Good Ole Bad Boy

By John E. Gallagher

For a while, Don Dixon stood tall in Texas. He was big rich, as Texans like to say. A successful real-estate developer, in 1982 he bought a tiny savings and loan in his hometown of Vernon and built it into a giant, at least on paper. By luring deposits from across the U.S. with high interest rates, Vernon S&L grew a spectacular 1,600% in just four years, making it one of the 20 largest thrifts in the state. But the S&L was lending money faster than it was coming in, often to projects on shaky financial footing. Meanwhile, Dixon indulged his taste for excess, notably a $22,000 gastronomic tour of Europe and a fleet of five airplanes. When federal regulators finally closed Vernon in 1987, they estimated that Dixon's extravagant ownership left taxpayers with a $1.3 billion bill, until then the largest single S&L mess in the U.S.

The Government decided last week that Dixon should pay for his extravagance. In a 38-count criminal indictment, the Justice Department charged that Dixon illegally used the S&L's money to pay for political contributions, pleasure trips and rent on a California beach house. If he is convicted on all counts, Dixon could face a 190-year prison sentence and a fine of as much as $9.5 * million dollars. (Dixon intends to plead innocent.) Eight Vernon officers have already been convicted, including Chairman Woody Lemons, who last week began serving a 30-year term, the longest to date for an S&L executive.

The Dixon indictment signals an upsurge in charges against the culprits accused of causing the S&L mess, the biggest financial scandal in U.S. history. But the Dixon case underscored the difficulty of prosecuting complicated financial crimes. The Government took more than three years to build its case against Dixon alone. And U.S. officials have not yet investigated 7,000 more tips about possible fraud at S&Ls. With so many leads and limited resources, the Justice Department may be able to prosecute only the most egregious misdeeds that befell thrifts in the 1980s.

The convictions, while satisfying for taxpayers, have done little to recoup the vast S&L losses. "We won't see any recovery near to the amount of losses," says Edward Dennis Jr., an assistant U.S. attorney general. "We won't even get close." The Congressional Budget Office estimated last week that the Government's S&L cleanup bill may total $150 billion, three times as much as Congress approved for the job last year. With interest, the final total could run as high as $500 billion over 40 years. Without another infusion of federal money, the bailout fund will be broke by year's end.

As the indictment describes him, Dixon embodied the high-rolling style of oil-patch opportunists. In the early 1980s Congress wrongheadedly tried to help struggling thrifts earn higher returns by liberating them to invest in virtually anything they wanted. Crafty entrepreneurs began building the S&Ls into fast-buck enterprises by sinking money into marinas, golf courses and even uranium mines.

Dixon lived with panache, lounging at a posh beach house in Solana Beach, Calif., and entertaining Vernon executives in high style. Trouble was, the money for such perks allegedly came from the thrift's vaults. According to the indictment, the rent on Dixon's beach house was paid by an associate, Jack Atkinson, who had got loans from Vernon. All told, Atkinson paid $577,000 in rent through loans. When Vernon would no longer extend the credit, Dixon allegedly arranged for Atkinson to receive an extra $24,200 as a "consulting" fee, which also went toward the rent.

The indictment charges that Vernon S&L picked up the tab for Dixon's personal trips and parties, some of them featuring prostitutes. Tagging along ! on several outings was the highest-ranking thrift regulator in Texas, Linton Bowman, who has not been charged with any wrongdoing. Dixon sought to win political allies with hard cash. He allegedly had Vernon make illegal contributions to the campaigns of such politicians as California Senator Alan Cranston, former House Majority Whip Tony Coelho and former House Speaker Jim Wright, all of whom have been tarnished by other connections to the S&L scandal. None of the campaigns were aware of the illegality of Dixon's contributions.

Considering the enormity of Vernon's failure -- 96% of its loans were overdue when the Government took over -- the indictment strikes some critics as tardy and tame. The Justice Department contends that it has been moving as quickly as possible, although last year it left $26 million unspent out of a fraud-fighting budget of $75 million. "These complicated white-collar-crime cases take time to develop," says Attorney General Dick Thornburgh. In north Texas alone, the Government is investigating more than 500 individuals affiliated with 38 different S&Ls.

Under pressure from Congress, the Justice Department has been beefing up the staff and budget devoted to the scandals. The agency has $110 million to spend this year, which has enabled it to hire 368 more financial-fraud investigators, as well as 202 FBI agents and 118 more assistant U.S. attorneys. Congress may provide further help. One bill would create "strike forces" to investigate fraud and provide higher salaries for prosecutors of bank crimes. Says Nancy Kassebaum, the Kansas Republican who introduced the measure in the Senate last week: "It is time to take off the gloves and unleash our best and brightest prosecutors on the mess."

After a slow start, the Bush Administration's bailout has been moving quickly. The Resolution Trust Corp., which is responsible for liquidating and selling off insolvent thrifts, has closed or sold 96 since the beginning of April and expects to handle another 45 by the end of this month. But the RTC's work load keeps growing; the CBO estimated last week that as many as 1,700 thrifts in the U.S. may collapse, more than half the S&L industry. The RTC has only enough money to deal with another 120 institutions at best. After that, the cleanup will come to a halt unless Congress comes up with more money.

Sensing rising voter anger, some Democrats think they may be able to make political hay from the mess. Since four of the five Senators accused of being $ swayed by contributions from S&L owner Charles Keating are Democrats, that may not be too easy. Still, some Democrats believe the slow start of the bailout is a separate scandal for which the Bush Administration alone is responsible. "Unlike the first crisis, in this one there is not plenty of blame to go around," contends Congressman Charles Schumer of New York.

As the S&L cleanup bill mounts, political mudslinging is likely to increase. "The Government needs a sideshow to shift focus from the cost of dealing with the problem," says Paul Horvitz, a finance professor at the University of Houston. At this point, the biggest new scandal would be to push the increased bailout cost into the future by borrowing more money. Felix Rohatyn, the Manhattan investment banker and fiscal gadfly, proposed last week that the Government pay for the bailout with a 5% surcharge on federal income taxes, which could raise $25 billion to $35 billion a year. Borrowing the money instead, he said, would amount to "leaving it to our children to pay off our own stupidity."

While a tax surcharge would be politically unpopular, it would be swift in its work. When the last failed S&L was closed and the last offender jailed, the scandal would finally be over.

With reporting by Jerome Cramer/Washington and Richard Woodbury/Houston