A middle-aged man trudges ponderously up Geary Boulevard, wearing large prescription glasses, disposable tinted eyeshades, baggy jeans, and a wrinkled gray T-shirt beneath an oversize canvas jacket. He's carrying a plastic bag stuffed with pieces of paper he plans to show a reporter at a coffee shop in San Francisco's Western Addition neighborhood.
Richard Newsom is campaigning against what he sees as corruption among overseers of America's savings and loan industry. He is perennially, and profanely, annoyed: Regulators today "lack both the stones and the expertise" to rein in rogue bankers, he claims.
But don't let Newsom's rumpled appearance and bricklayer's vocabulary fool you — he's no crackpot. The former state and federal banking investigator is remembered by veterans of America's last banking collapse as the sleuth who helped expose the frauds of legendary bank looter and politician briber Charles Keating during the savings and loan debacle of the 1980s. And he provided Nancy Pelosi with one of the most embarrassing moments of her career during the congressional hearings on the scandal (see sidebar on page 15).
During his days investigating 1980s savings and loan presidents, Newsom made a point of donning wrinkled khakis, an ill-fastened tie, and an unironed shirt, so that they might allow him to examine their books unaware of the "stones and expertise" behind the disheveled facade.
In the end, he says, "they were pretty disappointed to be exposed by a peasant like me."
"Newsom was a real-life Detective Columbo," writes William Black, a former senior savings and loan regulator, in his book The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry. "It was a special horror for the ever-elegant Keating to be taken down by such a slovenly character who also turned out to be whip-smart, tenacious, fearless, and extremely competent."
Two decades after the savings and loan scandal, America is scrambling to paste trillion-dollar Band-Aids on a global finance crisis without truly understanding the problem we're trying to fix. There have been no equivalents of the fireworks of the October 1989 U.S. congressional hearings into the collapse of Keating's Lincoln Savings and Loan, which ultimately cost the government more than $3 billion. Those hearings, where Newsom was the star witness, left no doubt that the banking collapse was abetted by massive fraud, conducted with the help of government regulators whose duty was to prevent such things. As he has watched the current banking crisis unfold, Newsom has become outraged at how little notice has been paid to the bank-regulation catastrophe that to his eyes is a replay of the meltdown two decades ago.
"Subprime loans were collapsing," he says. Federal regulators "realized this was a big problem, but nobody did anything. It was the old warhorse thing, when you hear the sound of the big guns off in the distance, and you feel that you can contribute."
A report issued by Federal Treasury Department investigators last week confirmed that Newsom, in a homegrown report he sent to government officials in August, accurately identified how regulatory failures helped cause a 2008 California banking collapse with uncanny similarities to the 1980s debacle.
In other words, the high-finance version of Columbo is back on the case — crooked bankers and regulators beware.
A dozen years ago, Newsom retired to tend to his wife, who had suffered a serious illness. Three years ago they moved from San Francisco to Montara; he staked out the local state beach for his daily strolls.
"Retirement was really good," he says, using the past tense. Even though he hasn't officially re-entered the workforce, it seems he's working full-time again, going after officials who whitewash banking scams. It's just like the old days.
Last summer, Newsom began a quest to expose what he came to see as regulatory corruption in the oversight of IndyMac Bank, a $32 billion peddler of "Alt-A" or "alternative documentation" loans (sometimes called liar loans) that allowed people to take out mortgage loans with minimal proof of employment or assets.
On July 24, Newsom happened across a prescient San Francisco Chronicle column by Kathleen Pender, which led by posing the question: "Why wasn't IndyMac Bank, whose problems were well known in the financial community, not on the Federal Deposit Insurance Corp.'s list of troubled institutions until shortly before its failure this month?"
The bank had been under the regulatory authority of the Office of Thrift Supervision's western district office in Daly City. A spokesman told Pender, "We thought IndyMac had the opportunity to work through its problems."
Newsom had heard that kind of explanation before — and it didn't sound right. "Pender was asking the right questions," he says, "but they didn't truthfully answer her questions." So Newsom looked up filings at the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the OTS.
IndyMac, as we now know, was a mess. Liar loans are a great business to be in if a banker wants to create the appearance of making extraordinary high-interest-rate profits — before collapsing in a pile of defaults. IndyMac amplified this boom-bust scenario by offering what it called "FlexPay" loans, also known as "option ARMs," which allowed borrowers to choose their monthly payments — even if those payments were so low that the total amount they owed increased each month because they weren't even paying off the interest, let alone the principal.
A $745,800 mortgage taken out in July 2007 on a live-work condo near the San Francisco Hall of Justice illustrates the pitfalls of IndyMac's business. The mortgage holder apparently rented to two tenants, and by the end of the following year owed $816,400 on the loan before losing the property to foreclosure in December.
IndyMac's lax lending standards made it easy for unscrupulous borrowers to defraud the bank. A scenario where a borrower puts no money down, makes no mortgage payments, and collects rent on a property until it is finally foreclosed upon theoretically could allow the borrower to walk away with more than $20,000 in profit merely for signing on the dotted line.