Running with A Bad Crowd: Neil Bush & the $1 billion Silverado debacle

Was Neil Bush a guileless victim of Denver’s hard-charging financial sharpies or a willing accomplice? In the view of government regulators, Bush and 10 other former directors and officers of Denver’s failed Silverado Banking, Savings and Loan are guilty of “gross negligence” and should pay $200 million in restitution for contributing to the S&L’s collapse. As the President’s outgoing, personable third son faces a separate disciplinary hearing this week in a Denver courthouse, federal investigators will accuse him of violating conflict-of-interest regulations while serving as a $12,000- a-year Silverado director. The 35-year-old oilman was widely perceived as a mere pawn of manipulators bent on cultivating political protection from federal regulators. Yet that sympathetic view now seems to fall far short of the full story.

A different portrait of the likable young Bush emerges from TIME interviews with former Silverado executives and real estate developers with whom the S&L had cozy and possibly illegal dealings. Citing Bush’s M.B.A. from Tulane University, Denver insiders contend that he had to be aware of his own vulnerability to the go-go bankers and developers with whom he dealt. More significantly, they insist that Bush did not fall innocently into the clutches of the shrewd operators. Bush, they say, was as enthusiastic as Denver’s highflyers in arranging their financing of his upstart JNB oil company, which he had the bad timing to start just after the petroboom had peaked.

The crafty moneymen not only bought stock in Bush’s company and gave him a $100,000 loan he did not have to repay but also consented to lavish compensation that Bush awarded himself from his failing company. According to thrift and real estate sources, Bush drew a salary of $120,000 a year, earned undisclosed bonuses and had a comfortable expense account.

In the lawsuit filed last week, the Federal Deposit Insurance Corporation is trying to recoup some of the $1 billion that the government spent to bail out the failed Silverado. “Our conclusion is that Silverado was the victim of sophisticated schemes and abuses by insiders and of gross negligence by its directors and outside professionals,” said Douglas Jones, the FDIC’s senior deputy general counsel. In the Denver hearing this week, the Office of Thrift Supervision aims to persuade an administrative-law judge that Bush should be banned in effect from ever again serving on the board of a financial institution. Bush contends he is innocent of the charges, in which he is accused of failing to disclose his business relationships with developers who sought loans from Silverado.

Despite the persistent spotlight on the President’s son, the story of Silverado’s amazing expansion and rapid demise illustrates the broader evils behind the S&L disaster. It is a tale of interlocking relationships and sweet deals among S&Ls and their biggest customers, the possible impact of political contributions in delaying crackdowns by regulators, even the deceptive lure of junk bonds and their king, Michael Milken. It is not a case history of nice guys being caught innocently in an oil bust, as the defunct thrift’s managers often claim. It is a study in greed, deceit and profiteering.

In the Silverado drama, Central Casting would have been hard pressed to come up with a group of characters who better personified the Roaring Eighties:

MICHAEL WISE. The former Kansas clothing salesman became the magnetic chairman of Silverado and was considered for a top S&L regulatory position even as outside auditors were questioning the integrity of Silverado’s loans.

KENNETH GOOD. A charming and freewheeling huckster who made and lost $1 million in Texas real estate by the age of 26, he used his high-wattage personality and borrowing power at Silverado to create a real estate empire that gave him toys like his $10 million mansion in Denver’s ritzy Cherry Hill. He ended up defaulting on $30 million in loans from Silverado.

BILL WALTERS. Fueled in large part by loans from Silverado, the aggressive Denver developer built up a net worth of $100 million and became chief of the city’s Chamber of Commerce. Then he too left Silverado holding the bag on nearly $100 million in bad loans.

LARRY MIZEL. The chairman of M.D.C. Holdings, a huge developer that changed the Denver skyline, he created and shuffled more than 100 front companies as the need arose and used Silverado as his personal piggy bank. The politically powerful builder traded undesirable land to Silverado in exchange for hopeless loans so the books of both would look better to regulators.

These operators were not on the scene in 1956 when Denver builder Franklin Burns, cashing in on the postwar housing boom made possible by the GI Bill, set up a friendly little thrift that eventually became Mile High Savings and Loan. He was doing just what Congress had envisioned when it carved out a role for S&Ls in the early 1930s. Limited by law to making home loans and earning the narrow profit margins provided by a relatively stable real estate market, Mile High was helping propel the great American Dream of home ownership for everyone.

When the small thrift ran into trouble during the inflationary climate of the mid-1970s, it was taken over by Denver businessman James Metz, who saw the sleepy S&L as the future flagship of a financial empire. He named himself chairman and hired Wise, an S&L marketing whiz from Columbia Savings in Kansas, to run the company. The nattily dressed Wise wasted no time in transforming Mile High’s small-town image. He launched an ambitious expansion drive, unveiled plans for a glass-and-steel headquarters downtown, and renamed the company Silverado, evoking the dreams of prospectors in the days of the Wild West. Silverado was only the 26th largest S&L in the state, with total assets of $56 million and five offices, but it was ready to go places. Propelled by the oil shock of 1979, petroleum prices were rocketing upward and providing fuel for a ferocious building boom.

Wise too was ready to move. He was eager to shake the small-town dust from his shoes and gain entry to Denver’s society. One of his first acts was to hire a public relations firm to burnish his image and put a speechwriter on the Silverado payroll. “I remember him standing up in white tie and tails and pledging $100,000 of Silverado’s money to the Denver Symphony,” recalls an associate. Chuck Henning, former executive director of the Colorado Savings & Loan League, notes that “Wise was image-conscious and was going through all the proper steps; he was close to ((federal regulator)) Kermit Mowbray, head of the Home Loan Bank Board in Topeka, and everybody figured he was being groomed to become president of the U.S. League of Savings and Loan Institutions.”

The self-assured Wise, who contributed handsomely to political campaigns, enjoyed the support of such influential officeholders as Colorado’s Democratic Congressman Timothy Wirth, who later graduated to the Senate. Wise served two terms on the board of the Federal Home Loan Bank of Topeka, which regulates thrifts in the region. He even served as chairman of the regulatory policy committee for the U.S. League, the most influential S&L lobbying group. Openly, the League poured millions of dollars into political campaigns through its PAC. Says Edwin Gray, former chairman of the Federal Home Loan Bank Board: “I don’t think it would be stretching it to say Wise controlled S&L policy and the way the industry developed.”

In the late 1970s and early ’80s, thrifts were struggling under the old rules because of inflation. Forced to pay high rates to attract deposits but dependent on low-interest, long-term home loans for revenue, the S&Ls saw their profits erode. Under constant pressure from thrift lobbyists, the old rules were felled one by one: in 1980 federal deposit insurance was increased from $40,000 to $100,000, money brokers were allowed to bundle massive deposits and thrifts were freed to make commercial loans.

Deregulation coupled with federal insurance set Silverado loose like a runaway stagecoach. “Silverado began to take advantange of that $100,000 insurance fast,” says Hemming. Wise opened an office that did nothing more than generate new deposits by telephone solicitation. He advertised market- breaking high interest rates called the Silverado Prime. But paying those rates meant Silverado had to get a higher return on loans. To do this, Wise and Metz gradually moved Silverado out of the home-loan market, abandoning small local builders and buyers in favor of big depositors and even bigger developers.

The energy boom of the late 1970s and early ’80s provided Silverado with plenty of opportunities for long-shot ventures with big returns. “It was a real Western boom that made the gold and silver days look pale by comparison,” remembers Jim Thomas, executive director of Colorado’s Independent Bankers Association. “We attracted all the con men, promoters, hucksters and sleaze artists in sight.”

Silverado’s officers had thrown prudent banking practices to the wind, and before long the S&L was locked into a constant seesaw battle with regulators. Says a former Silverado executive: “They began playing musical chairs with their auditors, and all kinds of things were going on between the federal regulators and management because of the dubious appraisals on property. Silverado would lend a developer $10 million, plus the money he needed to pay the interest on the loan, and then when the developer came back in a year after repaying nothing, they would roll the whole loan over and give him more money on top to pay new fees and interest. When inside auditors complained about irregularities, they ((the auditors)) were hushed up or let go.”

Government examiners had ample clues to what was going on. But as David Paul, Colorado’s financial-services regulator, told a congressional panel, “Silverado spared no expense to convince the regulators of their prudence.” Paul said Silverado had brought “enormous management, consulting, accounting and legal resources to bear to rebut regulators’ concerns.” And the fast-talking Wise had the ear of Mowbray, the chief regulator in Topeka, who seemed to give Silverado the benefit of every doubt.

Wise was well connected, and so were the real estate honchos who were part of the Silverado juggernaut: Walters, Good and Mizel. Walters had his own bank and a high profile as an extravagant political contributor. Mizel and his M.D.C. Holdings dominated the Denver housing market. He reinforced his clout with hefty political contributions to local, state and national politicians. In 1986 he was host at a luncheon attended by President Reagan and raised $1 million for the Republican Party.

One explanation for Mizel’s legendary fund-raising abilities became apparent only last month after a TIME story disclosed that M.D.C. had pressured some of its subcontractors into making personal campaign contributions; the developer then kicked the money back to them by allowing them to bill for phony construction work. That disclosure prompted dozens of contractors to admit that they too had been pressured by M.D.C. into making similar donations. “We were told that Mizel wanted to look good,” said a major contractor who gave $40,000 to various campaigns at M.D.C.’s orders. “The money came back to us from Lincoln Savings and Silverado.”

This is the world Neil Bush walked into when he went looking for financial backing to launch his own energy venture in the early 1980s. His benefactors saw him coming. After working for a couple of years pursuing oil and natural- gas leases for Amoco Production Corp., the 26-year-old Bush decided he was ready for bigger things. Neil and his wife Sharon were welcomed as a winsome couple in Denver’s highly stratified social set. Sharon volunteered to help at Children’s Hospital, Denver’s most chic charity. She sold cookies through Cookie Express, a mini-business she started with chum Nancy Davis Zarif, daughter of Denver oil tycoon Marvin Davis, who dominated society in the city. Neil played squash at the Denver Club. But genteel poverty amid rich friends pinched: with Neil’s $30,000 Amoco salary and a relatively modest $210,000 home, the Bushes were not keeping pace with their new friends.

Bush had lunch in 1982 with millionaire developer Walters, the major stockholder in Cherry Creek National Bank, to discuss financial backing for JNB, which Bush planned to launch with partners James Judd and Evan Nash. Walters quickly made $300,000 available to Bush to open JNB in January 1983. This enabled Bush to draw a more satisfying salary of $60,000 and provided generous operating expenses.

By August the flamboyant Good was brought into the deal. Bush had met Good at one of the aggressive speculator’s lavish parties, and they had become friends. Good opened a $750,000 line of credit for Bush, promised more and flashed visions of wealth before his new chum. He even lent Bush $100,000 to invest in a hot commodities tip. The tip fizzled, and Good forgave the loan, an arrangement Bush later acknowledged as “fishy.”

At another Denver party Bush met Wise, who knew of Bush’s close ties to Walters and Good. Silverado had underwritten Good’s financial ventures with more than $35 million in loans. Wise also was involved in a complex of multimillion-dollar deals with Walters, one of Silverado’s major stockholders and borrowers. Wise called up young Bush soon after the party, and they met for breakfast at a pancake house, where the bank executive offered Bush a directorship. Bush joined the board, despite his acknowledged lack of experience. “I think I was picked because of my background in oil and gas,” Bush said later.

Within months Bush was voting to approve more than $100 million in loans to Walters, but without disclosing to the rest of the board his connections to the developer. Another Office of Thrift Supervision conflict-of-interest charge against Bush is based on a line of credit for a Good-Bush oil venture in Argentina that the young director proposed to the board. The problem: Bush failed to inform his colleagues that he had struck a series of deals with Good under which the developer would infuse JNB with $5 million in capital and combine the company with Gulfstream Land & Development, a $250 million land venture in Florida that Good was assembling. To clear the way for his Florida deal, Good asked the Silverado board to accept a complex restructuring of his debt and forgive $11 million of his loans and pledges in return for a $3 million cash settlement.

The other Silverado directors were apparently unaware that Good had agreed to increase Bush’s JNB salary to $120,000 a year and provide tax-free bonuses, according to government records. At about that time, the developer had planned to make Bush a director of the Florida company, a post paying about $25,000 a year. Bush abstained from voting as Silverado’s board approved the windfall deal for Good in November 1986, but regulators complain that Bush had failed to disclose that he was anticipating a huge investment from Good at a time when his benefactor claimed he did not have the money to pay his full debt to the thrift.

That year, alarmed federal and state regulators were undertaking a special examination of Silverado, and a concerned supervising agent lectured the board about insider deals. But at this point, according to the Office of Thrift Supervision, Bush was financially dependent on Good. Bush had received a $22,500 bonus and new promises from Good to indemnify Bush if he was called on to pay old JNB debts he owed to Cherry Creek National Bank.

As the oil-driven bubble in the Energy Belt finally burst, the relationship between Silverado and some of its developers passed from insider deals to apparent fraud as both sides schemed to keep each other afloat. Silverado needed fresh capital because it had so many nonperforming loans. Major developers like M.D.C. Holdings had property that it could no longer develop. So Silverado began trading its bad loans to M.D.C. for its sorry property. Says a former M.D.C. executive: “It was like Silverado was telling M.D.C., ‘I’m going to trade you my dead cow for your dead horse.’ ” After keeping the bad loans on its books for a while, M.D.C. would sell them to a subsidiary, Home American Mortgage. That firm in turn pooled them in a real estate investment trust (REIT) so it could peddle them to other cooperating S& Ls.

Government investigators are now probing a complex network of companies and S&Ls that invested deeply in junk bonds, mostly handled by Drexel Burnham Lambert, and carried out elaborate deals to swap the bonds and other assets. Some of the bonds were used to artificially shore up ailing thrifts or were sold in multimillion-dollar lots to cooperating S&Ls. Federal investigators are giving particular scrutiny to Silverado, Charles Keating’s Lincoln S&L in California, CenTrust Bank in Miami, and San Jacinto Savings in Texas. Each had extensive business dealings with Drexel and with one another.

Milken had profitably discovered that S&Ls could use junk bonds in two ways: to borrow money for expansion and to invest money for a high rate of return. M.D.C.’s Mizel, hard pressed by the economic downturn in Denver and kept afloat by insider swaps with Silverado, met the junk-bond king in Manhattan and became Milken’s enthusiastic client. So too did the influential Norman Brownstein, an M.D.C. board member and Mizel’s attorney, who lobbied in Washington in favor of the use of junk bonds by S&Ls.

In December 1986 Larry Mizel held a glitzy black-tie New Year’s Eve party for his staff that was dubbed “resurrection night.” Milken had raised more than $500 million for M.D.C. that year by floating a junk issue; a series of tricky swaps of land and debt with Silverado had swelled the apparent assets and profits of both companies; and Bush had been brought aboard at Silverado. The future seemed bright.

But two private lawsuits, one on behalf of M.D.C. shareholders, claim that the company’s apparent worth had been improperly inflated by the phony transactions with Silverado. After this sale, M.D.C. shares fell from $22 to below $1 for a time. Many M.D.C. officers and board members, including Brownstein, mysteriously managed to sell much of their personal M.D.C. stock at its peak price. The lawsuits also contend that Milken was the architect of a scheme in which M.D.C. sold junk bonds to San Diego’s Imperial S&L, which eventually produced huge losses for the California thrift.

By mid-1987, despite the constant barrage of denials, inventive legal interpretations and outside expert opinions lofted by Wise and his officers, state and federal examiners had compiled a disturbing account of Silverado misdeeds. But Silverado seemed to be leading a charmed life: the thrift was merely warned about its wayward banking methods and allowed to keep operating.

Wise was the fair-haired boy of the S&L industry, responsible for targeting political contributions and praised for his audacious and inventive methods of attracting deposits. Then too, the thrift’s biggest customers were major political contributors. Good donated at least $100,000 to the Republican Party in 1988 after defaulting on his huge Silverado loans. “Good walked away from tens of millions of dollars in financial obligations, leaving taxpayers to clean up the mess, but he could find $100,000 to buy influence with the Bush Administration,” complained Colorado lawyer Carlos Lucero, a former Democratic candidate for the U.S. Senate.

M.D.C.’s Mizel was even more active in fund raising. Besides organizing the Denver luncheon for President Reagan, he directed a steady stream of dollars to state and national politicians, including Colorado Governor Roy Romer, a Democrat. Lawyer Brownstein, nicknamed Mr. Fixit, was a top Democratic rainmaker who arranged a Denver fund raiser in 1987 for Michigan Senator Don Riegle; Riegle is one of the Senators called the Keating Five for having received sizable contributions from the scandal-tarred head of Lincoln Savings. Of $37,000 raised for Riegle, $10,000 came from 16 people connected to Silverado and M.D.C.

By this time Silverado managers had little doubt about what was coming, even though their doors were still open. In January 1988 Wise asked the board of directors, including Bush, to sign a letter to the federal regulators asking that Silverado’s charter be amended so they could take advantage of a state law under which corporate boards can exempt themselves from personal liability if they are found to have breached their fiduciary duties.

By August 1988 neither regulatory forbearance nor political clout could disguise Silverado’s woes: the company announced a $200 million loss. Wise began publicly looking for a buyer to bail out the company. Silverado was insolvent, and Bush glibly announced that he was resigning because his father had been nominated as the Republican presidential candidate. On Oct. 24 the Colorado regulators notified their federal counterparts in Topeka that the hemorrhaging Silverado would be shut down at the end of the month.

Inexplicably, Washington officials declined to go along. Mowbray’s Topeka office relayed a message back to the Colorado regulators: hold off for a while. The day after George Bush was elected, the Topeka office started proceedings to shut down Silverado. The glaring coincidence has never been officially explained. Mowbray has said that he had received a phone call “from Washington” requesting the Silverado delay. He claims that he cannot remember who called.

M. Danny Wall, the chief S&L regulator at the time, resolutely denies accusations that the delay was for political reasons. But James Moroney, a former supervisory analyst with the bank board in Topeka, has declared publicly that concern about Neil Bush “was a material part of unconscionable delays in taking over Silverado.”

Colorado state officials seized Silverado in December 1988 and turned it over to federal regulators, who reopened it as a reborn Mile High Federal S&L and later sold it to First Nationwide Savings Bank, a subsidiary of Ford Motor. Investigators are trying to track the assets of the high-living Walters and Good, who claim they are broke. So far the investigators have found 174 trust funds linked to Good, who apparently still has staunch friends in Colorado. The Denver Economic Development Agency has just awarded a $100,000 development grant to Good Enterprises.

Neil Bush explained that he had joined the Silverado board for the “learning experience.” But just what he learned is not clear. After he folded JNB, he opened yet another oil-exploration firm, Apex Energy. That firm too is underwritten by silent backers. And although he has found no gushers yet, Bush was able to purchase a $550,000 house in one of Denver’s best neighborhoods last October.

The house is in Sharon Bush’s name, which is not unusual. But also in her name are a series of personal loans from Denver’s well-heeled Fred Vierra, president of United Artists Entertainment, a cable-TV company. The loans totaled $125,000 over the past 16 months. No one is alleging that there is anything improper about this borrowing, but it strengthens the suspicion that despite his painful ordeal, Neil Bush has not learned his Silverado lessons well enough. He seems insensitive to his role as a member of the nation’s First Family — and too willing to rely on financial backers attracted by his father’s fame rather than by any business acumen of his own.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Steve Hart

CAPTION: THE TRAIL OF DISASTER