Back in 1986 when the savings and loan crisis still looked relatively small, Sen. Jake Garn, R-Utah, made some amazingly accurate predictions.
He foresaw "devastating losses" to federal funds that insure savings and loans and warned of the then almost-unspeakable horror of taxpayers being forced to bail out the S&L industry. He unsuccessfully urged Congress to pass bills to avoid that.Instead of being praised as an S&L prophet, Garn is one of the most criticized people on Capitol Hill - often by House members who opposed his early bills and pressured M. Danny Wall, a former Garn aide, to resign as the nation's top S&L regulator.
Charges are flying that Garn did not do enough to stop the S&L disaster as the top Republican on the Senate Banking Committee; that S&L lobbyists were too cozy with him; that his S&L deregulation led to the collapse; and that he let problems fester while worrying more about flying in space or protecting Wall.
"I expect criticism. It's part of the job. But to have been a prophet on this and to have worked hard to resolve the problem, and then be criticized like this is infuriating," Garn told the Deseret News.
He challenged the press earlier this week to look at his record closely, predicting it would show that he was "the only one in Congress doing something about the problem."
The Deseret News accepted the challenge.
A review of the Congressional Record, Treasury Department chronologies and press clippings shows Garn fought long and hard to solve S&L problems and accurately predicted the consequences of inaction. The review, however, cannot settle debate over what caused the S&L fiasco and how much of the blame belongs with Garn.
Following is an overview of key S&L crisis events:
- In 1982, Congress passed the Garn-St. German Act to largely deregulate S&Ls and allow investment and activities beyond traditional home loans. Critics now charge that fueled failures, but Garn says fraud by thrift owners and collapse of housing markets, especially in the Southwest, are the culprits.
- In 1984 and 1985, worry began that S&L insurance funds could not cover potential losses from the growing number of insolvent thrifts, and regulators began to call for recapitalization of the funds.
During late 1984 and early 1985, Garn was busy - as critics claim - planning and training to fly on the space shuttle, which he did in April 1985.
- In July 1985, top S&L regulator Edwin Gray told the Senate Banking Committee - of which Garn was chairman through 1986 - that S&L insurance was "under enormous stress" and urged quick action to help reduce losses.
- On Feb. 12, 1986, a congressional study said S&L insurance funds needed as much as $22.5 billion beyond their resources. In subsequent weeks, the Reagan administration put together a plan to save the fund and restructure S&Ls.
In May, Garn and former Sen. William Proxmire, D-Wis., introduced the administration's bill, and in June, Garn also introduced a version of the bill that included financial system modernization.
- In August 1986, Garn dropped all of the banking reform provisions. That left only a "clean" bill forcing S&Ls to finance $15 billion to help close insolvent thrifts threatening insurance funds. It passed his committee the same day.
Meanwhile, House Speaker Jim Wright blocked floor action in the House on the bill, saying he feared it would encourage regulators to close Texas S&Ls instead of working with them - actions that helped lead to his forced resignation.
- On Sept. 10, 1986, Garn donated a kidney to his daughter. He ignored doctors' advice to stay in bed, and possibly risked his life by traveling to Washington trying to obtain final passage of his bill forcing S&Ls to finance $15 billion so regulators could afford to close insolvent S&Ls.
In a speech on Oct. 18, Garn correctly predicted, "We should not tempt the hand of fate by doing nothing now. The consequences of that kind of inaction are bleak: potentially devastating losses to the (thrift insurance) fund . . . and even the possibility of direct federal appropriations (from taxpayers)."
The Senate passed his bill, but the House insisted on keeping attached to it a housing bill that the Senate and President Reagan would not accept. Garn, finally forced into bed, said he telephoned former House Banking Chairman Ferdinand St. Germain, D-R.I., five times the last day of the session begging him to pass a clean bill.
The bill never passed. Congress adjourned. Garn issued a press statement on Oct. 20, 1986, expressing his disappointment and saying quick action was still needed.
- Shortly after the next Congress convened, Garn and Proxmire introduced a bill on Jan. 6, 1987, again calling for $15 billion for thrift regulators.
On March 9, Gray warned Garn that the thrift crisis was worse than earlier believed. On March 10, the Senate Banking Committee refused the full $15 billion requested, and despite efforts by Garn, passed out a bill calling for just $7.5 billion. Despite Garn's continued urging to fund the full request, the Senate approved the $7.5 billion later that month.
Garn said the action demonstrated "the failure to comprehend the size and the nature of the problem."
Of note, Garn at the time blasted also some S&L executives who suggested that taxpayers and not thrifts come up with that money. "There is simply no reason that the taxpayers of this country should bail out fraud, mismanagement and stupidity."
- In July, House-Senate conferees working with the Reagan administration approved a $10.8 billion bill, later passed by both Houses and signed by Reagan on Aug. 10, 1987. It was 18 months after first requested, with only two-thirds funding.
Also in July, Wall - Garn's former banking aide - left to replace Gray as the top S&L regulator, a job Garn helped him obtain.
In September, Democrats charged the Reagan/
Bush administration had not done enough to solve the S&L problem. Garn blamed instead the slowness of the Democratic-controlled Congress.
He also complained Democrats first wanted regulators not to close thrifts but to work with them or find buyers; then complained too many insolvent thrifts were open; and finally complained regulators were closing them too fast.
Garn said (which later turned out to be a bad prophecy), "There is no need to rush off to saddle the taxpayer with the burden. Is the problem enormous? You bet it is. But (regulators) clearly have the resources to deal with the problem in the near-term."
- In 1989, President Bush proposed a massive S&L bailout and reform bill - which Garn introduced with Riegle. It received quick passage in the Senate.
The House took several months to work out the bill, debating among other things whether Wall should automatically keep his job as top S&L regulator.
Garn said that he did not bargain away anything to protect Wall's job, which critics question. Senate negotiators insisted that Wall keep his job during restructuring.
A $160 billion bailout was finally approved - which many say is likely still too small now. Garn said the need would be tens of billions smaller if his early bills were passed and says no one knows how big the S&L problem will end up.
Some of Garn's critics, such as Omar Kadar - a Democratic activist and former BYU professor - say congressional oversight of S&Ls was grossly lacking and therefore those in charge, including Garn, should resign.
Garn said Kadar and most journalists attacking him have no background in banking and that his record shows he was trying hard to correct problems.