinessWeek (Oct 9 1989): p57
{B75} "Unsheltered" The Economist (Jan 6 1990): p31
{B76} "The junkification of American T-Bonds" The Economist (May 27 1989): p77