Autobiography - The Galindo Group

Ram Galindo THE MAKING OF AN AMERICAN Page 126
to the federal deposit insurance system. Jimmy Carter upped that ceiling to $100,000
per account. A person could have an account alone, another with a spouse, another
with each of the children, etc., so that the U.S. government could always insure all the
savings. During the Carter administration financial institutions known as Savings & Loan
(S&L), originally created to give homeowners widespread access to mortgage loans,
were in need of more funds to make home ownership even more accessible. The S&L’s
weak financial model needed improvement, for as long as their only source of revenue
was the rather low interest they received from mortgage loans, their ability to compete
for depositors’ money was limited. The first step authorized was to create a more
comfortable spread between their cost of money and the return from their loans. To
achieve this, S&Ls were empowered to invest in real estate projects as partners with
private developers, thus benefiting not just from fixed interest rates but also from the upside
developers seek.
The opportunity to achieve high returns in short periods of time activated a demand for
more funds, which could only be met by offering depositors a higher interest for their
money, which increased their cost of funds, which in turn pushed the S&Ls to enter ever
more risky projects. Often the S&Ls were injudicious with the way they managed the
expenses of their operations. However since the insurance limit had also been raised,
depositors were now guaranteed up to $100,000 on each account by the full faith and
credit of the U.S. government. They didn’t particularly care which S&L held their money
and they moved it around following the highest bidder. The race for deposits among
S&Ls was on. It turned out to be their death race.
The second step was to change the model for income producing real estate investments
themselves. This was achieved by allowing generous capital recovery periods much
shorter than the life of the buildings themselves, with the consequent high non-cash
expenses that produced accelerated depreciation expenses to investors in these types
of real estate. The resulting paper losses allowed affected taxpayers to shelter an equal
amount of other income from federal income tax. Investors benefited from inflowing
cash, capital appreciation, and tax shelter for other earnings. The problem was that all
the pent-up housing and commercial demand had disappeared long ago and by mid-
1986 the Texas real estate market was full of empty buildings without prospect of
significant occupancy. Only very few could meet their loan obligations. By 1987, the
problem had reached national scope and the federal government had to intervene at a
cost to the taxpayers never fully disclosed but estimated, on its sum total, in the order of
close to half a trillion 1994 dollars.
All these social engineering moves, akin to the more disjointed but equally detrimental
changes I had experienced in Bolivia, turned out, nevertheless, to be similarly
disruptive. Investors were making decisions based on the tax angles of each deal rather
than on its basic economics. By mid-1986 the Reagan administration eliminated the socalled
accelerated depreciation methods of investment recovery and with the stroke of a
pen destroyed the tax advantage based on which so many projects had been financed.
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