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What was the Savings and Loan Crisis?


The term 'Savings and Loan Crisis' is included in the Banking edition of the Financial Dictionary. It's available on mazon in Kindle or Paperback version. See more details here.

The most significant collapse of banks since the Great Depression in 1929 became the Savings and Loan Crisis of 1989. In 1989, over a thousand of the Savings and Loans in the country had collapsed. This brought to a close a route that had long been a secure means for obtaining home mortgages. It turned out that half of the failed S&Ls in the country came from Texas.

This pushed the Lone Star state into a recession. Poor investments in land and housing were auctioned off and crashed prices. The vacancy rate for offices increased to 30%. Crude oil prices plunged by 50%. Cases emerged of illegal practices. Empire Savings and Loan and other Texas banks were charged with criminal activities such as flipping land illegally.

The government had established the FSLIC Federal Savings and Loan Insurance Corporation to insure the S&L deposits as the FDIC does with regular banks. The problem arose as the S&L failures cost $20 billion from the FSLIC. They could not cover all of the costs which bankrupted them. Over 500 of the bank failures had been insured by other insurance run by state funds. Their collapse created costs of more than $185 million. This ruined the ability of state run insurance funds to protect bank depositors.

The crisis also took down five American senators called the Keating Five. They had taken campaign contributions of $1.5 million from the president of the Lincoln Savings and Loan Association Charles Keating. These senators pressured the government regulator Federal Home Loan Banking Board to not look into suspicious and potentially criminal involvement by Lincoln S&L.

The S&L crisis erupted because of a relaxing of standards that governed them. S&Ls had been unique banks which were allowed to receive funds from low interest deposits from savings accounts to make mortgages. In the 1980s a challenger to these savings accounts became popular in the form of money market accounts. They offered higher interest rates to savers. The S&Ls could not compete and were losing their funding source. They went to Congress to request a lifting of restrictions on their low interest rates they paid.

The Garn-St. Germain Depository Institutions Act resulted in 1982. S&Ls could then offer higher interest rates and were not limited to mortgage loans any longer. Now they could make consumer loans and commercial loans as well. Bigger problems came from the lifting of loan to value ratio restrictions.  Also the Reagan Administration cut back on budget for the Federal Home Loan Bank Board which caused them to cut their regulatory staff. They no longer had the man power to look into potentially risky loans.

The S&L banks engaged in risky activities to try to raise capital for lending. They became involved with speculative commercial and real estate loans. In only a few years to 1985 they built up their assets of these types of speculation by 56%. Forty different S&Ls in Texas tripled their size by expanding as much as 100% annually.

In 1983 as many as 35% of the S&Ls in the nation were not making money and 9% had been bankrupted technically. Federal and state insurance money proved to be insufficient as the banks continued to fail. A number of unprofitable S&Ls kept operating and making poor loans as losses mounted.

President George H.W. Bush and Congress bailed out the S&L industry with the FIRREA Financial Institutions Reform, Recovery, and Enforcement Act in 1989. This gave $50 billion of tax paper money to shut down the failed S&Ls. It also created an agency called the RTC Resolution Trust Corporation to sell off these bad assets. Proceeds went to pay off depositors who had lost money. In the end the crisis cost $160 billion, of which $132 billion came from tax paper money.

The term 'Savings and Loan Crisis' is included in the Banking edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.