WHO WILL TELL THE PEOPLE -- THE BETRAYAL OF AMERICAN DEMOCRACY
2. WELL-KEPT SECRETS
Because of its shocking size, the savings and loan disaster that unfolded in the late 1980s with massive losses for the taxpayers was widely portrayed as a unique failure of government. In fact, the patterns of political behavior that produced the savings and loan disaster are fairly typical of contemporary government and routinely replicated across many other issues, albeit with less costly results. Leaving aside the financial and economic complexities, the savings and loan bailout is most disturbing as a story of politics -- a grotesque case study of how representative democracy has been deformed.
The political question is simple: How could they have let this happen? The answer involves a tangled drama of governing politics that played out for nearly a decade without the public's ever catching on to the implications. Indeed, the real politics of the savings and loan crisis involved bipartisan management to keep this scandal from public view, even through the glare of a presidential election. Republicans and Democrats cooperated in this objective, and the taxpayers remained ignorant until 1989, when it was abruptly announced that they must put up hundreds of billions of dollars to clean up the mess.
Even the public's huge bill fails to describe the entire loss. In their manipulation of the government's financial regulation, politicians of both parties effectively destroyed a system of financial institutions that was explicitly created to serve citizens with the least resources. The original objective of savings and loan regulation was one of liberalism's noblest legacies -- broadened home ownership among all Americans, even families of modest means. In the end, the goal of housing was thrown over the side and the government's regulatory system was perversely diverted to a different purpose -- "socializing" the losses accumulated by freewheeling bankers and developers by making every taxpayer pay for them.
The obvious explanation for how this happened is the domination of government decisions by special interests. That is true enough, but too simple to be very helpful. Pushy lobbyists and interest-group parochialism are as old as the Republic, and it is impossible to imagine a robust democracy without them. Reformers who dream of "good government" without special interests and lobbyists are trying to imagine politics without the normal human appetites.
The more challenging question about the savings and loan fiasco is: What happened to the public voice in all this? Why was no one looking out for the rest of us? As the story demonstrates, democracy has been deformed by the breakdown of different self-correcting mechanisms, and by the operating climate of government itself. Modern representation has assumed a different purpose -- taking care of clients, not the larger public interest. Since most everyone is engaged in this enterprise, both legislators and the Executive Branch agencies, a mutual interest arises among them -- how to manage things so that all of them will be able to elude public accountability.
In that sense, the savings and loan disaster was actually a success story for the politicians. They managed the crisis year after year to protect their clients from loss, then they abruptly informed the voters of their obligation to pay right after the 1988 election. Yet no one in government was made to answer for the enormous injury they inflicted on taxpayers. The same political officers continued in power -- still managing things in much the same manner.
The story begins, however, with a revealing complication: A handful of conscientious representatives did try to warn the public. A few representatives did prod their colleagues, year after year, to face the problem before it was too late. These honorable politicians were ignored, along with the public.
One of the honest voices was Representative Henry B. Gonzalez of Texas, who has represented his San Antonio district for more than thirty years, accumulating seniority but little prestige. In 1989, despite the doubts and grumbles from some younger colleagues, he succeeded to the chairmanship of the House Banking Committee.
Gonzalez saw the outlines of financial disaster forming quite early and for more than five years made lonely speeches, trying to get someone to listen and act. Nobody in authority would do either. As early as 1982, he testified before his House colleagues, explaining the long-term consequences for the taxpayers if they further liberalized the regulatory rules for the S&L industry. They ignored his warnings.
"It was very difficult," Gonzalez recalled. "The only avenue I had for speaking out was special orders [when the House floor is open to random speeches on any subject]. Going back to 1984, I was making speeches and warning. None of the other members wanted to look at them or apparently anyone else. I made speeches and they were all printed in the Congressional Record. Ah, nobody read them. Nobody cared."
At seventy-four, Henry Gonzalez is an interesting exception to the political norm -- a solitary figure who never bought into the clubby arrangements of Congress, an inner- directed man who regularly upsets colleagues by plunging into discomforting subjects. His character deserves brief examination because the differences reveal many of the qualities that are now missing from the representative system.
"One good thing about not having any clout," Gonzalez confided, "is that all this money didn't come around and try to buy me. It didn't seem worth it to them. So I could say what was on my mind and not worry about losing contributors or anything like that."
To most of his colleagues, Gonzalez seems merely peculiar. He has the demeanor of an agreeable old uncle who insists on telling lengthy stories that will bore the children. He has a large nose and emphatic black eyebrows and a wincing expression when he talks. Listening to Gonzalez requires patience, for he is the type of politician who recounts historic moments with excruciating literalness. His account of counseling Lyndon Johnson back in 1964 on the war in Vietnam begins by describing the highway route the congressman drove from San Antonio to the LBJ ranch and where he stopped for breakfast.
His discourses on government loop loosely back and forth across fifty years of political memory -- from the San Antonio City Council in the 1950s to Reagan's unprovoked invasion of Grenada, back to the Texas legislature where Gonzalez filibustered for civil rights, then over to Richard Nixon's abandonment of the Bretton Woods monetary system in 1971. His elliptical sequences may bewilder even those who are old enough to remember the history.
Only with great patience does one discern that, indeed, these scattered recollections do form a coherent message. The story Uncle Henry is trying to tell is about the slow death of constitutional democracy in our time, as he himself has witnessed it. The American republic, Gonzalez laments, now resembles Rome in the time of the Caesars.
"The Caesars," he explains, "weren't tyrannical. They were guys who wanted to be loved, like the president. But they exercised power unrestrained by a Constitution, just like the president.
"When the president can bomb a foreign leader who's unpopular, we no longer have a constitutional democracy. If a president can do what Reagan did in Lebanon and Grenada and Nicaragua and Libya and what Bush did in Panama, we don't have a constitutional democracy. I'm still in kind of a daze. We have learned nothing. It demoralizes me. Makes me, not sad, but sick of heart. It's too great a country to go by default.
"We have so traduced democracy, cut off the participatory side, that the people don't see any point," he lamented. "I find that the people can see through things. The people are there. But what can they do? When they have no choice between the two parties, no real choice between the overwhelming preponderance of candidates?"
In Washington, these qualities have earned Gonzalez an unfavorable reputation -- he is regarded as an eccentric and dismissed, sometimes quite cruelly, despite his sophisticated grasp of the financial system. "I think all along their concept of me was that I was somewhat limited or inferior," the congressman said. "I've gone through the agony of being pictured or labeled with very little opportunity to give the real picture."
Gonzalez's ancestors came to North America nearly one hundred years before the Mayflower landed in New England, but his family settled in Durango, Mexico. His father was the first generation to live in the United States, where for forty years he was editor and manager of La Prensa in San Antonio, at that time the nation's only Spanish-language daily. The congressman is from a very old American family, yet feels the intense patriotism of the new immigrant who has found his home.
"I am completely indebted to this system," he said. "Without any particular resource, money, position and so forth, I've been given the privilege to serve. My gosh, I'm not going to do anything to ruin it for those who come along next."
Gonzalez is combative in politics and stubbornly so. He filed an impeachment resolution against Ronald Reagan after the Iran-Contra scandal, accusing him of betraying law and Constitution. He introduced another one against Paul Volcker, chairman of the Federal Reserve, during the deep recession in the early 1980s.
"You have to fight a fight," Gonzalez explained. "The trouble with these younger guys is they think you can talk a fight and the people won't know what happened."
If Gonzalez seems eccentric to modern Washington, it is because he is a living remnant from an earlier style of representation -- a politician who tries to do his own thinking. Rather than rely on sponsored policy studies or interest-group propaganda, Gonzalez mostly reads books and, compared to most of his congressional colleagues, is a man of wide-ranging erudition. His idea of a big night out in Washington is browsing in a secondhand bookstore.
Gonzalez is a kind of Jeffersonian fundamentalist living in an age of easy compromises -- a small-r republican who still believes, quite literally, in the restraints and responsibilities set forth by the Constitution. Liberal by political persuasion, he is populist in his skepticism of concentrated power -- including governing power. Naturally, this makes him seem eccentric.
His type is ill-adapted for survival in modern politics and is gradually disappearing. This constitutes a loss for democracy that, though intangible, explains much about the irresponsibility of government. In addition to his own strong character, a congressman like Henry Gonzalez has been empowered by his own constituents to function independently, to be free of the interest-group pressures that confine other politicians. The people back home know him. They trust him. Gonzalez has thus acquired a license to speak on behalf of the larger public interest, regardless of small-minded political currents. His constituents protect him against the retaliation from special interests.
The enduring question for democracy is how to revive and encourage the trusted representative -- how to create political conditions that would permit such relationships to develop and survive. Among other things, trust requires time and patience and sustained human engagement. In the quickness of mass-media politics, it is extremely difficult for either politicians or constituents to develop any sense of personal loyalty to one another. Local party organizations that once lent confidence to such relationships are now mostly defunct. Imposing term limits on elected representatives would, of course, have the opposite effect. It amounts to a permanent declaration of distrust between the voters and their representatives.
Democracy does not require a representative system peopled with philosopher kings or saints, but it does need circumstances that encourage politicians to represent their constituents while also, now and then, speaking for the national interest. Not every politician will rise to the opportunity, even when conditions are favorable. But this much is certain: If the Congress were amply populated with men and women of Henry Gonzalez's nettlesome independence, the savings and loan scandal would never have occurred.
The fact that no one listened to Henry Gonzalez might be interpreted as cultural bias or attributed to the congressman's independent qualities, except for this: The same warnings were also sounded year after year by Representative Jim Leach of Iowa, the second- banking Republican on the banking committee.
Jim Leach is from the other end of America's cultural spectrum -- an Episcopalian businessman, a blond graduate of Princeton, Johns Hopkins and the London School of Economics. He is a forty-nine-year-old moderate conservative whose Davenport district lies in the heart of middle American tradition. Leach also understands finance and banking on a most sophisticated level and, like Gonzalez, tries to be a representative in the larger sense of the word.
Leach saw the savings and loan crisis approaching for approximately the same reasons as Gonzalez and, year after year, he too spoke out. He called press conferences and issued dramatic warnings. He produced financial analyses that described the prospective losses mounting for the taxpayers. Nobody would listen to Jim Leach either.
"It's a wonderful story about the nature of modern politics," Leach said ruefully in 1989. "Why is it so hard for the Congress to do something for the public?"
The savings and loan industry originated on the wrong side of the tracks -- as mortgage associations in working-class neighborhoods. So, despite the industry's subsequent growth and power, the S&Ls were naturally aligned socially with Democrats, the party of labor. Commercial banks, the much larger and richer establishment institutions, are Republican. Investment banks and the securities industry have long-standing ties to both parties. The old blueblood investment money tends to be Republican but, since New Deal days, some of the largest Wall Street brokerages have been close to the Democrats.
The basic sociology of these rival financial interests that encircle legislators and banking legislation is important to grasp because it gets mixed up in complicated ways 'with the other source of their political influence -- campaign contributions. What often frustrates critics of modern politics is that, while political money is always present and always at work, it doesn't always neatly explain why things come out the way they do. The campaign money flows back and forth across these social divisions and sectoral interests in dizzying ways that defy a simpleminded analysis of who bought whose votes.
For instance, Democrats who take care of commercial banking interests, as many of them do, mayor may not get bundles of campaign money in return. Some do it because it provides both self-protection and social enhancement -- an entree with the Republican establishment on the other side of town. Many Republican members have played a similar game with S&Ls, going in the other direction. Political service on behalf of finance is like a price of admission to respectability.
"We've had a lot of liberals who were good on housing and would take care of the banks on the other side," said Jake Lewis, a longtime committee staff aide. "As long as they took care of the banks, they could be as liberal as they wanted." 
Some legislators are for sale, no question. But most legislators will take money from several or all of the contending forces in finance and so cannot possibly keep all of them happy at the same time. The Banking Committee, like Appropriations or Ways and Means or Finance, is known as one of the "money committees" because it is always so easy for its members to raise campaign funds from everyone. "If you're on Banking or the Finance Committee," said Senator Dale Bumpers, "you don't even have to open your mouth. They'll throw money at you over the transom."
The larger point, however, is that the setting for nearly all legislation in Congress assumes these client-representative relationships, however tangled. One can go down the dais in the Banking Committee chamber and label most of the members -- though not all -- by simply naming the financial sector or sectors for which they speak, whether it is hometown S&Ls or securities firms, the super-regional banks or the money-center behemoths.
One could draw similar seating charts for most committees of Congress and, for that matter, most regulatory agencies and officials in the Executive Branch. Nearly everyone in government has "clients" to protect or advance, sponsors who often helped put them there.
But this is a crucial point that many miss: Aside from the need to raise campaign money, most politicians want clients. The results of working for a client are visible and concrete, unlike so much of the sprawling legislative process, and client work is often more personally satisfying. Most members of Congress, after all, are relatively anonymous themselves in the larger dramas of Washington. Despite flourishes of grandeur, representatives and even many senators are generally unremarkable people who, without their tides, would be indistinguishable at a Kiwanis dinner anywhere in America.
Their work is unglamorous too -- the exhausting attention to small details of language that is the essence of legislating, the tedium of waiting and listening through endless amendments and arguments. Democracy, at its core, is plodding work and requires a heroic sense of patience.
Clients make them feel important. Who cares about what they do or think at the daily level of their existence? Lobbyists care. They are always available to discuss the fine-print problems of government. A few assorted civic groups might care and, on rare occasions, the C-Span audience might be watching the action. Otherwise, on most complicated and obscure matters, lawmakers are alone with their colleagues and the community of lobbyists. Absent a strong signal from their political parties, they are distant from any larger public and may feel only a distant responsibility to it.
Thus, the utterly normal thing about the savings and loan scandal, as it developed over a decade, is that it was never really treated as a "public issue." It was an intense, complicated political struggle between contending sectors of finance, but not something other citizens were expected to understand or care about. Restoring a public voice on such issues, amid the normal clamor of interests, is the difficult problem that faces democracy.
With some validity, the S&Ls always saw themselves as the historic underdogs on this political battlefield, fending off the superior political influence of the commercial banks while serving a "public purpose" larger than their own profit, namely, providing the easy mortgage terms that fostered broader home ownership. This was the Democratic party's great postwar domestic policy, a marriage of private enterprise and social policy created through the federal ceilings imposed on interest rates. The system provided a discreet subsidy for home buyers, regardless of their economic status, and, for forty years, the system worked: Home ownership steadily increased among American families. It was stopped in 1980 with the deregulation of interest rates -- and home ownership has decreased among Americans every year since.
For competitive reasons, commercial banks had waged a twenty-year campaign against the federal regulatory controls. Starting in the 1960s, banks lobbied to strip the thrifts of their protected position, and they finally succeeded in 1980, amid double-digit inflation, with the deregulation of interest rates. Financial deregulation was done by Democrats in the Carter administration, not by Ronald Reagan and the Republicans as so many assume. 
It left Democrats (and many Republicans) feeling vaguely guilty. Their favored clients, the S&Ls, were left in a gravely exposed condition, perhaps doomed by the head-to-head competition with banks. Everything that happened subsequently was influenced by a general feeling that Congress should do what it could to help the S&Ls survive the trauma of deregulation.
In 1982, the thrifts were given more liberal accounting rules and new lending powers that allowed them to plunge into the unfamiliar terrain of commercial real estate. Henry Gonzalez appeared alone before the House Rules Committee, pleading futilely against the measure and explaining the likely consequences if it passed. By 1990, the consequences were fully visible in all the defaulted shopping centers and office buildings owned by the federal government. This same measure, incidentally, also expanded commercial banks' ability to do real-estate lending and, thus, set the stage for another large financial crisis in banking that would also require a huge taxpayer bailout.
As for the public, its visible stake in this sectoral battle was virtually eliminated by the 1980 deregulation legislation. The implicit interest-rate subsidy for savings and loans that for forty years had stimulated housing and the gradual spread of home ownership was abolished. In the ensuing decade, mortgage interest rates were the highest of this century in real terms and home ownership declined for the first time since the 1930s.
Campaign money undoubtedly drove many of those congressional votes and framed the attitudes of legislators. Reforming campaign finance might well weaken the client linkages and thus create more space for a larger public perspective in the debate. Genuine reform could strike at the heart of the matter by enacting this rule: Senators or representatives can serve on. the Banking Committee or they can take the bankers' money, but they can't do both. A strict prohibition on campaign contributions from any interest-group organizations directly affected by the committee's legislative jurisdiction -- bankers, stockbrokers, home builders and developers, all of them -- would help liberate the lawmakers.
But such a general rule, applied to all relevant committees, would produce fierce resistance since it would also sever the political-money linkages for interest groups of every sort -- organized labor, the elderly, the pro-Israel lobby, farm groups, the doctors and insurance agents and teachers.
Furthermore, for those who believe campaign money is the core of the democratic problem, there is the disturbing case of Senator William Proxmire. The Wisconsin Democrat, until his retirement in 1988, was chairman of the Senate Banking Committee and a figure of unquestioned rectitude. During thirty years in the Senate, Proxmire made himself famous as a pinch-penny watchdog of public spending, lampooning dubious federal projects with his "Golden Fleece" awards. More important, Proxmire accepted no contributions for his low-budget campaigns, not from bankers or any other interests that came before his committee. If anyone was untainted by money, it was Proxmire.
Yet, on the savings and loan question, Senator Proxmire behaved more or less like everyone else in authority. He ignored the same facts, made the same misjudgments and took the same evasions. In retirement, he offered the same lame excuses as everyone else. "We were kept in the dark," the former senator claimed. "If we'd known, if we'd had the facts, it would have been a simple decision."
When he was faced with the crucial moment of decision in 1987, what Senator Proxmire did was no different from what so many members of Congress typically do. He called a friend in the industry for advice, someone whose judgment he trusted, the executive of a well-managed savings and loan back in Milwaukee. And the senator followed the friend's advice -- which was to postpone the day of reckoning for another year or two and see what happened.
In May 1985, four economists at the Home Loan Bank Board, the federal agency that regulated the savings and loan industry, prepared a study that made matters plain. At least one sixth of these federally insured institutions were broke -- insolvent. Liquidating all of them and promptly paying off their depositors would cost $15.8 billion. But the federally guaranteed insurance fund had only $6 billion and was, therefore, effectively insolvent itself. In other words, it was a $10 billion problem. If public officials had acted on that estimate in the spring of 1985, that would have been the approximate cost, whoever had to pay it.
Instead, when the report became public two months later, Senator Jake Garn of Utah, then the Republican chairman of the Senate Banking Committee, dismissed the likelihood of a busted insurance fund as "very, very remote." Senator Proxmire agreed, though he acknowledged that the problem was clearly "getting worse, not better." Treasury Secretary James A. Baker III assured senators they were right not to be alarmed.
"Obviously, it's no secret that thrifts continue to be in a fragile transition period," Baker testified. "I think we are encouraged, however, with respect to the earnings trend for thrifts. . . . So we are optimistic with respect to thrifts.... I don't think there is any cause for undue concern and I would reject any suggestion that we are in the midst of some sort of a major systemic problem with respect to any element of our financial services industry." 
Six months later, as declining oil prices collapsed the economies of Texas and other southwestern states, the size of the problem became much worse. By the end of 1985, economist R. Dan Brumbaugh, a principal author of the original study, concluded that it was now a $30 billion or $40 billion problem and growing ferociously every day. When he tried to explain the economic fundamentals driving the financial crisis, Brumbaugh was brushed off -- both in Congress and at Treasury.
"These people were profoundly anti-intellectual, " he said. "They did not engage in the ideas of this crisis. They were engaged in the politics of the crisis. They never really attempted to understand, on their own, how bad it was." Brumbaugh, incidentally, began sounding similar warnings in 1988 about impending insolvency for the Federal Deposit Insurance Corporation, the fund that protects depositors at commercial banks. He was again dismissed by bankers, the Treasury secretary, banking regulators and some congressional leaders as an irresponsible alarmist. Three years later, his dismal forecast was confirmed and taxpayers were required to provide $70 billion for the banks too.
The first substantive response to the ballooning S&L crisis did not occur until July 1986 -- a bit more than a year after the economists' initial warning -- when the Reagan administration sent a proposal to Congress for a $15 billion refinancing of the S&L insurance fund. Congress responded by stalling for another fifteen months in wicked back-and-forth between House and Senate. Finally, in the fall of 1987, two and a half years late, Congress approved special federal borrowing of $10.8 billion to replenish the broke insurance fund. Everyone in authority knew this amount was too little. By then, it was no longer a $10 billion problem but more like a $40 billion or $50 billion problem.
Staff economists at the Office of Management and Budget in the White House, the FDIC, the Federal Reserve, the General Accounting Office, and the Senate and House banking committees were all tracking the same problem, making their own calculations of the true cost and coming out, more or less, where Brumbaugh had. "There was a general feeling that it was going to be too low," said William Seidman, chairman of the FDIC. "We certainly knew it was too low." Then why didn't his agency say anything? It was not done. "We have been tarred before for speaking ill of our fellow regulators," Seidman explained.
The august Federal Reserve was, likewise, monitoring the S&L losses and designed a special lending program by which it could provide temporary liquidity loans to the embattled insurance fund, in the event of crisis. As it turned out, one of the first endangered S&Ls that would receive substantial lending from the Federal Reserve in early 1989 (about $100 million) was the infamous Lincoln Savings and Loan owned by Charles Keating. Fed Chairman Alan Greenspan, as a private consultant back in 1985, had himself been hired by Keating to provide an economic analysis of Lincoln designed to persuade S&L regulators to go easy on him.
Greenspan issued his report on Lincoln, certifying the soundness of the institution and the expertise of its managers. In fact, Greenspan authored similar declarations of soundness for fifteen other S&Ls. Fourteen of them failed. In other words, even the chairman of the supposedly disinterested central bank had a strong personal reason not to make a righteous stink about the impending S&L debacle. 
Who will tell the people? No one in authority, if they can see no clear advantage for themselves. No one in the political structure -- in either Congress or the Executive Branch -- has much incentive to mess with somebody else's problem. Typically, they will stand clear and watch, anxious only that the unfolding disaster does not splash up on them.
A member of the Armed Services Committee or Appropriations or Commerce might well have been aware that something was terribly wrong with the savings and loan industry, but this was the Banking Committee's baby. Responsibility has become so particularized in agencies and congressional committees that, in the larger public sense, there is very little responsibility at all.
In theory, the party leaders are supposed to intervene at this point and impose a broader perspective. But Democratic leaders, led by Speaker of the House Jim Wright of Texas, were themselves a large part of the political problem. They lobbied tenaciously to obscure the crisis and protect their friends and contributors in the industry.
In the Reagan administration, Treasury Secretary Baker did not raise a political alarm either. He was perhaps preoccupied, along with Vice-President Bush, in the troubles engulfing their own political clients in finance -- the Republican banks in Texas that were failing as dramatically as the thrifts. While the S&Ls were crashing, the federal government simultaneously bailed out most of Texas's largest bank-holding companies, devoting billions to the rescue of some of Baker's (and Bush's) best friends and major fundraisers.
Ronald Reagan, the president, was as usual out of it; he left office without ever once addressing the subject.
Who will tell the people? The question frames one of the most profound and difficult structural problems embedded in the present system. Politics and government are awash in information-facts and studies, propaganda and rhetoric -- yet none of it communicates timely warnings to the citizens. The savings and loan issue never rose to the level of a "public issue" because political leaders in both parties chose not to make it one -- that is, not to educate and exhort on a level that would arouse popular reaction.
In the absence of that, no one (save lonely voices like Leach or Gonzalez) is intelligently monitoring the action for the taxpayers and alerting them to trouble. The political parties used to perform this role but have abandoned it. The media do report endlessly on the major events of Washington but the style and focus of their news do not fulfill this function either. Neither, for that matter, do the ranks of reformers and civic organizations, which are mostly devoted to their own specific issues.
Without meaningful communication of this kind, democracy is bound to fail. With no one watching, those in power are left free to serve their narrow interests -- protecting themselves and their friends.
The ugly political question that explains the politicians' stalling and obfuscation was always this: Would the taxpayers be compelled to put up the money to resolve this financial breakdown? Naturally enough, politicians were reluctant to face that outcome. But, if the taxpayers weren't going to pay for it, then the industry itself would have to. The modest $10 billion bailout enacted in 1987 employed federally guaranteed borrowing to raise the money but the funds were in theory going to be repaid by the S&L associations themselves through the annual premiums they pay to the insurance fund.
Thus, if Congress had provided prompt, adequate financing to solve the crisis, that would have meant raising the industry's premiums sharply or committing public money from the Treasury. Not a pleasant choice, but either approach would have been a great bargain compared to the eventual cost to the taxpayers, approximating $200 billion, not counting the decades of interest that will be paid on the federal borrowing.
The savings and loan industry proposed a political alternative: Paper over the problem for now and let the next president deal with it. M. Danny Wall, who was the Republican staff director of the Senate Banking Committee and became chairman of the Home Loan Bank Board in the final year of the Reagan administration, described the lobbying in 1987:
"The industry was saying very uniformly but quietly that we want to wait for the next president. You won't find that on the record. The hired lobbyists weren't saying it. It was the guys who come to town who were saying it. Every member has got someone in the industry they pay attention to and it's usually the big ones and not necessarily from their own states.. Members of Congress are responsive to banks and thrifts because they're the financial system in their districts. Because the financial institutions are regulated, they come to Washington a lot and a lot of members get to know them. Those guys were saying: Let's just have enough money to get through next year."
The "good ol' boys" from Texas and California and Florida, where the S&L lending has been most reckless and the impending doom was most tangible, had a particular incentive for postponing a reckoning -- the more money that was provided to the federal insurance fund, the sooner their institutions would be closed down. Jim Wright and Representative Beryl Anthony of Arkansas, chairman of the Democratic Congressional Campaign Committee, hectored Banking Committee Democrats not to let these Republican regulators close down "our Democratic S&Ls."
But even executives of the sound and solid S&Ls far distant from Texas had an interest in deferring the problem to the next president: If the mess got big enough, the main burden of paying for it would be shifted from them to the taxpayers. Kenneth McLean, staff director of the Senate Banking Committee when Proxmire was chairman, explained the subtext driving the congressional decision:
"You were talking about taking away industry money and they said, look, we're paying for this mess. We don't think the Bank Board has the capacity to handle anymore money than $10 billion. Now, there were others -- the good ol' boy crowd -- that deliberately wanted to keep the money low so they wouldn't be shut down. So the message was: Let's let the problem build up and dump it on the taxpayers."
Congress, in effect, acquiesced to that logic and so did the Reagan administration. Sure enough, it was dumped on the taxpayers.
A delicate political problem remained for both Democrats and Republicans. Having temporarily papered over the crisis, now they would have to get through the 1988 presidential election season without the people finding out. This proved to be relatively easy since the only remaining power center that might have turned this into an embarrassing campaign issue was the news media. Politicians in both parties counted on political reporters not to catch on and they were not disappointed.
Yet every financial lobbyist in Washington knew, without being told, that a major taxpayer bailout of the savings and loan industry was in the works for 1989. They began to lay the groundwork for it early by drafting their own self-interested blueprints for how the next president should solve the problem. Distant from the empty politics of presidential campaigns, these bailout proposals were circulated freely among key political players.
The main trade group for commercial banks, the American Bankers Association, started work on its bailout plan in the spring of 1988, while voters were being entertained with news stories about Mayor Koch attacking Jesse Jackson in the New York primary or news- agazine essays on whether George Bush was a "wimp." Executives from the major Wall Street brokerages were busy on Capitol Hill too, helping congressional staffs design the new government debt issues that would be needed to finance the project. So many different financial trade groups produced versions of the coming bailout that the House Banking Committee staff created a huge spreadsheet listing all of the lobbyists' competing proposals side by side.
The financial industry naturally shared the politicians' interest in discretion, but the bailout plans were not closely guarded secrets. An inquiring reporter could obtain copies without any special effort at digging. Robert Dugger, lobbyist and chief economist of the ABA, explained the politics:
"Everyone knew the game was: Democrats don't bring this up, Republicans don't bring this up. Because a firefight on this issue will have more bodies on both sides than anyone wants to lose. The financial community knew that and we knew where the play was: Wage the presidential campaign on all issues, but don't use the thrift crisis. We all know it has to be dealt with. We'll do it right after the election." 
The chief S&L regulator, Danny Wall, understood the same terms of play. When Wall appeared periodically before congressional hearings, he was always asked whether the fund for liquidating failed S&Ls would be adequate. He always said yes. "I was asked in a code that everyone understood," Wall said. "The code was: Will $10.8 billion be enough to get you to 1989? My answer was, yes, this is enough for the near future. I was trying to be more explicit and still answer in code. Everybody knew what we were talking about."
At the White House, the immediate goal was to get Ronald Reagan safely into retirement without having his final year in Washington marred by an embarrassing taxpayer bailout for a deregulated industry. When Dan Brumbaugh was briefly considered as a candidate for the job of chief S&L regulator, the word came back to him through political channels: "If this guy really wants this job, he's going to have to sit down with Howard Baker [Reagan's White House chief of staff) and assure Baker that we can hold things together until this president gets out of town."
By the spring of 1988, Henry Gonzalez was, by his own account, "almost hysterical" on the subject. He called a press conference to describe once again the fantastic unraveling he knew was underway. He proposed an emergency $50 billion line of credit from Treasury so that regulators could immediately stop the hemorrhaging losses. Nobody in the press came to his press conference, aside from the trade papers covering the financial industry and Texas reporters. Gonzalez's dramatic proposal went unreported.
Simultaneously, Gonzalez pleaded for action with Representative Fernand St Germain of Rhode Island, then the Banking Committee chairman. St Germain, who was defeated that fall by his own sleazy S&L connections, brushed him off.
Gonzalez remembers telling him: "Freddie, you may think this is just Texas but sooner or later your constituents in Rhode Island are going to be alarmed too. Why don't you appoint a task force and tell people the truth about the size of the problem? Freddie says, 'Henry, you know all that'll do?' What? 'You'll have the president going to Texas and saying you're advocating a taxpayer bailout and you're a Democratic big spender.'"
Everybody knew except the voters -- and the thousands of political reporters who were covering the presidential campaign. They were busy covering the Willie Horton issue, Dan Quayle's college record and other complex matters. The corrective mechanism of the press failed the people too, for its own reasons.
Reporters and editors, save for a few rare mavericks, generally take their cues from people in authority; if the people in high places of government say there is no crisis, the media are inclined to accept that answer, even if contradictory evidence is easily available from less prestigious sources. The cultural boundaries imposed on editors and reporters by their own institutions are embedded in their definitions of what is "news." Cries of alarm from lone congressmen like Leach and Gonzalez, notwithstanding their personal brilliance, do not qualify as "news."
Political reporters would surely have written about the prospect of a taxpayer bailout if regulatory officials had announced it or if either the Republican or Democratic candidates had made an issue of it. But, of course, both parties had tacitly agreed not to bring it up.
One of the reasons elections have lost their meaning is that the content of campaigns is confined by this closed loop between the politicians and the reporters. The media define "politics" as the narrow subject of winning or losing elections -- not deciding issues in government. So the campaign coverage generally excludes public questions that people may care about-or ought to care about -- unless the subject figures in the electoral strategies of the candidates.
This premise reverses the dynamic of electoral accountability: Public questions get on the agenda for public discussion only if the campaign strategists select them as useful devices for winning votes. Issues that might lose votes are, not surprisingly, selected out. The only serious intrusion on this monopoly is the press's tenacious inquiries about personal character, sex, drugs and other provocative subjects.
The media, furthermore, have developed their own forms of protective specialization -- a way of defining their responsibilities in narrow compartments that is not so different from the government's. The political reporters who cover campaigns, having defined politics as elections, are not inclined to have much interest in the governing questions, especially complicated matters like financial regulation or economic policy. Meanwhile, the financial reporters who do cover such matters retreat from the broader political implications of what they are reporting.
Thus, though they work out of the same newsrooms, they do not intrude on each other's turf. Political reporters and editors dismiss subjects that are the core of governing as too dense and boring for campaign coverage, while financial reporters dismiss politics as a lot of empty hot air. As a result, though many stories were written in 1988 about the growing troubles of the savings and loan industry, they mostly appeared on the financial pages and were constricted by opaque terminology and timidity.
An average reader, following the news conscientiously, was given no way to divine what was coming right after the election -- much less know that the financial industry lobbyists were already at work designing the taxpayer bailout. Most political reporters, if they had read the same stories, would probably not have figured it out either. 
The S&L crisis did almost become a campaign issue anyway, but it was quickly snuffed out before the political reporters awoke to its meaning. Late in the day, the Democratic candidate, Michael Dukakis, issued a stinging attack on the S&L bailouts already underway in the Southwest and blamed the lax regulatory atmosphere created by Reagan and Bush for producing a costly scandal. In late September, the Dukakis campaign was prodded into surfacing the issue by Representative Charles Schumer of Brooklyn, another Banking Committee member trying to sound the alarm.
The political apparatus quickly shut the door on further discussion. Senator Garn went to the Senate floor the next day and denounced Senator Proxmire and other Democrats for playing politics with a bipartisan problem. Republicans in the House threatened to turn the issue around on Jim Wright and the other Texans who had lobbied so hard to protect their industry friends. Senator Lloyd Bentsen, the Texas Democrat who was Dukakis's running mate, communicated to campaign headquarters that this was not going to be a winning issue for their ticket. So did House Speaker Jim Wright. Representative St. Germain chewed out Representative Schumer for making mischief. That was the last word heard on the subject from Michael Dukakis.
After the presidential election, George Bush was widely congratulated for "facing up" to the problem by proposing a solution -- a $50 billion taxpayer bailout. But the public was once again cut out of the action. Just as Democrats had taken their cues from their special- interest patron, the S&Ls, now the Republicans turned to their clients, the commercial banks. George Bush's bailout legislation, proposed in early 1989, is a remarkably good fit with the blueprint the American Bankers Association drafted the summer before.
This transaction represents another critical juncture in the governing process where democracy breaks down -- the moment when the dimensions of the public problem are first defined and before any visible action has begun. As smart politicians understand, defining the terms of a problem will usually determine the scope of the solutions. Certain ideas and alternatives become the .accepted political agenda; other possibilities are ruled off the table. Smart lobbyists devote their principal energies to this stage because it is often where the contest is won or lost.
In some ways, this moment is when the public at large has the most to contribute -- when the discussion is still generalized instead of technical, when the arguments are about broad political choices and public aspirations. In the routines of modern Washington, this is the point where the public is nearly always excluded. 
That is what happened in the autumn of 1988. While citizens remained innocently unaware, the newly elected president's team conducted a series of private meetings to devise a bailout plan that would be announced right after Bush's inauguration. The private consultations actually started a few weeks before the election was decided. Treasury Secretary Nicholas F. Brady deputized two lieutenants, both former finance professors from the Harvard Business School, to begin drafting a bailout plan for the new president.
"Most everybody came through and talked to us," said Undersecretary Robert R. Glauber, "the ABA, the league [of savings and loans], a bunch of lobbyists, the guys from the bank board. It was the usual cast of characters." A public problem that had festered for a decade was now going to be "solved" in two months of backroom meetings at the Treasury Department with lobbyists from the financial industry and a handful of key congressional leaders.
Though they were academics, both Glauber and Assistant Secretary David W. Mullins, Jr., were quite familiar with the viewpoints of the leading commercial banks. In the year before he joined the government, Mullins had earned $262,000 -- four times his Harvard salary -- from Citibank and two other banks for conducting executive seminars. Glauber, in addition to his teaching, was paid $415,000 as a consultant to commercial banks, most of it from Morgan Guaranty of New York. Mullins was subsequently appointed a governor on the Federal Reserve Board, which regulates the banking system, among its other roles.
One politically unsettling idea that Mullins and Glauber came up with -- a small tax on' all depositors to pay for the bailout -- was quickly killed as an alternative when it was leaked to the press. Bank lobbyists made certain the proposal was widely broadcast and the ensuing uproar pushed the Bush administration into disowning the idea. Dugger, the ABA's chief economist, thought the episode reflected a misstep by two professors who did not fully appreciate how Washington works.
"The city works in concentric circles," Dugger explained. "There are a limited number of people -- I mean probably fifty people in the financial legislative arena-whom you can absolutely trust to keep a secret. That is the inner circle you talk to first. They were unfamiliar with this network at that time so Treasury didn't know which lawyers and lobbyists you can try out ideas on."
After the president announced his bailout proposal and Congress began hearings, other voices jumped into the debate, speaking for other public concerns. But it was already too late. The broad terms had already been decided and their new ideas were ruled out of order.
The Financial Democracy Campaign was a coalition of community-based organizations representing consumers, labor, low-income people, farmers, housing groups, churches and others. The coalition proposed new taxes on the wealthy and financial institutions to help pay for the bailout, but everyone in authority had already agreed this was not to be a tax measure. The coalition suggested radical remedies for the crisis in housing, the declining home ownership and homelessness that were the social corollary of the S&L crisis, but everyone agreed this was not to be a housing measure.
The Financial Democracy Campaign marshaled support from several hundred diverse citizen groups across the country and some local officials like the mayor of Boston, Raymond L. Flynn. The campaign generated lots of angry mail and even local demonstrations. Press conferences were held featuring the Reverend Jesse Jackson, Ralph Nader and Representative Henry Gonzalez, the new Banking chairman, to promote a citizens' agenda for reform. The press generally ignored these pleas, judging that these uncredentialed intruders in the financial debate would not be considered relevant by Congress. The press was correct.
In the end, the FDC's public-spirited lobbyists settled on a much smaller goal, a minor amendment that at least promised some concrete benefit for some ordinary citizens. They asked that the tens of thousands of empty houses that the government now owned as a result of the massive defaults be made available to low-income families and community housing organizations on a preferential basis.
Congress included their modest proposal in the final legislation, but it was an empty victory. A year later, the frustrated citizen groups were still trying to get the federal bailout agency to comply by selling vacant housing to poor people. In the meantime, under the same provision the citizen groups had lobbied for and won, General Electric qualified to buy twenty-eight apartment complexes with nearly six thousand units at a price that was half their market value. 
"Congress prefers to regurgitate people like us," said Tom Schlesinger, an activist from Charlotte, North Carolina, who manages the Financial Democracy Campaign. "When it wants to be Lady Bountiful, it throws us a crumb but it doesn't change the substance. Many of the 'white hat' groups in Washington have gotten used to that game and so they play it too -- crumbs for the poor-instead of saying: To hell with that, our members are middle class and they're getting screwed. There is a terrible set of mutually interacting traps and our inside-the-Beltway groups fall for them too." 
If taxpayers were the obvious losers, the major winners in this political contest were also obvious. The commercial banks, whose basic design had been followed and whose longtime competitors were now in disgrace. The major Wall Street brokerages too, for they got lots of new business by marketing the government's massive new debt issues that they helped to design. Wealthy investors won too, since the government was compelled to pay them premium interest rates on this new borrowing, even though it was guaranteed by the taxpayers.
In the short run, the politicians of both parties were winners too, for they had gotten the gullible electorate to swallow a huge new liability without much damage to any incumbents. In the long run, however, the victory might well prove to be pyrrhic for all these players -- the bankers and the politicians -- for the financial unraveling continued to spread into banking and other sectors like insurance.. As the crisis in banking gained momentum, the same political dereliction continued. Neither politicians nor the press would tell the people in a straightforward way what they were facing.
Impromptu solutions, arrived at in private and without a wide-ranging public debate, often produce embarrassing results for government. Bush's savings and loan bailout, as subsequently became clear, failed utterly to resolve the crisis and, indeed, the bailout itself became a continuing scandal of sorts. One year later -- right after the 1990 elections were completed -- the Treasury sent a new request to Congress for another $80 billion.
Thus, a perversely undemocratic pattern was established. In the even-numbered years, the politicians ran for election. In the odd-numbered years -- 1987, 1989 and 1991 -- they legislated taxpayer bailouts.
At the White House ceremony when the bailout legislation was signed into law, Henry Gonzalez received one of the president's pens. "When he turned to give me the pen," Gonzalez recalled, "I said, 'Mr. President, you realize, don't you, that this is just the beginning?' He looked at me kind of blank. Maybe he had something else on his mind."