Savings and loan crisis

US financial crisis from 1986 to 1995

This building at 1700 G St NW in Washington, DC, now occupied by the Consumer Financial Protection Bureau, housed the Federal Home Loan Bank Board from the 1970s onward. It was built in 1976.  Mortgages and interest rates

30 year fixed rate mortgage

15 year fixed rate mortgage

5/1 adjustable rate mortgage

10 year treasury yield

Effective Federal funds rate

Inflation Consumer price index

The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of approximately a third of the savings and loan associations (S&Ls or thrifts) in the United States between 1986 and 1995. These thrifts were banks that historically specialized in fixed-rate mortgage lending.[1] The Federal Savings and Loan Insurance Corporation (FSLIC) closed or otherwise resolved 296 thrifts from 1986 to 1989, whereupon the newly established Resolution Trust Corporation (RTC) took up these responsibilities. The two agencies closed 1,043 banks that held $519 billion in assets. The total cost of taxpayers by the end of 1999 was $123.8 billion with an additional $29.1 billion of losses imposed onto the thrift industry.[2]

Starting in 1979 and through the early 1980s, the Federal Reserve sharply increased interest rates in an effort to reduce inflation. At that time, thrifts had issued long-term loans at fixed interest rates that were lower than prevailing deposit rates. Attempts to attract more deposits by offering higher interest rates led to liabilities that could not be paid-for by the lower interest rates at which they had loaned money. Nor could outflowing deposits simply be paid out by sale of now less-valuable assets. The end result was that about one third of S&Ls became insolvent, causing a first wave of failures in 1981–83.

When the problem became apparent, Congress acted to permit thrifts to engage in new lending activities with the hope that they would diversify and become more profitable. This included issuance of adjustable-rate mortgages and permission to enter into commercial real estate lending. Lower capital requirements and permissive accounting standards also allowed weaker thrifts to continue operating even though under the old rules or US GAAP they would have been insolvent. These changes allowed for substantial risk-taking and thrift industry growth. Many new thrifts were formed in the American southwest and levered themselves to substantial size rapidly. The regional concentration of thrift investments there, along with thrifts' inexperience in the new types of lending they had entered, proved highly fragile. When property prices in those regions dropped in 1986, a second and larger wave of failures started.

The thrift deposit insurer, FSLIC, was unable to pay for all these failures and became insolvent. FSLIC's financial weakness, along with congressional pressure, also forced regulators to engage in regulatory forbearance. This allowed insolvent thrifts to remain open and tied FSLIC to capital injections. Attempts to recapitalize FSLIC arrived both too late and in insufficient amounts. Failures continued to mount through 1988 and by February 1989, congressional legislation – the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 – was brought to establish the Resolution Trust Corporation to wind down all remaining insolvent thrifts. The law also brought more stringent capital regulations for thrifts and an increase in supervisory resources. Responsibility for thrift supervision and thrift deposit insurance were also transferred, respectively, to the then-new Office of Thrift Supervision and the Federal Deposit Insurance Corporation.

## Causes

[edit]

Thrift institutions originated in the 19th century with the goal of pooling resources among members to make loans with which to purchase residential properties.[1] The industry grew rapidly at over 10% annually in the postwar period amid government support for home financing.[3] At the time, thrifts were regulated by two – or three, if state regulators are included, – institutions. Examinations were conducted by the Federal Home Loan Bank Board (FHLBB); but supervisory authority was separate and resided in regional Federal Home Loan Banks.[4] Conflict of interest concerns also existed in the privately-owned home loan banks, leading to poor working relationships between federal employee examiners and the private supervisors. Delays between examinations and their reports arriving to supervisors also meant that supervisory action, if it were to be taken, would be months late.[5] Weak enforcement powers, along with thrifts' rights to contest unfavourable reports, meant the Federal Home Loan Bank Board was highly deferential to bank management.[6]

### Interest rate increases

[edit]

See also: Stagflation and Early 1980s recession in the United States

The early 1980s saw a recession along with high interest rates, which stressed both thrift and other banking institutions considerably.[7] Negative net interest margins, due to the low interest earned on assets with high deposit interest expenses needed to retain deposits, caused a wave of thrift failures between 1981 and 1983.[1] Federal regulations, especially Regulation Q, placed caps on deposit interest rates. Depositors responded by withdrawing their cash and depositing them in money market mutual funds. In response to these outflows, Congress passed the Depository Institutions Deregulation and Monetary Control Act of 1980 which phased out Regulation Q interest rate caps and expanded thrift lending powers to include construction loans. The deposit insurance limit was also raised from 40,000 to 100,000 dollars per account.[8] The phase-out of deposit interest rate caps, however, caused thrifts' deposit interest expenses to increase substantially as they scrambled to retain depositors. The resulting decline in profitability led to a wave of thrift failures in 1981–83.[9]

Many of these failures were outside of their managers' control. The high and volatile interest rates in the early 1980s meant that even thrifts with diversified residential mortgage portfolios, constrained by existing price caps, became unable to meet their obligations.[10] The historical institutional characteristics of thrift institutions – low loss rates accompanied by low earnings and capital – were stable but severely challenged by these market conditions.[11]

### Deregulation and commercial lending

[edit]

Thrift examination activities[12] Year | Exams per thrift | Exams per asset (billions)

|
|

1980 | 0.80 | 5.41
1981 | 0.85 | 4.96
1982 | 0.85 | 4.08
1983 | 0.68 | 2.62
1984 | 0.75 | 2.40
Federal Home Loan Bank Board members, pictured in the Board's 1985 annual report. From left to right, Donald I. Hovde, Edwin J. Gray (chairman), and Mary A. Grigsby.

The 1981 Garn–St. Germain Depository Institutions Act completed a process of deregulation that provided relief to weak thrifts by allowing their deposit insurer, the Federal Savings and Loan Insurance Corporation (FSLIC), to provide direct capital injections through "net worth certificates".[13] The Garn–St. Germain Act also hugely expanded thrift lending powers, allowing them to engage in commercial real estate and line-of-credit lending, which many thrifts eagerly exploited.[14] Between 1980 and 1986, thrifts' residential mortgage holdings as a proportion of assets fell from over 80 percent to less than 60.[15]

These new lending powers were not accompanied by any increase in supervisory resources or powers.[16][17] The view at the time was that the interest rate environment would quickly ease, allowing for thrifts to restructure their asset portfolios,[18] and that expanded lending powers would allow for thrifts to diversify their portfolios and engage in more profitable lending activities.[13] It was expected that thrifts would continue being the relatively docile institutions they had then always been and diversify their portfolios prudently; few believed at the time that these deregulatory episodes would allow thrifts engage in excessively risky lending.[19]

Many of the loans made under expanded lending powers were concentrated in rapidly-growing states such as California, Florida, and Texas.[20] Lax state supervision and highly permissive leverage restraints allowed thrifts in these states to expand rapidly, taking on considerable risk concentrated in these business lines and geographic regions.[21] The highly-sensitive nature of commercial real estate values to local economic conditions made these thrifts highly sensitive to those local economic conditions.[22] These issues were compounded by the relative inexperience of thrift staff in evaluating risks of commercial lending and equity investments.[23]

The deregulatory policy of the Reagan administration, enforced by its appointment of thrift executive Edwin J. Gray, reduced thrift examinations between 1981 and 1984 by 26 percent.[24] Normalized per institution or by assets held, FSLIC-insured institutions' supervisory resources were stretched.[25] However, Gray's position reversed after the fraud-induced failure of Texas-based Empire Savings and Loan: he spent the next two years increasing examination resources and tightening financial regulations. Such efforts were, however, not supported by industry groups or the Reagan administration.[26]

### Forbearance

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FLHBB was headquartered in this building at 1700 G St NW in Washington DC, here depicted in a photograph on the cover of the December 1984 issue of the FHLBB Journal.

Attempts to smooth over rough market environments included considerable regulatory forbearance: when a regulator decides not to apply regulations that normally would disrupt the operation of a bank. The FHLBB therefore progressively lowered net worth requirements from five percent in 1980 to three percent in 1982.[18] Lax phase-in rules also meant that many newer savings and loan institutions could be required to have net worth requirements lower than three percent; in fact, new institutions could be levered from two million dollars in capital to $1.3 billion in assets (a multiple of 650) in about a year.[18]

FHLBB also chose to adopt regulatory accounting principles which allowed institutions to defer reporting of losses and treat more instruments as capital. Accounting rules over supervisory goodwill (a type of intangible asset) were also liberalized, making it easier for thrifts to purchase insolvent thrifts. Since this substituted for the normal cash injections from FSLIC due to the insurer's limited financial resources, this utilised such goodwill as essentially an accounting fiction. Such lenient accounting rules, however, also had the effect of preventing the FHLBB from intervening against thinly-capitalised institutions whose balance sheets were supported by intangibles.[27] Policy responses chosen by the Reagan administration, and adopted by the FHLBB under pressure, also led to demands not to use taxpayer money. Along with political demands not to alarm the public by closing institutions, these constraints forced FHLBB into a policy of "hiding the poor condition of [thrifts] behind accounting gimmicks".[28][29]

By 1983, even though the interest rate environment had substantially eased, a tenth of thrifts were insolvent on a GAAP basis, with those institutions controlling 35 percent of thrift industry assets. Even so, such institutions were allowed to continue operating and thereby exposed taxpayers to eventual losses through their failure and following deposit insurance claims.[30]

### Fraud

[edit]

Several high-profile casualties of the crisis involved fraud. A variety of methods were identified. For example, a thrift officer could extract compensation and other benefits from origination fees on low-quality loans.[31] Alternatively, they could collude with developers to book paper profits that were extracted and eventually placed on the government, or simply pay themselves high compensation until the thrift became bankrupt, and place the responsibility for paying off depositors onto FSLIC.[32][33] William K. Black gained considerable notoriety for his leadership in prosecuting Charles Keating, who was temporarily successful in blocking Black's investigations, because campaign contributions coordinated by Keating had saved Jim Wright from financial ruin and elevated him to the Speaker of the House. Keating also had bought support from five US Senators, but it was not enough to keep him out of prison.[34] Black said that many senior executives can find accountants and auditors willing to conspire to commit fraud; he coined the term "control fraud" to describe this phenomenon.

However, such fraud was not the core reason for the crisis.[35][36][37][38][39][40] Estimates of the number of failures that involve fraud or insider abuse ranges considerably due to the difficulty in detecting fraud and distinguishing it from bad business judgment. An Office of the Comptroller of the Currency study in 1988 indicated fraud in 11 percent of failures between 1979–87; a Federal Deposit Insurance Corporation study in 25 percent of failures in 1989; a Resolution Trust Corporation study in 1992 found fraud in 33 percent of its cases; and a 1994 General Accounting Office study reported 26 percent of banks that failed in 1990–91 had issues with fraud.[41] The most clear cases of fraud both within and without of the thrift system were concentrated in a few large institutions that had grown substantially and were alleged to have conspired to manipulate junk bond markets with thrift directors for personal gain.[42]

Regardless, there was fraud and insider abuse in many cases.[43][44] The Crime Control Act of 1990, after the crisis, established a special counsel to investigate and prosecute fraud in financial institutions. Between 1988 and 1992, the Department of Justice sent 1,706 bankers to prison and found guilty verdicts in 2,603 cases.[45] Expert estimates as of a Congressional Budget Office report in 1992 as to the proportion of losses due to fraud eventually borne by the government range from three to 25 percent,[46] with a more narrow consensus estimate in the range 10–15 percent (corresponding to taxpayer losses of 16–24 billion dollars).[47]

## Thrift failures

[edit]

Insolvent thrift institutions (1980–89)[48] Year  | # of thrifts  | # insolvent[49] | % insolvent

|
|
|

1980  | 3,993  | 43  | 1.1%
1981  | 3,751  | 112  | 3.0%
1982  | 3,287  | 415  | 12.6%
1983  | 3,146  | 515  | 16.4%
1984  | 3,136  | 695  | 22.2%
1985  | 3,246  | 705  | 21.7%
1986  | 3,220  | 672  | 20.9%
1987  | 3,147  | 672  | 21.4%
1988  | 2,949  | 508  | 17.2%
1989  | 2,878  | 516  | 17.9%

Realisation of interest-rate risk in the early 1980s led to a short series of failures that impelled a deregulatory episode from 1980–81. The failure of Empire Savings and Loan in 1984 also drove the FHLBB to reverse course and tighten regulations on thrifts.[26] Such actions were too late, however, since the poor loans had already been made and were already on thrift balance sheets.[50]

The condition of the banking system as a whole was also not entirely solid. The rapidly changing legal environment, along with new financial technologies, also destabilised commercial banks.[51] 1984 saw the largest commercial bank failure to date, that of Continental Illinois, which was infamously branded "too big to fail".[52] The bank failed amid a rise in foreign non-performing loans (mostly in Latin America) and an electronic bank run. The FDIC stepped in to prevent the failure of almost 2,300 smaller banks which had their money in Continental and a general panic.[53]

Moreover, even by 1983, FSLIC's reserves were clearly inadequate for the thrifts that had already by that time failed: with just a bit more than six billion dollars in reserve, outstanding claims by that point already totalled $25 billion.[54]

### Intensification

[edit]

Total Savings & Loans Institutions in the United States[55]

Losses reported by thrifts through to 1985 were mostly deferred due to the lax accounting rules in place and covered by positive real estate values in the southwestern United States.[56] The first major thrifts to go were in Ohio and Maryland in 1985. That March, Home State Savings Bank of Cincinnati, Ohio collapsed after a depositor run triggered by news that it had lost $540 million in a securities scam. Not insured by the federal government via FSLIC, it was instead insured by a private state insurance program. This program became promptly insolvent and the governor, Richard F. Celeste, ordered the first bank holiday since the Great Depression.[57] In Maryland, that May, Old Court Savings and Loans similarly failed. The panic also spread across Maryland thrifts, which also insured by their state and not the federal government. The governor, Harry R. Hughes, capped deposit withdrawals; by June, the Maryland legislature ordered all state-insured thrifts either to become FSLIC members or liquidate in six months. The thrift failures in Ohio and Maryland cost those states' taxpayers some 250 million dollars.[58]

A sharp regional recession in the southwestern United States and Texas, caused by a drop in oil prices, caused a fall in the value of commercial real estate in those areas. Thrifts in those states, highly exposed to local commercial real estate prices through their heavy aggressive lending activities, quickly became insolvent.[59] Pressure compounded on banks due to follow-on real estate effects and an agricultural recession in Great Plains states.[60] The elimination of favorable tax treatment for real estate construction in the Tax Reform Act of 1986 also contributed to a slowdown in constructing lending and lowered real estate values.[61]

### FSLIC recapitalization

[edit]

FSLIC reserves (1980–89)[48] Year  | Reserves
(billions $)

|

1980  | 6.5
1981  | 6.2
1982  | 6.3
1983  | 6.4
1984  | 5.6
1985  | 4.6
1986  | –6.3
1987  | –13.7
1988  | –75.0
1989  | Dissolved

The failures in 1985–86 were extremely expensive for FSLIC. Resolving those failures cost $7.4 billion in 1985 and $9.1 billion in 1986. This brought the FSLIC reserve fund to less than $2 billion on the eve of 1987. Compounding this, the size of the thrift industry had expanded considerably, meaning that the money in that reserve fund was spread thin.[62][63] FSLIC's immediate response to raise revenue by increasing deposit insurance premia.[64] It also sought to restrict thrift taking of brokered deposits, which it viewed as fuelling thrift growth. However, those regulations were stuck down by a federal court and may regardless have done little to enforce asset quality.[65] Further regulations in 1984–85 attempted to slow the growth of thrift institutions and change the calculation of regulatory capital to better match current conditions; regulatory personnel were also taken on to examine banks for compliance with these regulations.[66]

Credit losses, however, came too quickly for this re-regulatory push to have much impact.[67] With insufficient resources to handle those losses, FSLIC's sought to defer sale of institutions and assets so that they could be handled with the limited resources on hand.[68] The Reagan administration recognized by April 1986 that FSLIC was itself approaching insolvency; it asked Congress for $15 billion to pay for FSLIC costs through bonds sold against future FSLIC premia. Little was done on the matter and the issue of insolvency was played down to avoid alarm and unfavorable press.[69] By January 1987, the problems were of such magnitude that it was the first piece of business in the new session. However, specifics of the funding bill were harshly debated. The thrift industry group, supported by House Speaker Jim Wright, insisted on less than $7.5 billion and compulsory regulatory forbearance. While the administration resented the inclusion of regulatory forbearance, public news of FSLIC's impending (or already actual) insolvency in a GAO report led the administration to accept regulatory forbearance for more money. The resulting Competitive Equality Banking Act was signed on August 11, 1987, giving FSLIC $10.8 billion through sale of bonds via an off-balance sheet government entity.[70][71] It also required thrift supervisors not to close thrifts that had equity ratios of more than 0.5 percent which met rather lax business viability criteria.[72]

The effect of the 1987 act was that risky institutions were unrestrained in their risk-taking behaviors. They then attempted to "gamble for resurrection",[73] hoping that even riskier lending would allow them to get sufficient profits to stave off bankruptcy. The effect of assistance also engendered moral hazard, where owners could accrue profits from risky loans but place losses at the feet of taxpayers.[74]

At the end of 1988, 2,969 thrifts remained active. This was over three hundred less than in 1985 and over a thousand less than in 1980. These failures were highly geographically concentrated: a third of the failures from 1985 forward occurred in just three states: California, Texas, and Florida;[75] Texas accounted for 40 percent of thrift failures in the worst year of the crisis, 1988.[54] Faced with so many institutions, FHLBB, under its new chairman M. Danny Wall, attempted to sell off hundreds of insolvent thrifts in receivership. These sales could only be accomplished with substantial government support and although it allowed FSLIC to dispose of almost 200 thrifts by the end of 1988, some 250 insolvent institutions with $81 billion in assets remained.[76][77]

### FIRREA and the RTC

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The final members of the Federal Home Loan Bank Board, pictured in its 1988 annual report. The chairman M. Danny Wall, in center, became the first director of the Office of Thrift Supervision pursuant to FIRREA.

Further information: Resolution Trust Corporation

The number of banks that were formally insolvent under FHLBB regulatory guidelines at the end of 1988 was 250, however, the number insolvent after excluding intangible assets more than doubled to 508. These insolvent thrifts continued to lose money rapidly. Moreover, FSLIC at the same time was itself insolvent.[78] The new president, George H. W. Bush, announced a proposal on February 6, 1989, to resolve the thrift failures.[79] The plan included three major elements: a temporary agency would be created with 50 billion dollars in funding to liquidate the insolvent thrift institutions with that money being raised via another off-balance sheet vehicle paid for by higher insurance premia on the thrift industry; the FHLBB and FSLIC would be dissolved, with supervisory powers devolving to the incipient Office of Thrift Supervision within the Treasury Department and the FDIC; regulations would be tightened as well, with regulatory capital no longer including intangibles such as goodwill and doubled to six percent within two years.[80] On August 9, 1989, the proposals brought by Bush were passed essentially unchanged as the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 into law.[81] Many other regulatory provisions were also included, such as risk-based capital applied to thrifts, re-imposition of restrictions on thrifts' non-residential mortgage portfolios, and funding for financial crimes prosecutions.[82]

The Resolution Trust Corporation, created by the act, sold or liquidated all remaining thrifts. Those institutions remained for the time being in operation under conservatorship. The RTC was also given generous amounts of time to sell assets in small tranches: buyers were more willing to purchase smaller portions and the RTC was also able to assess and market its assets.[83] The closure of FSLIC and the creation of RTC only to sell or liquidate insolvent institutions also forced thrift owners to take fewer risks since they knew that assistance would no longer be forthcoming.[84] In 1989 the RTC disposed of 37 thrifts at a cost of $51 billion, which came under fire from congressional leadership. The next year, 1990, saw the sale of 315 institutions at a cost of $20 billion. Congress, although criticizing the RTC for its ballooning staff, appropriated an additional $30 billion in March 1991.[85] Late in that year, many of the assets bundled into mortgage-backed and commercial-paper backed securities.[86] Amid a funding deficiency, the RTC was forced to shut down operations in 1991, but after new appropriations in 1993, the RTC was wound down by year-end 1996. Overall, it recovered 78 percent of the book value of all assets and disposed of 747 thrift institutions with $402.6 billion in assets.[87]

## Scandals

[edit]

A number of high-profile thrift failures and scandals also emerged from the crisis. Notable institutions included:

* Lamar Savings and Loan (Austin, TX), led by Stanley Adams, which cost $2 billion to resolve;
* Vernon Savings and Loan (Dallas, TX), led by Don Dixon, which on resolution had 94 percent of loans non-performing; and
* Columbia Savings and Loan (Beverly Hills, CA), led by Thomas Spiegel, was closed in January 1991 at the cost of $3.25 billion.[88]

Especially publicized was the insolvency of Lincoln Savings and Loan Association, led by influential Republican donor and political figure Charles Keating. Between 1984 and 1989 it grew five-fold, investing mainly in commercial property and equities. After supervisors recommended the thrift be seized for criminal fraud in 1987, Keating leaned on senators Dennis DeConcini (D-AZ), John McCain (R-AZ), Alan Cranston (D-CA), John Glenn (D-OH), and Donald Riegle (D-MI) to curtail the investigation. When it became known that the five men, later dubbed the Keating Five, had received $1.3 million in campaign contributions, they became embroiled in a congressional ethics investigation. Eventually, the matter was dropped by the new FHLBB chairman, Danny Wall, who later resigned in December 1989 for failure to take action against Lincoln, which failed that year at a cost of $2.6 billion.[89] Keating was eventually prosecuted and convicted, but the convictions were overturned due to incorrect jury instructions and, later, a poisoned jury. Eventually, in 1999, he pled guilty and was sentenced to time served.[90][91]

Other figures were similarly drawn in to allegations of fraud and corruption. Neil Bush, the son of then-vice president George H. W. Bush, was hauled before Congress and sued by the FDIC for his involvement in Silverado Savings and Loan (Denver, CO), which failed in December 1989.[92]

## Consequences

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Thrifts were not the only financial institutions adversely affected in the 1980s. Many banks failed as well. Between 1980 and 1994, 1,617 commercial banks failed (9.14 percent of all banks) with total assets of $206 billion.[93] However, the overlapping regional banking crises in the 1980s were far less severe on the commercial banking side because the FDIC remained solvent. Moreover, the federal commercial bank regulators were more proactive in their approaches to limit growth and enforce capital requirements;[94] the FDIC's financial solvency meant, unlike FSLIC, a policy of regulatory forbearance was not forced on it by circumstance.[95]

In just the years 1986 to 1995, the number of federally insured thrifts about halved from 3,234 to 1,645.[96] 1,043 thrifts failed with total assets of over $519 billion.[97] Congress ultimately appropriated $105 billion to the Resolution Trust Corporation, though only $91.3 billion were ever used. After banks repaid loans through various procedures, by the end of 1999, taxpayers suffered combined FSLIC and RTC expenses of $123.8 billion with an additional $29.1 billion (approximately 19 percent) of losses imposed onto the thrift industry.[98] Approximately $60 billion of those losses were attributable to regulatory forbearance as required by the Competitive Equality Banking Act of 1987.[99]

The higher insurance premia along with regulatory burdens, without concomitant legal powers, that were enacted by FIRREA led to progressive exits from the thrift industry over the 1990s as thrifts re-chartered themselves as commercial banks.[100][101] Changes in thrift powers also meant that they lost their distinctiveness vis-à-vis commercial banks: between 1980 and 1995 the share of 1–4 family mortgages originated by thrift institutions fell from 47 percent to 15.[102] In the aftermath of the crisis, even the words "savings and loan" became less common as thrift institutions renamed themselves merely as "bank" or "savings bank".[103]

Bank regulators' powers were also strengthened. The FDIC Improvement Act of 1991 expanded federal banking agencies' examination authority, requiring annual inspections and sufficient examination staff for those inspections. Moreover, the agencies received prompt corrective action powers to compel banks to recapitalize when falling below certain capital thresholds. Such orders were also backed up by further powers to suspend banks' legal authority to do certain types of business, to ban fragile banks from paying out dividends, or to replace bank directors.[104] Furthermore, restrictions were also imposed on how long banks could stay open while below minimum regulatory capital requirements, putting a "hard stop" of 90 days after which a bank must be placed into receivership.[105] Public awareness of the problems of a lack of geographic diversification enforced by law also may have played a role in the passage of the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994, which lifted historical restrictions on banks operating across state lines.[106]

## See also

[edit]

* 1980s portal
* 1990s portal
* Money portal

* Financial crisis
* List of largest bank failures in the United States
* Subprime mortgage crisis
* Cottage Savings Ass'n v. Commissioner, a United States Supreme Court case dealing with the tax consequences of the S&L crisis
* United States v. Winstar Corp., a U.S. Supreme Court case that gives a concise but useful history of the crisis and the accounting practices that aggravated that crisis

## Citations

[edit]

1. ^ a b c Sharma 2022, p. 39.
2. ^ Curry & Shibut 2000, p. 26 (total assets of closed institutions), 33 (cost to the public, broken down by taxpayers and industry also noting that liquidation of RTC assets would not materially affect losses); see also p. 29 noting confusion among previous estimates.
3. ^ Mason 2004, pp. 129, 139 (Table 5.1).
4. ^ Moysich 1997, p. 171.
5. ^ Moysich 1997, pp. 171–72.
6. ^ Moysich 1997, p. 172.
7. ^ Sharma 2022, p. 39; Mason 2004, p. 213.
8. ^ Mason 2004, pp. 215–16.
9. ^ Sharma 2022, p. 39; Mason 2004, p. 218.
10. ^ Bodie 2006, p. 326.
11. ^ Mason 2004, pp. 255–56.
12. ^ White 1991, p. 89 (Table 5-13).
13. ^ a b Mason 2004, p. 219.
14. ^ Mason 2004, p. 219; Hanc 1997, p. 10.
15. ^ Moysich 1997, p. 179 (Figure 4.1).
16. ^ Hanc 1997, p. 26, noting that underwriting standards fell without controls by property.
17. ^ Curry & Shibut 2000, p. 27, noting "the deregulation of the thrift industry without an accompanying increase in examination resources".
18. ^ a b c Moysich 1997, p. 173.
19. ^ White 1991, pp. 90–92, remarking at length on "silence on the safety risks" and that a thrift crisis "seemed too remote".
20. ^ Mason 2004, p. 224.
21. ^ Sharma 2022, p. 40; Mason 2004, p. 224.
22. ^ Freund et al. 1997, p. 158.
23. ^ Mason 2004, pp. 258–59.
24. ^ Mason 2004, p. 226.
25. ^ White 1991, pp. 88–89.
26. ^ a b Mason 2004, pp. 226–27.
27. ^ Moysich 1997, pp. 173–77.
28. ^ Steinreich & Oglesby 2016, p. 112.
29. ^ Moysich 1997, pp. 177, 187.
30. ^ Moysich 1997, pp. 180, 187, noting that this forbearance policy allowed thrifts "to substitute credit risk for interest-rate risk".
31. ^ Moysich 1997, p. 184.
32. ^ Akerlof & Romer 1993, pp. 29–30).
33. ^ Mankiw, N. Gregory. "Comments and discussion". In Akerlof & Romer (1993), p. 66.
34. ^ Black (2005, 2013).
35. ^ White 1991, p. 117, arguing "any treatment of the S&L debacle that focuses largely or exclusively on [fraud] is misguided and misleading" and that "it perpetuates the incorrect notion... that virtually all the thrift insolvencies were caused by 'crooks'... [and] also diverts attention from an understanding of how and why government policies went awry".
36. ^ Iden & Manchester 1992, p. xi. "Fraud was also a factor, but it was not a fundamental cause of the disaster".
37. ^ Moysich 1997, pp. 184–85, noting "although the majority of S&Ls were not fraud-ridden, few had the management expertise necessary for dealing with the new lending opportunities... in many cases, prudent underwriting standards were not observed and the necessary documents and controls were not put in place".
38. ^ Mason 2004:
* p. 241, noting that "significantly, fraud was not a major cause of thrift failures despite its prominence in several high-profile insolvencies";
* p. 258, noting that "many observers have incorrectly portrayed fraud as the leading cause of the S&L crisis".
39. ^ Bodie 2006, p. 326, noting that "the biggest losses to the FSLIC were incurred not as a result of fraud or even of poorly diversified asset portfolios, but rather as a result of failure on the part of regulators to act quickly to stem the losses".
40. ^ Steinreich & Oglesby 2016, pp. 96–99, passim.
41. ^ Hanc 1997, p. 34, citing:
* Office of the Comptroller of the Currency (June 1988). Bank failure: an evaluation of the factors contributing to the failure of national banks (PDF) (Report).
* General Accounting Office (March 1994). Bank insider activities: insider problems and violations indicate broader management deficiencies (PDF) (Report). GAO/GGD-94-88.
42. ^ Akerlof & Romer 1993, pp. 51–54.
43. ^ White 1991, p. 117\. "The bulk of the insolvent thrifts' problems... did not stem from [fraud]... these thrifts failed because of an amalgam of deliberately high-risk strategies, poor business judgments, ... and sloppy and careless underwriting, compounded by deteriorating real estate markets" (emphasis in original).
44. ^ Hanc 1997, p. 34, noting "it seems reasonable to infer that fraud and abuse not only were present in a large number of bank and thrift failures in the 1980–94 period but also contributed to some of them".
45. ^ General Accounting Office (January 8, 1993). Bank and thrift criminal fraud: the federal commitment could be broadened (PDF) (Report). pp. 4, 6, 77 (exact statistics). GAO/GGD-93-48.
46. ^ Iden & Manchester 1992, pp. 11–12.
47. ^ Mason 2004, p. 258.
48. ^ a b Moysich 1997, p. 168 (Table 4.1).
49. ^ Moysich 1997, p. 168, noting that the number of insolvent thrifts is determined on a tangible capital to assets basis; this is not based on the FHLBB regulatory capital rules.
50. ^ White 1991, pp. 125–26.
51. ^ White 1991, p. 107.
52. ^ Davison 1997b, p. 236.
53. ^ Davison 1997b, pp. 250–51.
54. ^ a b Robinson 2013.
55. ^ https://banks.data.fdic.gov/explore/historical/?displayFields=STNAME,COUNT,ASSET,DEP,EQNM,NETINC&selectedEndDate=2023&selectedReport=SIF&selectedStartDate=1934&selectedStates=0&sortField=YEAR&sortOrder=desc
56. ^ White 1991, p. 99.
57. ^ Mason 2004, pp. 227–28.
58. ^ Mason 2004, p. 228.
59. ^ Sharma 2022, p. 40; Mason 2004, pp. 228–29.
60. ^ Hanc 1997, p. 16.
61. ^ Mason 2004, p. 229; White 1991, p. 109.
62. ^ Mason 2004, p. 230.
63. ^ Moysich 1997, p. 168 (Table 4.1), instead reporting that on the eve of 1987, FSLIC had reserves of –6.3 billion dollars.
64. ^ White 1991, p. 126, noting that FSLIC increased premia by 150 percent.
65. ^ White 1991, pp. 126–28, rejecting the argument that brokered deposits cause risk taking as a reversal of causality and, for the court, citing 595 F. Supp., 73 (D.D.C. 1984).
66. ^ White 1991, p. 129.
67. ^ White 1991, p. 133.
68. ^ Mason 2004, p. 230; White 1991, p. 134.
69. ^ White 1991, pp. 137–38, 140 ("officials were in a bind[:] excessively loud entreaties to the Congress that the FSLIC was broke might cause depository nervousness and runs, while still not springing loose the bill – the worst of all possible worlds").
70. ^ Mason 2004, pp. 232–33.
71. ^ Moysich 1997, p. 186, noting the amount in the Competitive Equality Banking Act was "clearly inadequate".
72. ^ Mason 2004, p. 233.
73. ^ E.g. Bernanke, Ben (April 11, 2007). Financial Regulation and the Invisible Hand (Speech). New York University Law School. "Equity holders may 'gamble for resurrection' by encouraging rather than discouraging excessive risk-taking. Thus, as was evident in the savings and loan crisis of the 1980s, market discipline by equity holders may break down when it is most needed."
74. ^ Sharma 2022, p. 41.
75. ^ Mason 2004, pp. 239–40.
76. ^ Mason 2004, pp. 235–36.
77. ^ See White 1991, pp. 152–60, for description of the Texan thrift sale strategy and structure of thrift sales.
78. ^ Mason 2004, pp. 241–42.
79. ^ Mason 2004, p. 242; Moysich 1997, p. 186.
80. ^ Mason 2004, p. 242.
81. ^ Mason 2004, p. 244.
82. ^ Mason 2004, pp. 246–47.
83. ^ Mason 2004, p. 248.
84. ^ Sharma 2022, pp. 45–46.
85. ^ Mason 2004, pp. 251–52, noting the RTC Funding Act, Pub. L. 102–18.
86. ^ Mason 2004, pp. 252–53.
87. ^ Mason 2004, pp. 253–54.
88. ^ Mason 2004, p. 237.
89. ^ Mason 2004, p. 238.
90. ^ McCarthy, Donald (2004). "Lincoln Savings: a Coda". In Barth, James R; Trimbath, Susanne; Yago, Glenn (eds.). The Savings and Loan Crisis: Lessons from a Regulatory Failure. The Milken Institute Series on Financial Innovation and Economic Growth. Vol. 5\. Milken Institute. pp. 173–178\. doi:10.1007/1-4020-7898-6_10. ISBN 978-1-4020-7871-2.
91. ^ McFadden, Robert D (April 2, 2014). "Charles Keating, 90, Key Figure in '80s Savings and Loan Crisis, Dies". New York Times.
92. ^ See eg:
* Labaton, Stephen (September 22, 1990). "F.D.I.C. Sues Neil Bush And Others at Silverado". New York Times.
* Larosa, Michael (August 25, 2023). "A tale of two presidential sons". The Hill.
93. ^ Hanc 1997, pp. 3, 14–15 (Table 1.1).
94. ^ Moysich 1997, p. 187.
95. ^ Hanc 1997, p. 47.
96. ^ Curry & Shibut 2000, p. 26.
97. ^ Curry & Shibut 2000, pp. 26, 27 (Table 1).
98. ^ Curry & Shibut 2000, pp. 29, 33.
99. ^ Mason 2004, p. 260.
100. ^ Mason 2004, pp. 261–62.
101. ^ Davison 1997a, pp. 133–34.
102. ^ Mason 2004, p. 263.
103. ^ Mason 2004, p. 264.
104. ^ FDIC 2017, pp. 103, 127.
105. ^ FDIC 2017, p. 186.
106. ^ Kroszner, Randall S (2001). "The motivations behind banking reform". Regulation. 24. Cato Institute: 41. See also Kane, Edward J. (1996). "De jure interstate banking: Why only now?". Journal of Money, Credit and Banking. 28 (2): 142. doi:10.2307/2078020. JSTOR 2078020.

## References

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### Books

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* Federal Deposit Insurance Corporation (1997). An Examination of the Banking Crises of the 1980s and Early 1990s. History of the Eighties. Vol. 1\. Washington, DC: Federal Deposit Insurance Corporation. ISBN 0-9661808-0-1. LCCN 97-77644.
* Federal Deposit Insurance Corporation (2017). Crisis and response: an FDIC history, 2008–2013. Federal Deposit Insurance Corporation. ISBN 978-0-9661808-1-7.
* Mason, David L. (2004). From buildings and loans to bail-outs: a history of the American savings and loan industry, 1831–1995. Cambridge University Press. doi:10.1017/CBO9780511511714. ISBN 0-521-82754-X. LCCN 2003069691.
* White, Lawrence J. (1991). The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation. New York: Oxford University Press. ISBN 0-19-506733-9.

### Articles and chapters

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* Akerlof, G. A; Romer, P. M. (1993). "Looting: the economic underworld of bankruptcy for profit" (PDF). Brookings Papers on Economic Activity. 1993 (2): 1–73\. doi:10.2307/2534564. JSTOR 2534564.
* Bodie, Zvi (2006). "On asset-liability matching and federal deposit and pension insurance" (PDF). Federal Reserve Bank of St. Louis Review. 88 (4): 323–29.
* Curry, Timothy; Shibut, Lynn (2000). "The cost of the Savings and Loan Crisis: truth and consequences" (PDF). FDIC Banking Review. 13 (2): 26–35.
* Davison, Lee (1997a). "Banking legislation and regulation". In Federal Deposit Insurance Corporation (1997), pp. 87–135.
* Davison, Lee (1997b). "Continental Illinois and "too big to fail"". In Federal Deposit Insurance Corporation (1997), pp. 235–57.
* Federal Deposit Insurance Corporation (June 12, 2023). "The S&L crisis: a chrono-bibliography". FDIC.gov. Retrieved November 5, 2024.
* Freund, James; Curry, Timothy; Hirsch, Peter; Kelley, Theodore. "Commercial real estate and the banking crises of the 1980s and early 1990s". In Federal Deposit Insurance Corporation (1997), pp. 137–65.
* Hanc, George. "The banking crises of the 1980s and early 1990s: summary and implications". In Federal Deposit Insurance Corporation (1997), pp. 3–86.
* Iden, George; Manchester, Joyce (January 1992). "The Economic Effects of the Savings & Loan Crisis" (PDF). Congressional Budget Office.
* Moysich, Alane. "The Savings and Loan Crisis and its relationship to banking". In Federal Deposit Insurance Corporation (1997), pp. 167–188.
* Robinson, Kenneth (November 22, 2013). "Savings and Loan Crisis". Federal Reserve History. Federal Reserve Bank of St. Louis.
* Sharma, Padma (2022). "Government assistance and moral hazard: evidence from the Savings and Loan Crisis" (PDF). Economic Review. 107 (3). Federal Reserve Bank of Kansas City: 37–53.
* Steinreich, Dale; Oglesby, Rodney A. (2016). "The savings and loan debacle twenty-five years later: a critical appraisal, interest-group theory re-examination, and final closing of the book". Journal of Accounting & Finance (3): 96–115.

## External links

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External videos

Booknotes interview with Martin Mayer on The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry, November 25, 1990, C-SPAN

* Classic Financial and Corporate Scandals
* (Mis)Understanding a Banking Industry in Transition by William K. Black, from Dollars & Sense Nov/Dec 2007

* v
* t
* e

Savings and loan crisis

Federal authorities|

* Federal Deposit Insurance Corporation
* Federal Savings and Loan Insurance Corporation
* Federal Housing Finance Board
* Federal Home Loan Bank Board
* Office of Thrift Supervision
* Resolution Funding Corporation
* Resolution Trust Corporation

Major federal legislation|

* Federal Home Loan Bank Act
* Homeowners Refinancing Act
* National Housing Act of 1934
* Interest Rate Control Act of 1966
* Depository Institutions Deregulation and Monetary Control Act
* Economic Recovery Tax Act of 1981
* Garn–St. Germain Depository Institutions Act
* Tax Reform Act of 1986
* Competitive Equality Banking Act of 1987
* Financial Institutions Reform, Recovery, and Enforcement Act of 1989
* Federal Deposit Insurance Corporation Improvement Act of 1991

Types of thrifts|

* Federal savings association
* Federal savings bank
* Mutual savings bank
* Savings and loan association
* Savings bank

Major thrift failures|

* American Savings and Loan
* CenTrust Bank
* Franklin Savings Association
* Gibraltar Savings Association
* Home State Savings Bank
* Lincoln Savings and Loan Association
* Old Court Savings and Loans
* Western Savings and Loan

Economic factors|

* Early 1980s recession in the United States
* Inflation
* Stagflation

Balance sheet factors|

* Asset-liability mismatch
* Credit risk
* Fixed-rate mortgage
* High-yield debt
* Interest rate risk
* Mortgage fraud
* Wholesale funding

Other topics|

* Keating Five

* v
* t
* e

Financial crises

* Bank run
* Commodity price shocks
* Credit crunch
* Credit cycle
* Currency crisis
* Debt crisis
* Energy crisis
* Financial contagion
* Social contagion
* Flash crash
* Hyperinflation
* Liquidity crisis
* Accounting
* Capital
* Funding
* Market
* Minsky moment
* Social crisis
* Stock market crash

Pre-1000|

* Financial crisis of 33 CE
* Crisis of the Third Century (235–284 CE)

Commercial revolution
(1000–1760)|

* Great Bullion Famine (c. 1400–c. 1500)
* The Great Debasement (1544–1551)
* Dutch Republic stock market crashes (c. 1600–1760)
* Kipper und Wipper (1621–1623)
* Tulip mania crash (1637)
* South Sea bubble crash (1720)
* Mississippi bubble crash (1720)

1st Industrial Revolution
(1760–1840)|

* Amsterdam banking crisis of 1763
* Bengal bubble crash (1769–1784)
* British credit crisis of 1772–1773
* Dutch Republic financial collapse (c. 1780–1795)
* Copper Panic of 1789
* Panic of 1792
* Panic of 1796–1797
* Danish state bankruptcy of 1813
* Post-Napoleonic Irish grain price and land use shocks (1815–1816)
* Panic of 1819
* Panic of 1825
* Panic of 1837

1840–1870|

* European potato failure (1845–1856)
* Great Irish Famine
* Highland Potato Famine
* Panic of 1847
* Panic of 1857
* Panic of 1866
* Black Friday (1869)

2nd Industrial Revolution
(1870–1914)|

* Panic of 1873
* Paris Bourse crash of 1882
* Panic of 1884
* Arendal crash (1886)
* Baring crisis (1890)
* Encilhamento (1890–1893)
* Panic of 1893
* Australian banking crisis of 1893
* Black Monday (1894)
* Panic of 1896
* Panic of 1901
* Panic of 1907
* Shanghai rubber stock market crisis (1910)
* Panic of 1910–11
* Financial crisis of 1914

Interwar period
(1918–1939)|

* Early Soviet hyperinflation (1917–1924)
* Weimar Republic hyperinflation (1921–1923)
* Shōwa financial crisis (1927)
* Wall Street crash of 1929
* Panic of 1930
* Chinese hyperinflation (1937-1950)

Wartime period
(1939–1945)|

* Greek hyperinflation (1941–1946)
* Chinese hyperinflation (1937-1950)

Post–WWII expansion
(1945–1973)|

* Hungarian pengő hyperinflation (1945–1946)
* Kennedy Slide of 1962
* 1963–1965 Indonesian hyperinflation
* Chinese hyperinflation (1937-1950)

Great Inflation
(1973–1982)|

* 1970s energy crisis (1973–1980)
* 1973 oil crisis
* 1973–1974 stock market crash
* Secondary banking crisis of 1973–1975
* Steel crisis (1973–1982)
* Latin American debt crisis (1975–1982)
* 1976 British currency crisis
* 1979 oil crisis
* Brazilian hyperinflation (1980–1982)

Great Moderation/
Great Regression
(1982–2007)|

* Brazilian hyperinflation (1982–1994)
* Souk Al-Manakh stock market crash (1982)
* Chilean crisis of 1982
* 1983 Israel bank stock crisis
* Black Saturday (1983)
* Savings and loan crisis (1986–1995)
* Cameroonian economic crisis (1987–2000s)
* Black Monday (1987)
* 1988–1992 Norwegian banking crisis
* Japanese asset price bubble crash (1990–1992)
* Rhode Island banking crisis (1990–1992)
* 1991 Indian economic crisis
* 1990s Swedish financial crisis
* 1990s Finnish banking crisis
* 1990s Armenian energy crisis
* Cuban Special Period (1991–2000)
* Black Wednesday (1992 Sterling crisis)
* Yugoslav hyperinflation (1992–1994)
* 1994 bond market crisis
* Venezuelan banking crisis of 1994
* Mexican peso crisis (1994–1996)
* 1997 Asian financial crisis
* October 1997 mini-crash
* 1998 Russian financial crisis
* 1998–1999 Ecuador economic crisis
* 1998–2002 Argentine great depression
* Samba effect (1999)
* Dot-com bubble crash (2000–2004)
* 9/11 stock market crash (2001)
* 2001 Turkish economic crisis
* South American economic crisis of 2002
* Stock market downturn of 2002
* 2002 Uruguay banking crisis
* 2003 Myanmar banking crisis
* 2000s energy crisis (2003–2008)
* 2004 Argentine energy crisis
* 2007 Chinese stock bubble crash
* Zimbabwean hyperinflation (2007–present)

Great Recession
(2007–2009)|

* 2008 financial crisis
* September 2008
* October 2008
* November 2008
* December 2008
* 2009
* Subprime mortgage crisis
* 2000s U.S. housing market correction
* U.S. bear market of 2007–2009
* 2008 Latvian financial crisis
* 2008–2009 Belgian financial crisis
* 2008–2009 Russian financial crisis
* 2008–2009 Ukrainian financial crisis
* 2008–2011 Icelandic financial crisis
* 2008–2011 Irish banking crisis
* 2008–2014 Spanish financial crisis
* Blue Monday Crash 2009
* European debt crisis
* Greek government-debt crisis

Information Age
(2009–present)|

* 2009 Dubai debt standstill
* Venezuelan banking crisis of 2009–2010
* 2010–2014 Portuguese financial crisis
* Energy crisis in Venezuela (2010–present)
* Syrian economic crisis (2011–present)
* August 2011 stock markets fall
* 2011 Bangladesh share market scam
* 2012–2013 Cypriot financial crisis
* 2013 Chinese banking liquidity crisis
* Venezuela economic crisis (2013–present)
* 2014–2016 Brazilian economic crisis
* Puerto Rican government-debt crisis (2014–2022)
* Russian financial crisis (2014–2016)
* 2015 Nepal blockade
* 2015–2016 Chinese stock market turbulence
* 2015–2016 stock market selloff
* Brexit stock market crash (2016)
* Venezuelan hyperinflation (2016–2022)
* 2017 Sri Lankan fuel crisis
* Ghana banking crisis (2017–2018)
* Turkish economic crisis (2018–present)
* Lebanese liquidity crisis (2019–present)
* Sri Lankan economic crisis (2019–present)
* COVID-19 pandemic
* Financial market impact
* 2020 stock market crash
* Recession
* Chinese property sector crisis (2020–present)
* 2021–2023 inflation surge
* 2022 Russian financial crisis
* Pakistani economic crisis (2022–present)
* 2022 stock market decline
* 2022–2025 German economic crisis
* 2023 United States banking crisis
* 2023–2024 Egyptian financial crisis
* 2025 stock market crash

* List of banking crises
* List of economic crises
* List of sovereign debt crises
* List of stock market crashes and bear markets

Authority control databases: National |

* United States
* Israel

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