Pushing Up Daisies BY TOM PHILPOTT JR. THE DAISY CHAIN by James O’Shea Pocket Books, 1991, 296 pages Many people find their way to the general through the personal. In that sense, biographies have their right. And, that being so, better they should be written without great distortions \(small ones are quite Leon Trotsky HE STORY OF Don Dixon’s tenure as owner of Vernon Savings and Loan is the story of the S&L crisis itself. He acquired the healthy but low-profit thrift in 1981 just before deregulation and handed it to the federal government in 1987, in whose custody it became a $1 billion sieve. He exploited deregulation as boisterously, as intently, and as disastrously as anyone else in the business. When his high-risk, high-yield deals began to sour, and regulators started watching, he moved to buy politicians with more lust than anyone save Charles Keating himself. His S&L’s money won him personal interventions against regulators from then-House Speaker Jim Wright; and it was on the Vernon-owned yacht, High Spirits, that then-House Whip Tony Coelho threw the fund-raising soirees that eventually cost him his job. When all of this finally crashed down around him, Dixon responded with the classic vulgarity of his era: He declared in a federal courtroom that the company car Vernon had provided him wasn’t extravagant it was a “family Ferrari, four seater, automatic transmission.” James O’Shea’s The Daisy Chain is a biography of sorts. It traces the fall of Vernon Savings \(of Vernon, Texas, population sits in a federal prison convicted of fraud for his Vernon crimes. O’Shea lays out the mechanics of Dixon’s schemes with admirable clarity. By now anybody who has have followed the S&L story knows that the Garn-St. Germain Depository Institutions Act, passed by Congress and signed by President Reagan in 1982, allowed thrifts to invest federally backed dollars in just about any real-estate project they could dream up, whereas previous law permitted investmest only in home Torn Philpott Jr. is an Austin writer. mortgage loans. But in acquiring Vernon, O’Shea explains. Dixon exploited one of the least-discussed and most heinous of the Reagan-backed deregulations the one that allowed real-estate developers to run S&Ls. As a condo builder in Dallas in the early ’70s, Dixon had gorged on loose credit and built thousands of hideous, over-priced units designed to soak up petrodollars flowing into Texas. But then the recession and oil crash of ’74 hit, and Dixon wanted to renegogiate his bank loans. Unamused, his creditors foreclosed, forcing Dixon into bankruptcy court. The lesson, for Dixon. was clear: The credit industry and the building industry must collaborate; bankers need a little business sense, a little foresight, in dealing with developers. Who better, then, to run a S&L than a condo mogul? By the late ’70s, his condo operation, Dondi Corp., had rebounded. The petrodollars had begun to rain down again, and the dirt flew all over the Southwest. Now Dixon only needed to pei -petuate steady credit at easy terms without the threat of quick foreclosure when an economic downturn exposed his building projects as redundant and overvalued. Acquiring an S&L was an obvious answer, and here lies the full, grotesque profanity of the Reagan deregulation. This new dual creature, the S&L owner/real-estate mogul, could now tap into a potentially unlimited pool of depositor money to finance his own or his friends projects with utter impunity. And since Garn-St. Germain had also removed limits on the amount of interest S&Ls could pay out, they needed only to raise interest rates to attract millions in additional deposits. The profits would of course be private; the risks, as we have since learned, would be all too public. In this spirit, Dixon acquired Vernon in late 1981 for $1.1 million in cash and a bank note worth $4.7 million \(half of which Dixon avoided paying back when he went bankrupt built a solid business by making mortgage loans. The new owner, Dixon, declared soon after the deal that his would be a “developer’s bank, run by developers, for developers.” HE GARN-ST. GERMAIN Act wasn’t the only savory feast the Reagan Administration slopped onto the plates of fidiciary gluttons like Dixon. O’Shea details how Donald Regan, then Reagan’s treasury secretary, in 1982 eliminated limits on the amount of brokered deposits S&Ls could accept. The concept of brokered deposits mocks the idea of federal insurance for ac counts of $100,000 or less. Brokered deposits work like this: Wall Street brokerage firms e.g., Merrill Lynch, which, as O’Shea points out, Regan ran before he became treasury secretary gather huge chunks of cash from wealthy investors, break them down into chunks of $100,000, and then shop for the highest interest rate. Garn-St. Germain’s interest deregulation had placed the S&Ls into position to compete for these funds. With the limits on such deposits gone, S&Ls could draw federally insured cash into their coffers simply by offering Wall Street high interest rates on brokered deposits. To make money, they would have to finance risky ventures that promised high -returns. Vernon, under Dixon, pursued this path hotly. Between 1982 and 1986, O’Shea reports, Vernon’s deposits swelled from $78 million to $1.3 billion. Its brokered deposits as a percentage of total deposits rose by more than 1000 percent over the same period. Dixon knew what to do with this windfall. Here’s how a typical Dixon-era Vernon deal worked: A developer would hire an appraiser to value a project at. say, $10 million. This appraisal would be based on a forecast of steady inflation at a time, mind you, when the Federal Reserve had launched a brutal attack against inflation. Vernon would agree to loan the $10 million, add another $1.3 million to set up an account to pay a year’s interest on the loan, add another $250,000 in developer fees, and another $750,000 for the fee that Vernon demanded for making the loan. The loan would thus add up to $12 million even though the project had been valued at $10 million by kept appraisers. In financing the first year of interest, Vernon guarenteed short-term success for questionable loans. And in financing the very fees it earned from the deals, Vernon effectively transferred depositor money directly into its earnings sheet. Amazingly, Vernon demanded no up-front cash from developers on these deals instead, they asked only for a percentage of any profits they might generate. Here, then, was the cycle: Vernon would jack up interest rates to draw millions in brokered deposits, invest that money in dubious ventures that promised high returns, and pour the self-generated fees and interest payments into its earnings column. In the short term, everything looked fine. All loans performed beautifully for at least a year, and after that, this “developers’ bank” was more than willing to renegogiate terms. The bank, writes O’Shea, would typically loan troubled developers an additional $2 million to make interest payments on non-performing 26 APRIL 5, 1991
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