The S&L Crisis at Home

How a UT finance prof helped drive an S&L into the ground

By Tom Philpott and Scott Henson
July 1990; pages 4-5, 9; Volume 1, No. 7

The following is the first in a series of articles concerning the roles of various UT administrators in the S&L crisis.

"I get blamed for lots of society's problems that aren't my fault," said President Bill Cunningham at a Meet the President Forum with liberal arts students last fall. "Some people want to blame me for the S&L crisis, but that's not my fault either." Perhaps not. But if not, then at least some current or past members of the UT administration were involved.

One of the most prominent UT figures involved in a major S&L scandal was Dr. Robert Mettlen, the Lamar Savings Association Centennial Professor of Finance, former federal S&L regulator and former board member at the now-defunct Lamar Savings. Polemicist has decided to probe into some of Lamar's financial dealings and misdealings while Mettlen served on the board.


Mettlen served on the board of Lamar's holding company, Lamar Financial Corp. from March 1981 through July 1985. Mettlen also served as a director of Lamar Savings, the S&L itself, from January 1983 through July 1985, and as advisory director from July through October 1985.

Mettlen found himself in the convenient position of both sitting on the board of Lamar Savings, while at the same time serving as the region's chief thrift regulator. In 1982 he was appointed to serve as Federal Home Loan Bank Board (FHLBB) in Little Rock, the Southwest's regional branch of federal regulatory/central banking agency for S&L's that serves the same function as the Federal Reserve Board does for banks. In 1983 Mettlen engineered a move of board's regional headquarters from Little Rock to Dallas. Mettlen received a reappointment to the Chair's position in 1985, and eventually left without finishing his term after 1987.

Throughout this period, Mettlen didn't limit his influence to just banking circles. He also held administrative positions at the University of Texas. Mettlen began his UT administrative service in 1970, with a hiatus between 1973 and 1979. In the eighties, he served as Executive Assistant to President Peter Flawn (79-81), Vice President for Administration (82-84), and Vice President for Planning and Special Projects (84-86). Since 1975 he has co-directed and lectured in the "Texas Savings & Loan School," an executive development program at UT-Austin. Since 1985 he has co-directed the "Graduate School of Savings Institutions Management," a new executive training program also at UT-Austin.

Mettlen also held leadership position in local business and government circles. He served on the board of directors of the Austin Chamber of Commerce from 1983-1985 and participated on the Comprehensive Plan Steering Committee (1986-1987) for the City of Austin. He even served on the Executive Committee of the "Forming the Future" Citizens project for the Austin Independent School District.

Lamar Savings Debacle

The following accounts of Lamar's shady loans, land deals and stock schemes have been extracted from the FSLIC's lawsuit and accounts from state media. The FSLIC's accusations stem from information gleaned from Lamar's own financial records, minutes from board meetings, and other information obtained when the thrift went into receivership. This is by no means a definitive list of the thrift's transgressions - that would fill volumes. But it does give insights into the breadth and depth of the Lamar's federally backed defrauding of U.S. taxpayers.

Mettlen eventually settled his portion of the lawsuit out of court, paying only retribution for the "December 1985 Stock Repurchase Scheme" cited below. Yet with all of his academic, professional, and community responsibilities - especially considering his position as the region's chief thrift regulator - Mettlen plainly either knew or should have known about the excessive and grandiose measures that led to the crash of Lamar Savings, one of the most scandal-ridden S&L's in the industry's history.

Running from Regulators

According to the initial complaint of the lawsuit filed by Lamar Financial Corporation (LFC) and Federal Savings and Loan Insurance Corporation (FSLIC) against its former directors under the Racketeer Influenced and Corrupt Organizations Act (RICO), Lamar Savings' demise resulted from a series of fraudulent and conspiratorial attempts by its directors and some borrowers to push up Lamar's net worth to assets ration above the federally required minimum.

The lawsuit states that in 1981 - the year Mettlen joined the board at Lamar Financial - various economic and regulatory changes in the late 1970s and early 1980s caused Lamar Savings to report a loss for the first time. It reported a disastrous drop in its net worth to assets ratio, from 4.0 percent (above the regulatory minimum of 3.0 percent), as of December 31, 1980, to 2.05 percent as of December 31, 1981.

Previously, like all pre-deregulation S&Ls, Lamar Savings' loan portfolio had consisted largely of single family mortgages.

But as a result of the company's declining net worth, according to the lawsuit, Lamar's "management at the time began to embark on a conscious program of investing its funds in larger, more speculative commercial real estate loans and direct investments in real estate and other ventures, a program which required a rapid growth in deposits in order to generate the funds necessary to participate in such activities."

By 1983, the year Mettlen joined the board of Lamar Savings (he remained on the board of the holding company), LFC chairman Stanley Adams, Lamar's officers, and the board of directors could no longer maintain the savings and loan's net worth to assets ratio above the federal mandate.

The lawsuit alleges that Adams and other defendants "began a scheme and course of conduct which had as its primary purpose and objective the disguising and hiding, from regulatory authorities and non-conspiratorial directors and shareholders, the negative impact of these risky loans and investments upon the regulatory net worth of Lamar Savings and the general financial condition of both Lamar Savings and Lamar Financial."

Funny Money

Like many other troubled thrifts, Lamar attempted to hide its falling net worth to assets ratio from regulators by "pumping up" its net worth just prior to the end of each quarter. During the first five months of 1985, for example, Lamar closed a total of 21 commercial loans with a total value of $89,000,000, averaging about four closings a month at just over $4,000,000 per loan closing.

But then LFC received a stern letter from Carol Ondrake of the FHLBB in Dallas dated June 19, 1985 threatening to place a supervisory agreement on Lamar if the net worth were not increased above regulatory minimums.

Mettlen, who was FHLBB chairman of the board at the time, evidently failed to inform his fellow FHLBB regulator of the Lamar directors' questionable response to that letter.

According to the lawsuit, "after the receipt of the Ondrake Letter, over the three-day period of June 27, 28, and 29, 1985 (immediately prior to the close of a quarter-year regulatory reporting period) the [defendants] ... closed or caused to be closed through Lamar seven additional loans totalling in excess of $132,000,000, for an average loan amount of almost $19,000,000."

The lawsuit goes on to allege that: "For the quarter ending June, 1985, as a result of the foregoing transactions and other net worth 'pump up' measures, Lamar reported to the regulators a resulting increase in its regulatory net worth in an amount approaching $5,000,000." During the next two months Lamar closed twenty more commercial loans with a total value of $143,000,000. During this period Mettlen left the board of the holding company and limited his involvement with Lamar Savings to that of an "advisory director."

In September, just before Mettlen left his post as advisory director, "an additional twenty commercial loans with a total loan value in excess of $150,000,000 were closed. All but one of these loans, or in excess of $127,000,000 of such loans, were closed within the last two weeks of the quarter-end, of which fifteen loans, totalling in excess of $75,000,000 were closed within the last four days of the quarter-end ...

"For the quarter ending September, 1985, as a result of the foregoing transaction and other 'pump up' measures, RICO-Defendants reported to the regulators a resulting increase in Lamar's regulatory net worth in an amount exceeding $14,000,000 and an improvement in its net worth to assets ratio from 2.10 percent to 2.81 percent. Although these figures were almost up to the minimum 3 percent level and although they ostensibly constituted a dramatic turnaround over a four-month period, the figures had no basis in reality." Loans are recorded on the books as asset, and increase the company's net worth.

These "pump up" loans were insufficiently backed by collateral or weren't supplemented with capital from the borrower. But Lamar recorded them as gains in its net worth anyway, without respect for financial regulations or traditional lending practices. Examples of such exorbitant and irresponsible loans follow.

De Soto Financings

In 1984 Robert Mettlen became the Lamar Savings Centennial Professor in Finance. He was also on the board of both the holding company, Lamar Financial, and of the S&L itself, as well as chairman of the Dallas FHLBB. At the time he was also UT vice president for administration. In a 4-8-84 article, Mettlen explained to the American-Statesman that donors of endowed chairs don't influence who receives them. "The donor does not name a recipient," said Mettlen. "If he gives a million dollars to a chair, that doesn't give that person the right to choose a half brother from Oshkosh to fill the Joe Doaks chair in truth and wisdom." Perhaps it's a coincidence that it was a chairman of the Dallas FHLBB and Lamar boardmember that received the benefit of Lamar's endowment. Or, perhaps it was just what it appears - an explicit quid pro quo. Whatever the case, it is certain that Mettlen remained silent concerning Lamar's financial antics in the coming months.

For example, one of the major loans made at the end of June 1985 was to Louis G. Reese, Inc. in the amount of $37 million. According to the FSLIC lawsuit, "At the closing of the loan, a total of $28,717,448 in cash disbursements were made to various parties and affiliates of the borrower without proper documentation" as required by federal law. About $6.5 million of these disbursements went to the Berkshire Realty Company to purchase properties on which Lamar had foreclosed, and which were dragging down the thrift's net worth.

Over $4.1 million went to Berkshire to make the down payment on property in Houston known as the "Witte Property." The lawsuit goes on to say that "Additionally, Lamar made a loan of $13,250,000 to Berkshire Realty Company in order to facilitate the purchase of the Witte Property from Lamar. The Witte Property loan was made despite the fact that Lamar did not obtain a required appraisal of the property until after the closing of the loan." The loan was made on a non-recourse basis. This means Berkshire would not be required to repay the loan if it sold the property - i.e., the new owner must assume the debt.

Another $2.3 million of the proceeds of the De Soto loan were used by Berkshire as a down payment on the Ponderosa Ranch, then also owned by Lamar. The thrift made another $1.7 million loan to facilitate that deal.

The lawsuit says that "Lamar recognized a gain and booked an increase in its net worth in the amount of $1,510,808 on the sale of the Witte Property to Berkshire. Lamar also recognized as income loan origination fees in the amount of $265,000. Both the gain on the sale as well as the loan origination fees were paid out of loan proceeds and illegally booked as income. Additionally, the sum of $116,044 was recognized as income by Lamar on the sale of the Ponderosa Ranch to Berkshire."

In other words, Lamar's board risked taxpayer-backed depositor money to take foreclosed property off its books. Much like the Regent's spending student-service fee money at their whim, Lamar's board members consistently approved loans without concern for the people who ultimately must pay.

An Iran-Contra Connection?

One of the stranger bad loan deals by Lamar Savings involved another Houston thrift, Mainland Savings, and billionaire Saudi arms dealer and Iran-Contra middleman Adnan Khashoggi. According to the suit against Lamar, Lamar and Mainland had in 1984 exchanged some $96 million delinquent loans on a "trash for trash basis" in an attempt to get scheduled items off the books. The suit says that "although the effect of the deals was to temporarily avoid the regulators' wrath, these loans and participations ultimately caused substantial losses."

Thus, the two thrifts had already established an untoward relationship when the Khashoggi deal came down. According to Pete Brewten and Greg Seay of The Houston Post (8-7-88), Lamar loaned a Khashoggi company $46 million on a non-recourse basis to purchase a 21-acre tract south of the Galleria in Houston. "In 1985," the Post states, "a Mainland subsidiary bought the 21-acre tract south of the Galleria from a Khashoggi company for $22 million, subject to existing debt of $46 million to Lamar Savings. In exchange, the Khashoggi company bought $10 million of Mainland preferred stock.

"The FSLIC eventually foreclosed on the land and recently sold it for about $20 million. Thus, there was an apparent loss of $38 million on the deal." Khashoggi walked away with $12 million on the deal. Mainland Savings went into federal receivership and taxpayers picked up the tab.

Khashoggi during this period also worked as an agent of the Israeli government on many projects, including as a go-between for the United States and the Iranians in their infamous arms deals. According to The Iran-Contra Connection: Secret Terms and Covert Operations in the Reagan Era by Peter Dale Scott, Jane Hunter and Jonathon Marshall, Khashoggi "introduced Israeli officials, including [then-defense minister Ariel] Sharon, to Sudanese president Nimeiri in the early 1980s, paving the way for the airlift of Falasha Jews from Ethiopia. His London-based lawyer was involved with several Israelis in some gigantic arms deals with Iran, said to have the approval of Prime Minister Shimon Peres. He arranged the sale of Egyptian arms to Israel for resale to South Africa ... Khashoggi was hardly able to manipulate the Israelis; he was simply their agent."

Perhaps not coincidentally, the book goes on to state that "An 'Undated Memorandum' discovered in Oliver North's office mentioned $12 million from an arms sale to Iran that would be used to purchase supplies for the contras. When questioned, North said he had obtained the figure from the Israelis, who would disburse the funds." Although merely conjecture, with Israelis and Israeli agents exercising control over the money transaction between the U.S. and Iran, the money could really have come from anywhere, including Texas S&Ls. Pete Brewten of The Houston Post has documented cases when money from Texas S&Ls was funnelled to the contras. Why else would a billionaire international arms dealer be hitting up small, scandal-ridden Texas thrifts for loans, if not to generate funds untraceable to any government or its officials?

The Meyerland Shopping Center Deal

Pete Brewten and Greg Seay report in the 12-4-1988 Houston Post that Lamar apparently helped to use Meyerland Shopping Center in Houston as a conduit to funnel loans to offshore (non-U.S.) companies that have been involved with drug money laundering. In 1984, when the transaction occurred, Mettlen was on the board of both Lamar Savings and the holding company Lamar Financial, as well as chairman of the Dallas-FHLBB.

According to the Post, the value of the Meyerland property was inflated from $35 million to more than $100 million in one day. Meyer family matriarch Leota Hess told the Post that Michael Adkinson, a Houston real estate developer, approached her claiming he represented Vorvados Investments, one of the off-shore firms. Adkinson paid Hess $35 million without even looking at the property. That same day, Vorvados sold Adkinson the shopping center for $70 million. Of the $70 million, Lamar loaned Adkinson $58 million, secured only by the east 40 acres of the center - less than half the land involved in the original deal.

Hess says the property wasn't even worth $35 million. She told the Post that other developers were interested in buying the property, but weren't willing to pay her $35 million.

According to county property records, reports the Post, in the two years following the purchase of the Meyerland properties, more than $150 million in loans were issued against the property. Of this, according to the Post, some $42.7 million were bogus loans from two offshore money-laundering companies, Vorvados Investments and Sandsend Financial. The rest of the loans came from federally insured S&Ls including Lamar. If the notes from the offshore companies were indeed bogus, then Meyerland would have been chanelling federally insured monies to these offshore firms.

All of the money was lost; Lamar had to foreclose on the property, the value of which couldn't come close to covering the loan. Adkinson, for his part, went bankrupt. According to the Post article, "His bankruptcy papers list as assets a Chevrolet pickup, a gun, less than $200 in cash, and the body of an Italian sportscar worth $10,000. He lists liabilities of $169 million."

Lamar later sued Adkinson over these transactions, but the Post says observers close to the matter including federal officials think the lawsuits are "smokescreens to try to camouflage the possibility that [Lamar was a] more than willing participants in the deals. But even if Lamar didn't knowingly finance offshore money-laundering schemes, its directors should still be faulted for making substantial loans backed only by property worth a fraction of the amount of the loan.

The December 1985 Stock Repurchase Scheme

Months after he left the board, Mettlen was still embroiled in Lamar's internal scandals. In fact, when Mettlen settled his part of the lawsuit out of court, the only retribution he had to pay was $3,020 for his role in the "December 1985 Stock Repurchase Scheme."

The scheme involved current and former Lamar Financial boardmembers, including Mettlen, conspiring to help embattled Lamar chair Stanley Adams preserve his control over the company. By November of 1985, the lawsuit alleges, Lamar chairman Stanley Adams faced "stepped-up regulatory pressure to terminate [his] control and domination over" Lamar. In part, the suit continues, this pressure included a "proposed spinoff of City Savings [a San Angelo thrift owned by LFC] from Lamar Financial, under which Defendants Adams and Mrs. Adams would be entirely divested of title to their legal ownership of Lamar Financial stock."

To thwart that proposal, the suit charges, Adams "conveyed the stock previously held by Adams as custodian to his children in an amount sufficient to give the children 47 percent of all Lamar Financial stock issued and outstanding after the proposed spin-off of City Savings," thus making the children the independent owners of the stock. To give the Adams children a controlling interest in Lamar Financial, the suit alleges, certain defendants, including Mettlen, sold a total of $14,452,000 in Lamar Financial stock at "the grossly excessive price of as high as $20 per share."

"Significantly," the suit continues, "Lamar Financial did not approve of the repurchase of such shares nor did it notify all of its shareholders of its tender offer." The defendants, the suit alleges, "either knew or should have known that the stock of Lamar Financial ... had no value or, alternatively, value far less than $20 per share."

The Aftermath, or not

Although no one knows yet how much money Lamar Savings cost American taxpayers while Mettlen was on the board, we do know that Robert Mettlen himself probably won't be held accountable. Mettlen did pay, as noted above, $3,020 to settle his share of the civil suit against Lamar - prosecutors couldn't prove he'd made any other direct profit from Lamar's activities. But does that make up for the damage done at the thrift while the chair of the Dallas FHLBB sat idly by?

The statute of limitations for most the crimes described herein is five years. But at the rate the federal government currently pursues prosecuting S&L criminals, Mettlen and the other Lamar directors may be free and clear by the time anyone can indict them. Rep. Charles Schumer (D-NY) has gathered evidence that the federal Justice Department has willfully squelched efforts to prosecute S&L crime. He notes that the FBI has asked for a total of 425 agents to investigate financial institution fraud, but the Justice Department has allocated money to fund only 202 agents, or 47 percent of the number requested. The U.S. Attorney's office requested 231 new lawyers in March 1989 to prosecute financial fraud, but the Justice Department has allocated money to pay only 118 attorneys, or 51 percent of the number requested. As of March 1989 the Justice Department hadn't acted at all on more than 2,300 cases of financial fraud.

U.S. Attorney General Dick Thornburgh told Congress in 1989 that "We'd be fooling ourselves to think that any substantial portion of these [stolen] assets is going to be recovered. Yet at the recent Congressional hearings on the looting of Silverado Savings and Loan in Colorado, one representative noted that the federal government makes anywhere from $4 to $7 for every dollar it spends prosecuting financial fraud. Surely a return rate like that demands increased investment.

Not only has Mettlen avoided federal prosecution, he has also managed to keep his name out of the local press. When Lamar went into federal receivership, the Dallas Times-Herald, The Houston Post, and other state papers ran stories with Mettlen's name in the headline, playing up the significance of the looting of a thrift while the Dallas FHLBB chair sat on the board. In the Austin American-Statesman article announcing the event, Mettlen's name wasn't even mentioned until well after the article jumped to a back page, and then only in a list of defendants in the civil case.

While Mettlen stepped down from his UT administrative duties - except as co-director of the Graduate School of Savings Institutions Management - he remains on the finance faculty and will teach a Fin354 Money and Banking class in the fall. Since federal prosecutors and the local press have given Mettlen a free ride, it's up to students in his Money and Banking class to ask pungent questions of him concerning his role in the Lamar Savings debacle. Feel free to contact Polemicist editors for more information on Lamar, or to pass on information gleaned from Mettlen's responses.