The Savings and Loan Crisis of the 1980’s

1. The Savings and Loan Crisis of the 1980’s “The Largest Theft in History” - And a precedent for things to come

2. In A Nutshell • The Failure of 747 Savings and Loan Institutions • Regulated by the FDIC & FHLBB • Caused by volatile interest rates in the 70’s, over regulation of S&L Institutions in the early 80’s, deregulation in the late 80’sand “junk”. • Massive federal bailout totaling in $160 Billion, majority of which paid for by the taxpayers.

3. Timeline • 1970’s:Fluctuating economy leads to unpredictable interest rates • 1980-1982:Statutory and regulatory changes give the S&L industry new powers to invest in areas of business and return to profitability. • 1982-1985:Reductions in the Bank Board's regulatory and supervisory staff. Industry assets increase by 56% between 1982 and 1985. • 1986-1989:Compounding losses as insolvent institutions are allowed to remain open and grow, allowing ever increasing losses to accumulate. • 1990-1991: Government bail-out totaling $162 billion

4. Conclusions • Strong and effective supervision of insured depository institutions is essential • The industry can’t have too much influence over regulators • Regulators need adequate resources • Insolvent, insured financial institutions must be closed promptly in order to minimize potential losses

5. S&L Industry of the Early 80’s • FSLIC insured approximately 4,000 state- and federally chartered savings and loan institutions with total assets of $604 billion. • 118 S&Ls with $43 billion in assets failed, costing the FSLIC an estimated $3.5 billion to resolve. • During the previous 45 years, only 143 S&Ls with $4.5 billion in assets had failed • Would have cost the FSLIC approximately $25 billion to close these insolvent institutions in early 1983.

6. Regulations and Supervision • Regulation of S&L’s separate from commercial banks and mutual savings banks. • Home Owners. Loan Act of 1933 empowered the FHLBB to charter and regulate federal savings and loan associations. • National Housing Act of 1934 created the FSLIC to provide federal deposit insurance for S&Ls similar to what the FDIC provided for commercial banks and mutual savings banks.

7. Early Response: Deregulation • The primary problem was the lack of FSLIC resources available to close insolvent S&Ls. • Political, legislative, and regulatory decisions in the early 1980s were imbued with a spirit of deregulation. • Reported capital was further augmented by the use of regulatory accounting principles (RAP) that were considerably more lax than generally accepted accounting principles (GAAP).

8. Deregulation Effects • Characterized by extremely rapid growth. • S&L growth was fueled by an influx of deposits into institutions willing to pay above-market interest rates. • The high-growth period between 1982 and 1985 was also the period when examination and supervision were weakest

9. Competitive Effects on Banking • Enactment of Garn.StGermain and the deregulation of asset powers by several key states caused S&Ls to adapt their strategies. • The troubled condition of S&Ls resulted in higher interest rates for all financial institutions • Because of continuing uncertainty about the FSLIC’s ability to close insolvent S&L’s, the deposit premium rose through 1989

10. Resolution • Losses in the S&L industry continued to mount as declining in real estate values deepened • Competitive Equality Banking Act of 1987 funded the FSLIC with to resolve insolvent institutions • Final cost of resolving failed S&Ls: $160 billion- $132 billion from federal taxpayers

11. Discussion Topic: Bail-Outs Bail-Out Economics – Capitalism Contradiction • Buying troubled assets • Making capital infusions • Insuring bank assets Problems and Issues