On 28 June 1985, we submitted our last story as a reporter on the staff of the Sacramento Bee, a story about a Gambino Family wiseguy, the bankruptcy of a Northern California county’s largest employer, money laundering, and a death buy arson in a Goodfellas-style Southern California insurance scam.
Since we had quit the paper over repeated censorship of major stories, most notably our coverage of the crimes and corruption that would lead the what became the largest single bank collapse to date and the subsequent censorship of another story about organized crime and political corruption in California and its nationwide connections.
That final story was undertaken after we turned in our two weeks’ notice, and it’s the never-before-published story we posted on 10 November.
Today’s story was written after the editor of the Bee’s Sunday editorial section called us at home with a request to write something for him. “Sure,” we said, “but they’ll probably kill it.”
No, he said, he had only taken the editorial position after he had been assured he would have absolute editorial discretion.
So what did I want to write about, he asked.
“What about the collapse of a bank in Davis, a major player on the national scene?”
We explained that we had inside information from friends and other sources in Davis, just across the river from Sacramento and the city where we were living at the time.
We explained that we’d need some serious expense money in order to acquire documents and buy some lunches. No problem, came the reply.
The story we turned in several weeks later, the editor said, was the best work he’d ever commissioned. It would run in two weeks.
Then came the call. “We’re still ready to go, but there’s been a quest that you leave out one name.”
I named the name [more of that later]. “That’s the one,” the editor said.
“The answer is no.”
“I’ll have to get back to you,” the editor said.
The next day came the expected call.
“Still insist on leaving the name in?,” came the question.
“Well, then, I’ve got some good news and some bad news,” he said.
“The bad news being that your higher-ups won’t run the story if the name stays in, and the good news is that you’ll pay the full amount and give up any claim to rights on the story.”
“You got it.”
So we pocked our check for five figures and took the story to the Davis Enterprise, the much smaller daily paper in the community most impacted by the bank collapse.
The story ran with the name intact. A few months later a friend at the Enterprise called with some news. My report had just been award the 1992 California Newspaper Publishers Association Best In-Depth Reporting award — a fact the Bee didn’t report, though it did cover other awards.
So why is the story still important today?
The problems that brought down Farmers Savings and Loan came about, in part, because of differences between state and federal regulations involving S&Ls and banks. In addition, Farmers was chartered under state law, not federal, and the state had far fewer regulators than Uncle Sam, and state rules were somewhat loser [though federal S&L rules were also looser than federal bank laws].
In the years since, that state got out of the S&L charter business, and federal rules were tightened.
Then came Bill Clinton, and federal rules for banking institutions were dealt a major blow by the abolition of the Depression-era Glass-Steagall Act, paving away for the financial shenanigans leading up to the Great Recession.
The story of Farmers Savings foreshadowed in key respect what would happen a quarter-century later.
Oh, and that name we were encouraged to omit? He was the man Hillary Clinton would use to leak word to the press about her current presidential run — and more on that at the end of our very long post.
Here’s the story:
FARMERS SAVINGS BANK: A Tale of Big Bucks, Ruin, and Death
For a time, it was a marvel, the American Dream come true.
There was the $2 million corporate jet, a corporate Mercedes fleet, a system of huge bonuses, and a set of offices that was the largest non-governmental complex in Davis.
There was the stock, too — soaring from a low of $12.50 to as high as $70 a share in less than five years.
More impressive were the numbers on the yearly balance sheets, colossal nine-figure sums with dollar signs in front of them. At its peak, the bank was administering nearly $2 billion in mortgages, collecting fees for handling notes it bought from some institutions and sold to others.
Then there were the profits — $4.4 million in 1983, up from less than $50,000 three years earlier.
In just four short years, Farmers Savings Bank had grown from a single office housed in a trailer into a financial titan. It was the 41st largest S&L in a state which housed the nation’s largest thrifts.
More significantly, it had skyrocketed into one of the top ten players in the nation’s volatile secondary mortgage market and bankrolled the play by creating a new investment vehicle — a high-yielding six-, seven- and eight-figure certificate of deposit dubbed the ULTRA.
But it was a case of too much of a good thing and too few internal checks.
Within a few chaotic months, Farmers collapsed, foundering on a catastrophic computer crisis, the acquisition of an out-of-state company one regulator called a financial black hole, and a portfolio of questionable value.
Finally, after a disastrous slide in reserves, a pair of massive layoffs, and a missed payroll, federal and state regulators stepped in, deposing the man who shaped and rode the whirlwind through its dramatic rise and precipitous fall.
And for that man, Peter Anders, mysterious death was to follow.
“It was a case of too much too fast,” said Jim Streng, Sacramento Counter Supervisor and a member of the Farmers board of directors until he quit in 1984after leading an unsuccessful fight to kill the Lear Jet purchase.
Said Thomas Needham, a co-founder of the bank, “It was such a dramatic up-and-down event. It took off like gangbusters, and then the party was over.”
The story of Farmers Savings is a testimony to the ills besetting California’s savings and loan industry. According to federal regulators, the state has led the nation in savings and loans takeovers. With 18, California houses a quarter of all the country’s thrift placed in receivership by the feds.
And that number, they caution, may represent just the tip of the iceberg.
One of the problems, according to some officials, is in the differences in regulatory requirement for state- and federal-chartered thrifts.
State-chartered thrifts are permitted to maintain 10 percent of their assets in direct investments, such as real estate and service corporations. Federally chartered S&Ls have a three percent direct investments ceiling.
“That was certainly one source of many of Farmers’ problems,” said one state official.
Origins in a small town
Farmers began as the dream of one man, David de la Cruz of Dixon.
In 1978, de la Cruz was working in the controller’s office of Pacific Standard Life Insurance in Davis.
“I was thinking of leaving them, and I had always dreamed of starting my own bank,” de la Cruz said. So he approached another colleague at Pacific Standard, attorney Thomas Needham of Davis.
Together the two explored requirements for starting a state-chartered outfit.
“We found we needed a third incorporator, so we turned to Peter Anders,” de la Cruz said.
Anders was a UC Davis law school graduate who had set up business as a financial consultant and real estate speculator. He specialized in creating IRA and Keogh retirement accounts for many of the community’s most prominent citizens.
Together the three men raised $125,000 to cover the legal and consultant costs required to file the complex application forms with the state Department of Savings and Loan in 1978.
They also recruited 200 potential stockholders who pledged to buy nearly $1,4 million in stock and make deposits of $315,950. Of the potential investors listed in the 1978 filing, de la Cruz brought in 51, Anders 15, and Needham 5.
While Anders and Needham went after large investors, de la Cruz went for smaller investors, “like waitresses at the restaurant where I ate.” But de la Cruz also brought in Norman Woodard Sr., a prominent Dixon businessman who, with pledges for $100,000 in stock and $100,000 in savings, was the largest of the initial investors.
Needham himself signed up for $100,000 in stock, de la Cruzfor $37,500, and Anders for $20,000.
Farmers was chartered as a Dixon savings and loan.
“The state requires very complicated market studies, including an extensive analysis of the area. We filed for Dixon because there was no way we could’ve gotten a charter for another savings and loan in Davis,” de la Cruz said.
Farmers opened for business in in 1980 with 20 employees and a trailer for an office.
Anders pushes for control
For the first two years, with de la Cruz as chairman, Farmers chartered a conservative path.
“I was represented as a savings and loan that would serve the farm community,” said one early investor recruited by de la Cruz. “I liked that, because I’m a farmer and anything that helps farmers is near and dear to my heart.”
Needham and de la Cruz were conservative. They wanted their bank to grow slowly, as a traditional thrift — taking in savings and lending money to farmers and homeowners.
But Peter Anders had bigger dreams.
As a professional investment counselor, Anders had played on the mortgage market and made money, friends say.
He had also created a bewildering array of real estate partnerships, including A&A Investment Partnership, C&C, D&D, E&E, F&F, H&H, I&I, K&K, L&L, M&M, O&O, Q&Q, R&R, and S&S, as well as California Mortgage Investors, PFA Financial Services, PFA Retirement Plan, and PFG Financial Group.
In 1980, Anders and a Sacramento man, Charles L. McGranaghan, set up the first in a series of businesses operated out of offices at 719 Second Street in Davis.
Those business, Pension Income Program [PIP] One and Two and PMC Development Fund, specialized in creating real estate syndications for tax-sheltered retirement accounts. Anders was listed as a general partner in PIP One and Two and vice president and senior account manager of FMC.
Anders was also responsible for selecting and managing the protfolios of the PIP shelters, according to their 1980 prospectuses.
Eventually, Anders and McGranaghan parted company, with McGranaghan taking the businesses. On 23 October 1984, McGanaghan filed for bankruptcy, listing debts of more than $1.5 million.
Anders has been named a defendant in a lawsuit filed by an attorney for creditors who invested in PIP One and Two. “We don’t know where their money went,” said Steve Baird, of Mountain View, the attorney for the investors. “The lawyers for Anders’ estate have told us there’s no use suing them because there isn’t any money there.”
Launching the push for growth
Peter Anders was a man who dreamed in large numbers, and the slow-growth course charted by de la Cruz and Needham was not for him.
In 1982, Anders made his push for control.
“Some of us on the board filed a petition with the state asking them to refuse him permission to buy more stock. You have to get state approval before you can buy a controlling interest,” de la Cruz said.
“We wanted to keep things on an even keel. We didn’t want to see things skyrocket. We were also worried because if he had control, Peter could set his own salary.”
But the petition was denied, and in May Anders won control. His first move was to oust de la Cruz from the chairmanship of the nak he had founded.
It was then that Farmers shifted course.
By the end of 1982, Farmers had assets and liabilities of $53.3 million — up 1000 percent from the year before.
That was just the beginning.
The secondary mortgage market is a frantic one. Profits on individual mortgages are usually small; they are bought, at a discount, from the original lender, them resold, often for a fraction of a percentage point higher, to pension funds and other institutional investors.
Making money means dealing in high volumes, tens and hundreds of millions of dollars worth of paper.
To play in the fast-paced secondary market, Farmers needed capital, lots of it. And the way to raise that money was through jumbo certificates of deposit [CD’s] — accounts of $100,000 or more.
At the end of 1981, Farmers had assets and liabilites of $53.3 million. Of the total $2.3 million in savings, $1.1 million was in the form of jumbo CDs. Passbook and checking accounts totaled just over $350,000.
By the end of 1982, with Anders at the helm, assets and liabilities leaped to $53.3 million. Jumbo CDs totaled $44. million — an increase of nearly 4100 percent.
“They were paying considerably more for money than any other major association in the industry,” said the president of a major Sacramento-based savings and loan.
Numbers rising, very rapidly
By the end of 1983, assets and liabilities had leaped to $205.4 million. Savings deposits reached $186 million — with $177 million in jumbo CDs, up 395 percent from the year before.
Farmers had begun a major advertising campaign. “They were taking these big ads in Mortgage Banker magazine, advertising how much money they had,” said Edward Rubin, a UC Davis real estate law professor. “They were the largest single advertiser.”
Anders had also moved the bank’s headquarters to a former bank building at the corner of Second and C Streets in Davis — a building purchased for $550,000 in 1979 by real estate partnerships Anders headed. Dixon, the bank’s original home, now housed only a branch.
As the numbers on Farmers’ balance sheet grew, so did the bank’s staff. “They were pirating our people at incomes that seemed to be substantially more than were justified by the industry,” said one Sacramento area thrift president.
If the salaries were high, the bonuses paid to the crew who played the mortgage market were higher still.
“We were paying those guys huge bonuses,” said de la Cruz. “They were making several times their annual salaries. Some of us on the board were concerned because the bonuses were based on the bottom line of the financial statement.”
De la Cruz said bank statements can be misleading. “The profit is real only if all the loans are paid, if the insurance stays in force, if everything works. If something goes wrong, the profit evaporates.”
But Anders was charging ahead, buying more stock for himself, bringing in friendly directors, consolidating his position.
Lord, won’t you buy me a Mercedes Benz?
In addition to the hefty bonuses, Anders asked the board to buy a Mercedes for the bank’s president, lawyer Dean Itano. Next came a Mercedes for Anders himself, then more cars for the staff.
“I voted against them,” said Streng. “Six months earlier we had voted to buy a Volkswagen, and now we were buying Mercedes.”
Streng left the board in December 1983 when Anders announced that Farmers was now the proud owner of a Lear Jet, purchased for a mere $2 million.
“I don’t think any company nears a Lear Jet,” Streng said, “especially Farmers Savings with Metro Airport just 30 minutes away. But Peter said it would save the corporation money. I just never understood how it would.”
Streng said the Lear Jet purchase was merely the catalyst for a decision which had been taking shape in his mind.
“When I got onto the board, it was a conventional savings and loan, in the business of making conventional real estate loans. As a builder, I know something about that.
“But then Peter saw some openings in the secondary market, and I don’t pretend to understand that. It appeared to be very profitable, but I had concerns that if you would make money that easily, you could lose it just as easily.”
At nearly the same time as Streng left, Anders gathered the final votes needed to force de la Cruz and Needham off the board. He was the last of the founders, the one now firmly in control. The new board was his, controlling 80 percent of the corporate stock, including those shares in a $1 million December offering.
That same month, Farmers paid out nearly $1.7 million for land in a South Davis industrial park to build a new corporate headquarters, following the city’s rejection eight months earlier of a proposal to build an eight-story high-rise complex in downtown Davis on land Anders owned.
The board approved a pair of sprawling two-story office buildings, and, when the city gave the go-ahead, construction started in 1984. On 23 July 1985, Yolo County set a value of $3.9 million on the just-completed buildings and fixtures — bringing the total cost of the offices to $7.3 million.
The brokerage staff moved into one of the two buildings; the second, unfinished by the time the drama ended, was to house lavish executive suites, a large ultra-modern cafeteria, and a well-equipped gymnasium.
The 1983 annual report was an exuberant document. It concluded with these words: “In the coming year, Farmers will break ground in many areas. There are no existing formulas on which to rely. The Bank will continue to respond with innovative alternatives to meet the challenges that lie ahead.
The troubles had already started.
From the Jumbo to the ULTRA
To fuel its rapid emergence into the secondary mortgage market, Farmers needed cash — lots of it. But it couldn’t rely on federally insured accounts to cover the play.
So the company needed to sell millions in jumbo CDs, individual certificates of deposit greater than the $100,000 insurance ceiling set by the Federal Savings and Loan Insurance Corporation [since folded into the Federal Deposit Insurance Corporation].
“They were paying more than anyone else around,” said the president of a rival savings and loan.
Late in 1983, Farmers executives had created a CD called the ULTRA, a floating rate certificate paying a guaranteed minimum that ran as high as 12 percent, according to one investor. The ULTRA was designed, in part, to attract brokered deposits from other institutions.
ULTRA funds were earmarked in part for as series of limited partnerships, with Farmers or its subsidiaries as the general partner. Funds were to be invested in income-producing property.
Thanks to the ULTRA, Farmers was able to attract the needed cash, and by year’s end, brokered CDs accounted for 96 percent of the institution’s deposit base.
But by the end of 1984, federal regulators grew alarmed with what they saw as excessive reliance on expensive accounts and the use of savings deposit to fund real estate transactions. The federal bank board handed down an edict limiting the size of Farmers’ pool of Ultra accounts.
That decision was the first step in slowing what had, until then, been a seemingly endless growth surge.
A computerized debacle
Buying and selling massive blocs of mortgages requires an incredibly sophisticated system to keep track of hundreds of thousands of loans.
Making money in that market means dealing in volume — where millions can ride on the rise and fall of a fractional interest rate.
It is a business made possible only by modern data processing technology — by computers.
Farmers’ original system was based on small “micro” computers. When Anders moved into large-scale buying and selling, the old system bogged down.
The bank brought in a new computer, an IBM mainframe. But then, in an effort to maintain continuity with the old system, the bank hired a crew to write a program for the new machine based on the program for the vastly smaller old system.
It was a disaster. The new program was cumbersome and painfully slow. As programmers struggled to bring the system up to speed, record-keeping started to fall behind.
Soon bank managers simply didn’t have a clear picture of where the bank stood. The only accurate information was six to eight months out of date.
“Records were in terrible shape,” said one bank source. “A lot of paperwork was missing. We might know the amount of a loan, but sections describing the interest rate or duration might be missing.”
“We were flying blind during much of 1984,” said one former member of the bank’s board of directors.
It also meant that information reported to regulators and accountants wasn’t accurate.
There were other problems, too.
Loading on troubled loans, missing data
According to one bank source, when Farmers bought the mortgages, sellers insisted the bank take varying percentages of troubled loans along with the blue chips. “That’s a common industry practice,” the source said.
In addition, one top regulator said, when Farmers bought large blocs of mortgages, there was often no time to scrutinize files on individual loans.
In some instances, files would prove incomplete, and when Farmers resold the loans and the problems were discovered, the purchasers would ask Farmers to take the loans back — and the bank would comply. “That’s standard practice in the industry,” the regulator said.
The net effect was that, as time passed, Farmers was holding an ever-larger portfolio of questionable loans, said the official.
Playing the mortgage market requires buyers and sellers — and, according to a 1995 article in American Banker, Farmers was buying paper before they had sellers lined up, contrary to normal banking policy.
Normally, loans have been presold to pension funds and other institutional investors before a broker buys them from the originating lenders. But with Farmers, thanks in part to the severe digital record-keeping problems, that wasn’t always the case, leaving the bank with a large “uncovered position,” with mortgages in hand and no buyers.
By 19 October, the signs were clear enough that Anders decided to go public with his fears. In an interview with a Sacramento Bee reporter, he acknowledged that Farmers was “at a dangerous point” in its growth.
But he was to make his worst decision two months later.
Entering the real estate game
Before he took the helm at Farmers, Anders had been active in real estate syndication — creating limited partnerships to buy property with his own business acting as general partner.
He wanted the bank to do the same thing.
Farmers had already purchased a small California syndicator, Ibex Capital, but the money it generated was too small for Anders, bank sources say.
It was in the fall when Anders opened negotiations with Security Properties, Inc. [SPI], a Seattle company with no relation to a similarly named California corporation based in Pebble Beach.
Security was a high stakes real estate syndicator with partnerships holding $1,5 billion in property and a payroll of 1,500.
California thrift regulators were also looking at SPI, because all major acquisitions by state-chartered S&Ls required authorization from the Department of Savings and Loan.
While regulators couldn’t find enough wrong with the deal to issue a clear turn-down, they were worried and urged Anders not to buy. “We told him it looked like a potential disaster,” said one state regulator.
But on 3 December 1964, Anders notified the press that Farmers had bought Security Properties for $30 million.
There’s a whole lot more after the jump, including computer shenanigans, lies to state regulators, questionable investments, an unsolved murder, a powerful political player and Hillary Clinton backer, and much, much more. Continue reading