Reviewed by James Schaefer University of Evansville

The Savings and Loan crisis has been in the news since 1989. Apparently the seriousness of the situation cannot be overstated, as many have suggested that the thrift industry has been destroyed. The magnitude of the crisis has resulted in numerous articles and books. The topics of these writings have ranged from detailed chronologies of the entire industry (from its inception to the present) to abuses by specific people at individual thrifts.

Vol. 18, No. 1 of The Accounting Historians Journal included a review essay of three books on the crisis. Thrifts Under Siege, by R. Dan Brumbaugh [1988], analyzed the economic forces battering thrift institutions and suggested the need for dramatic reform of thrift and commercial banking. Brumbaugh was one of the first writers to devote significant attention to RAP, or regulatory accounting principles. Other People’s Money [1989], by Paul Zane Pilzer, provided a discussion of the history of the industry and insight into the regulatory problems involved. Inside Job [1989], by Stephen Pizzo et al., investigated dozens of failed thrifts and suggests the involvement of organized crime.

This review examines three more books, two of which are written by economists. Edward J. Kane occupies the Everett D. Reese Chair of Banking and Monetary Economics at Ohio State University. Kane has researched and taught the subject of deposit insurance for over ten years. His work was sponsored in part by the Urban Institute. Lawrence J. White is Professor of Economics at New York University and has served as one of the three Board Members of the Federal Home Loan Bank Board, the regulator of and provider of depositor insurance (through the FSLIC) to the thrift industry. The third author is Martin Mayer, who has written over ten books on business and finance, as well as numerous other works of fiction and nonfiction. He once served as a commissioner on the President’s Commission on Housing and was also assigned to the Commission’s finance committee.

AN ECONOMIC PERSPECTIVE

Economists tend to view transactions differently than accountants. For example, most economists would use market value instead of historical cost as a basis for measuring assets. Economists also would include all sources of positive and negative future cash flows as assets and liabilities and not omit certain “offbalance sheet” items from the net worth equation. When economists speak of “costs,” they are normally referring to opportunity costs instead of the direct monetary expenses involved in any activity. Hence economists and accountants who decide to measure the same phenomenon may arrive at very different results.

One of the common denominators of Kane and White is their dissatisfaction with the accounting principles used by thrifts. While neither author holds accountants responsible for the crisis, throughout their books both are critical of accounting. A recurring theme in Kane is that federal authorities have systematically used accounting discretion to understate the depth and breadth of industry problems. Kane states, “federal regulators and federal politicians let accounting gimmicks” hide the massive red ink generated by the thrift industry [p. 1]. White also says the economic insolvency of the FSLIC and certain thrifts was systematically coveredup by “smokeandmirrors” accounting [p. 92]. White repeatedly refers to accounting as a “backwardlooking” framework [e.g., pp. 41, 113, 225, 226] and stresses the importance of net worth based on market values instead of historical cost. Both authors believe that accounting should be changed to a market basis, with White stating that this is the most important reform needed [p. 225].

Kane and White are in the mainstream of current economic literature in their call for market value accounting [e.g., see Mishkin, 1992]. Both believe the use of historical cost is indefensible and see no major problems in implementing marketvalue accounting. While both acknowledge how RAP replaced GAAP for thrifts, they apparently miss the significance of RAP being developed outside of the formal accounting standardsetting process. They do not recognize the accounting profession’s previous attempts to deal with inflation (e.g., SFAS No. 33). They also do not mention the exceptions to valuing an asset at historical cost under GAAP, such as the LCM rule for inventories, shortterm investments in marketable equity securities, etc.

However, both books offer thoughtful, wellreasoned information useful to accounting historians interested in learning more about the crisis. They both explain:

1) the process by which individual thrifts became insolvent due to a combination of external forces beyond the control of management.
2) the incentive for federal regulators and politicians to procrastinate in dealing with the problem.
3) the inherent problems with federal deposit insurance as it has been structured, especially levelbased premiums.
4) their conclusions (reached individually) that fraud was not a major factor in the crisis.

Both Kane and White offer a wealth of tables relevant to the crisis. For example, Kane’s Table 23 [pp. 3437] chronicles the major federal laws affecting savings institutions from 19321987. White, in Table 31 [pp. 2632], details the various depository institutions and their regulators.

MAYER’S PERSPECTIVE

Mayer’s book is an attempt to explain how the S & L situation developed, what is likely to happen next, and what should be done. While it should be of interest to accounting historians, often it reads like a popular account of the crisis. The author relies heavily on stories, some old and some new, as well as anecdotes. For example, by page nine he is already repeating the ofttold episode of Don Dixon’s abuses while in control of Vernon Savings and Loan. However, beginning on page 13, he presents a story new to the literature as he recounts his witnessing of an attempt by former Democratic party chair Robert Strauss to change a Wall Street Journal story. The story was critical of the Bank Board’s decision to allow the withdrawal of $268 million from First Gibraltar Savings by its owners. At the time, the thrift reportedly was paying more on deposits than it was earning on loans and was undercapitalized. Mayer claims that Strauss urged the Bank Board to approve the withdrawal while at the same time hiding the transaction from the public. Mayer is bipartisan in his criticism of public officials, as he also discusses actions of Reagan Administration officials such as Donald Regan and other politicians including Senator Edward Kennedy, Representative Joseph Kennedy, and Governor Michael Dukakis.

Accounting historians’ primary interest in Mayer will be his stories and views of the accounting profession’s involvement in the crisis. Implicit in his writing is the profession’s vulnerability on both the accounting principles used by thrifts and the audit failures. He gives examples of both and frequently names CPA firms who were involved. His significant views include:

1) the accounting profession could have stopped “the atrocious theft from the government’s insurance funds… “[p. 19].
2) “CPAs who took big fees to certify the books (for thrifts guilty of abusive practices) were really coconspirators” [p. 13].
3) “if a client paid an auditor enough money, the auditor was quite willing to do lots of things the FSAB condemned” [p. 73].

Compared to Kane and White, Mayer’s reasoning is elementary if not flawed. Mayer states that deposit insurance is “the crack cocaine of American finance” without a satisfactory development of this analogy. Similarly he suggests that deposit insurance “draws remarkably unattractive characters to the operation of banks and thrifts” [p. 20], again without a satisfactory development. His understanding of how accounting functions also is questionable, as he states “in doubleentry bookkeeping, every asset must be matched with a liability” [p. 67].

To Mayer’s credit, however, he understands the development of RAP better than most, if not all, writers of the crisis. While not presenting a thorough discussion of how RAP were developed largely outside of the FASB, in passing he describes how the Bank Board developed accounting principles which “virtually guaranteed a profit” [p. 69] while being inconsistent with GAAP in material aspects. Moreover, he is the only one of these authors to devote attention in any detail to the role of the independent auditors in the crisis.

CONCLUSION

Marketbased accounting may soon replace the historical cost model for all public accounting. In January 1992, the FASB issued Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” which will require all companies to disclose in footnotes the estimated current value of their financial instruments, both assets and liabilities. The rule applies to all publicly owned entities, including banks, thrifts, and other financial institutions. The move to marketbased accounting may not stop at disclosure, as SEC Chairman Breeden has previously admonished FASB Chairman Beresford for a disclosure solution, stating that the SEC believes that the “profession must begin a serious and sustained review of the prospects for marketbased accounting applied more broadly in the financial statements of reporting companies” [Muth, 1991, p. 12].
The issue of whether or not management is to blame for the thrift crisis is important to the accounting profession. If the crisis is indeed a result of fraudulent and dishonest management practices, the profession is vulnerable to criticisms such as Mayer’s that it could have stopped the crisis. However, students of the crisis may not be convinced that management fraud and dishonesty are responsible, although a government report suggests that criminal activity was a central factor in many thrift insolvencies [General Accounting Office, 1989]. While a deposit guarantee system may invite abusive practices, studies have not shown such practices to be widespread. Moreover, the occurrence of thrift failures in clusters (e.g., Texas) and the finding of the incompetent or dishonest management among failed thrifts does not mean the entire industry is afflicted with such management. It is not surprising to find a high incidence of bad real estate loans in economically depressed areas. Also thrifts which have survived the crisis due to adequate capital levels and sound

180 The Accounting Historians Journal, December 1992
management policies tend not to call attention to themselves.
Neither thrift management nor the accounting profession was responsible for: 1) implementing more favorable accounting treatment of items such as loan loss deferrals for thrifts; 2) increasing the ceilings on deposit insurance while reducing regulatory supervision; 3) raising interest rates to record levels in the 1980s, creating unfavorable interest rate spreads; or 4) causing the high levels of inflation during this period.
The accounting profession is vulnerable on two fronts, audit failures and a lack of action. Kane, White, and Mayer all mention the problems regulators had in monitoring the thrift industry in the 1980s. This placed even more responsibility on the thrifts’ independent auditors, whose function is to attest to the fairness of financial statement presentation. Unfortunately, little progress has been made in determining what caused these audit failures and what corrective action is necessary. As Denzil Causey stated in a recent editorial:
The year 1991 was a milestone marking the first public recognition of the declining fortunes of accounting firms, continuing loss of credibility for CPAs, and no action by the AICPA or regulatory authorities such as the SEC and State Boards of Accountancy to address the real problems of the profession .. . Perhaps 1991 is most surprising for remedial actions that never took place. Banks continued to fail and some failures continued to be surprises. People continued to ask where were the auditors [1992, p. 4].
REFERENCES
Brumbaugh, R. Dan, Jr., Thrifts Under Siege, Cambridge, MA: Ballinger Publishing Company (1988).
Causey, Denzil, “No Leadership for a Declining Accounting Profession,” Accountant’s Liability Review (January 1992): 4.
Financial Accounting Standards Board, “Disclosures about Fair Value of Financial Instruments,” Statement of Financial Accounting Standards, No. 107 (1992).
Mishkin, Frederic S., “An Evaluation of the Treasury Plan for Banking Reform,” Journal of Economic Perspectives (Winter 1992): 133153.
Muth, Robert F., “Missed the Target,” United States Banker (October 1991): 12.
Pilzer, Paul Zane, Other People’s Money, New York: Simon & Schuster (1989).
Pizzo, Stephen, Mary Flicker, and Paul Muolo, Inside Job: The Looting of America’s Savings and Loans, New York: McGrawHill and Company (1989).
U.S. General Accounting Office, Thrift Failures. Costly Failures Resulted From Regulatory Violations and Unsafe Practices, 1989, Report to Congress, GAO/ AFMD8962.