Centennial Savings and Loan

THE SAVINGS AND LOAN scandal of the 1980s is the greatest white collar-crime in terms of monetary loss to date (2004). Hundreds of institutions collapsed due to illegal and fraudulent transactions.

[Page 149]Savings and loans were created in the 1930s as an alternative to banks that were limited to real estate loans within 50 miles of the institution. Their executives had to be familiar with local property values. Such conservative practices meant depositors were at virtually no risk of losing their money. To insure safety the Savings and Loan Federal Deposit Insurance Corporation was created in 1934 to shield depositors against even a remote chance of loss.

During the late 1970s, deposits were withdrawn from low-interest paying saving accounts when interest rates climbed. Savings and loans were, by law, limited to long-term low-interest real estate loans, making it nearly impossible to survive. Deregulation allowed savings and loans to pay higher interest and make loans for a wider variety of purposes. Deregulation also created the widespread use of brokered deposits or large sums of money placed with the savings and loan that paid the highest interest rate.

The savings and loan scandal was not the work of one institution. The distinction of Centennial Savings & Loan Association of Santa Rosa, California, was the blatant nature of fraud and how rapidly the institution inflated its paper value, making its executives and associates wealthy using brokered deposits. Centennial began in the small California town of Guerneville, California, with capitalization of $2 million in 1977. The location was poor because real estate was in little demand, and there were few local depositors. Centennial struggled until Erwin “Erv” Hansen, who had a good reputation in the industry, was appointed president in 1980. Under Hansen, Centennial moved to Santa Rosa and started receiving brokered deposits putting hundreds of millions of dollars at his disposal.

In violation of regulations and sound banking practices, deposits were used to make loans to Centennial officials whose names were kept off the books. Funds were spent for the personal benefit of Centennial executives, wasting huge amounts on lavish consumption. A private jet, personal chef, parties, and a $48,000 desk for Hansen were the tip of the iceberg. Hansen used Centennial's funds to pay for his personal extravagance. Centennial's Executive vice president, Beverly Haines, admitted embezzling $2.8 million.

Centennial was also involved a link to organized crime, illustrating how legitimate savings and loans were endangered by a business relationship with acriminal organizations; Centennial's personnel dealt with known organized crime figures. The end came in 1985 when Centennial collapsed losing $165 million.