Savings & Loans Crisis (80s)

1. Savings & Loans Crisis (80s) Tanya Carone April 16, 2013

3. Where individuals put their $$? • Interest rates • Risk • Federal insurance for deposits • 1970s • Interest rates at banks were capped • Money Market accounts available • Higher interest rates than S&L

4. When to pay off mortgage? • When you have made all of the payments • When you sell you house • When you refinance • Dropping interest rates • More refinancing • More home sales • Increasing interest rates • Little refinancing • Fewer home sales

5. Impact of Interest Rates • Scenario 1 • Saving Accounts Interest Rates 4% • Mortgage Interest Rates 7% • Scenario 2 • Saving Account Interest Rates 10% • Mortgage Interest Rates 7%

6. What would you do? • Liabilities have higher rate than assets • Minimal refinancing due to increase interest rates • Fewer individual putting in deposits

7. Changes to Regulation • Removed cap on interest rates • S&L could offer higher interest rates to encourage more deposits • Allowed S&Ls to engage in “new” activities • Commercial real estate • Bonds

8. High Risk Investments • Government insurance of deposits • S&L keep rewards from investments • Government covers losses • Junk Bonds • Speculative Real Estate

9. Lincoln Savings & Loan American Continental Corporation Charles Keating Chairman & Controlling Stockholder 1984 FHLBB Lincoln Savings and Loan • Increased high risk assets • Land • Equity positions in real estate • Junk Bonds

10. Keating Actions to Oppose Regulators • Audited in 1986 • Unreported losses • Surpassed regulated direct investments limit • Tried hiring away regulators and/or their wives • Used political influence (Keating Five) • Alan Cranston (D – CA) • Dennis DeConcini (D-AZ) • John Glenn (D-OH) • John McCain (R-AZ) • Donald Riegle (D-MI) • Filed lawsuit again FHLBB

11. Backup

12. Graph of Total and Insolvent S&Ls