Orphans in the Storm: New Deal Banking Reform and Its Limits
Walter Davis killed himself in a New York police station. And somehow, that still wasn’t the end of the story for the people he hurt.
Chapter 7 of Shortfall picks up right after his death. The authorities were sure they’d find a hidden fortune. They searched safety deposit boxes in New York. They sent the FBI. They even got Scotland Yard involved. And they found almost nothing. An old passport. Two silver mementos. His entire estate after selling his Packard cars came to $485.
But here’s the thing. The money wasn’t hidden in some vault. It was gone. For twelve years, Davis had been paying depositors inflated interest rates, shelling out $450,000 more than their money actually earned. Add in a collapsing real estate market, years of extravagant living, and massive insurance premiums, and the so-called fortune had simply evaporated. The real mystery, as Echols puts it, wasn’t where the half million went. It was what happened to the $125,000 he and Lula withdrew in the final months before the collapse.
The Family Under Siege
While the authorities chased phantom money, the people closest to Davis suffered. Lula, his widow, became the prime suspect. The FBI file on Davis is full of correspondence about whether to charge her with mail fraud. She had withdrawn $10,000 from their shared New York bank account. She had been in contact with Walter while he was on the run. The press turned on her too. When she refused to comment on her husband’s arrest, the paper ran her photo with the caption: “Refuses to Talk.”
It got worse. A depositor called Lula threatening to come after her brother-in-law Roy with a gun. An anonymous letter arrived at her house signed “The crowd of poor you owe.” The authorities questioned the family’s laundress, tried to charge Walter’s handyman, and even considered going after Lula for running a “lewd and disorderly house” based on whether her daughter’s fiance slept over.
Dorothy, Echols’s mother, was “cut dead” on the streets for three years. People she’d considered friends wouldn’t look at her. She eventually left town. Eva Terry, Davis’s former secretary and supposed accomplice, had the embezzlement charges against her quietly dropped. Turns out the police finally believed what she’d been saying all along.
The Scam After the Scam
If the original B&L collapse was bad, what came next was almost worse. A group called the Colorado Springs Liquidation Corporation swooped in and convinced two-thirds of the City’s 3,600 depositors to sign over their claims. They promised faster payouts. They bragged about backing from unnamed “rich men.” None of it was true. The corporation had zero cash capital, and their agreements promised depositors nothing in return.
It became a cottage industry. Smooth-talking salesmen went door to door. One of them convinced an elderly widow named Mrs. Dotson to trade her claim for worthless gold mining stock. Her daughter tried to stop it but left the room too soon. A man named Marshall accumulated fifty-five of these claims and flipped them for 10 to 15 cents on the dollar.
For three years, these scam artists operated with basically no interference. One warning article ran in 1932, and then silence. The city council, the district attorney, the mayor: all quiet.
The New Deal Arrives (Sort Of)
The federal government did eventually step in. The Home Owners’ Loan Corporation, or HOLC, started refinancing mortgages in default. By 1936, they’d helped 684 homeowners in the Colorado Springs region with over $1.2 million in loans. Nationwide, more than a million homeowners got HOLC assistance.
New federally chartered savings and loans opened up. They came with deposit insurance and promised to be nothing like the old building and loans. “As different from those defunct associations as a national bank is from a pawn broker’s office,” one spokesman said.
But people didn’t buy it. A 1938 study found that absolutely nobody surveyed in the Denver area saved in a building and loan. Nearly 70 percent said they avoided them because of what had happened to them or people they knew. In Pueblo, the HOLC reported “intense bitterness towards anything that smacked of building and loan.”
A City That Wouldn’t Change
Here’s what I found most striking about this chapter. Colorado Springs didn’t just resist reform. It doubled down on the exact ideology that had enabled the collapse. The city was built on rugged individualism. Anti-union, anti-regulation, anti-government aid. Even nearby dust bowl farmers initially refused a federal plan to control soil erosion because they “preferred dealing with the problem individually.”
When unemployed men asked the taxpayers’ association to support a public works project, the taxpayers said no. When the Communist-led council of the unemployed demanded free water and electricity for the poor, nobody took them seriously. The police chief made sure there would be no May Day parades.
El Paso County cut four hundred people from old-age pensions when payments were less than $28 a month. The local paper called the relief programs an “appalling” snowball, even while admitting they kept homes intact and hungry children fed. Colorado eventually voted against Roosevelt in 1940 and 1944. By the end of the thirties, Colorado Springs was a “Depression-ridden resort town” that felt like a ghost town.
So what did they do? They courted the military. They wined and dined Army brass at the Broadmoor Hotel. By the 1980s, 60 percent of the local economy was tied to military spending. The irony is thick. A city that hated government dependence became entirely dependent on government contracts.
The S&L Crisis, Round Two
The chapter’s final punch is about what happened when America forgot all of this. By the 1980s, Reagan-era deregulation let savings and loans do basically whatever they wanted. “The best way to rob a bank is to own one,” said California’s savings and loan commissioner. The S&L crisis cost taxpayers somewhere between $150 and $175 billion. Denver’s Silverado Savings & Loan alone cost $1.3 billion. Its board included Neil Bush, the president’s son.
Nobody remembered the building and loan collapses of the 1930s. Nobody could push back against deregulation because nobody knew the history. And that ignorance, Echols argues, is exactly how it happened again.
And then happened again with subprime mortgages in 2007.
The title of this chapter, “Orphans in the Storm,” comes from a lawyer who said that pre-Depression B&Ls had been abandoned by the government like orphans. But the real orphans were the depositors. They waited a full decade for their final dividend payment. In the end, they got back 41 percent of their money. The rest was just gone.
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