Savings and loan (S&L) crisis
The Savings and Loan (S&L) crisis was a significant financial disaster in the United States that unfolded from the late 1970s to the late 1980s. It began during the administrations of Jimmy Carter and Ronald Reagan, as deregulation policies were introduced to enhance competition among banks. This led to an expansion of savings and loan institutions, allowing them to engage in riskier investments, including commercial real estate, which had previously been restricted. However, when the real estate market collapsed, many S&L's faced insolvency, resulting in widespread bankruptcies and significant losses for depositors, some of whom lost their entire life savings. The crisis was exacerbated by instances of fraud and mismanagement within the industry, notably involving figures like Charles Keating. In response to the ensuing chaos, the government intervened with a federal bailout estimated between $50 billion and $60 billion and enacted the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in 1989, which aimed to strengthen oversight. Ultimately, the crisis had far-reaching impacts, contributing to a national economic recession in the early 1990s and reshaping the discourse on financial regulation in the U.S.
Savings and loan (S&L) crisis
The Event Deregulation leads to a national banking crisis
The S&L crisis of the 1980’s, during which one thousand savings and loan associations across the United States failed, was the nation’s largest-ever financial scandal and cost American taxpayers and depositors billions of dollars in bailouts, contributing to large budget deficits and possibly to the 1990’s recession.
The events leading up to the S&L crisis began during the Jimmy Carter and Ronald Reagan administrations in the late 1970’s and the early 1980’s, when the government removed many of the federal regulations on banks in a laissez-faire approach designed to make banks more competitive on the open market. Until then, federal law had required savings banks to maintain maximum interest rates on savings accounts and had prohibited them from issuing checking accounts or credit cards. Savings banks also could not make commercial or nonresidential real estate loans. On the other hand, unlike savings banks, commercial banks could, when necessary, borrow from the Federal Reserve Bank. Under deregulation, savings and commercial banks became almost indistinguishable. One result of this situation was an immediate increase in savings and loan institutions, or S&L’s, which, under the supervision of the Federal Home Loan Bank Board and insured by the government’s Federal Savings and Loan Insurance Corporation (FSLIC), could for the first time freely venture into lucrative commercial real estate markets and issue credit cards. By 1980, there were forty-six hundred such institutions in the United States. However, this trend quickly reversed when the S&L crisis began: By the end of the 1980’s, there were only three thousand S&L’s left, and five years later, that number had been reduced to less than two thousand.
The Crisis Looms
Deregulation resulted in the growth of the U.S. economy during the 1980’s, especially in the real estate sector. This growth enticed many of the underregulated S&L’s to invest in high-risk, speculative ventures; it also tempted unscrupulous executives to defraud the regulatory agencies. Thus, when the real estate market faltered and fell, the S&L’s found themselves in dire circumstances, because they owned real estate that was worth less than they had paid for it. Numerous bankruptcies ensued, and a great number of S&L depositors lost their money. Indeed, many lost their entire life savings.
In 1988, the Federal Home Loan Bank Board, whose function it was to supervise the S&L’s, reported that fraud and insider abuse were the primary causes of the S&L failures. The head of Lincoln Savings of Phoenix, Arizona, Charles Keating, came to be known as the worst of the abusers. With full knowledge that Lincoln Savings was about to become insolvent, Keating removed $1 million from the S&L. He was eventually convicted of fraud, racketeering, and conspiracy and spent four and one-half years in prison. His conviction was then overturned, and he pleaded guilty to bankruptcy fraud to avoid a new trial. Before his conviction, however, Keating attempted to secure the aid of five U.S. senators—Alan Cranston, Dennis DeConcini, John Glenn, John McCain, Donald W. Riegle— in avoiding regulatory sanctions for his company. When the relationship between Keating and the senators became public, a national scandal ensued, and the senators became known as the Keating five.
Congress and various states attempted to respond to the S&L crisis during the early and mid-1980’s, but their stopgap measures were insufficient. Eventually, in 1989, newly elected president George H. W. Bush engaged in a full-scale federal bailout of the industry. He estimated, to the shock of the country, that the government would have to spend between $50 billion and $60 billion. Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). It ensured oversight of the S&L’s and eliminated the Federal Home Loan Bank Board, which had failed to effectively supervise the S&L industry. The government also created the Office of Thrift Supervision (OTS).
Impact
The 1980’s were characterized by deregulation of industry in general, which had been a major plank in President Reagan’s platform and was at the center of his economic philosophy. The deregulation of the banking industry that led to the S&L crisis, however, was begun by Reagan’s predecessor, Jimmy Carter. The ensuing financial disaster became a major threat to the U.S. financial system. The crisis severely dampened the Republican Party’s enthusiasm for deregulation, and it changed the terms of the debate about financial policy in the United States.
It soon became clear that President Bush had grossly underestimated the cost of the S&L bailout. Economists have estimated the final cost of the crisis at $600 billion. The savings and loan crisis, in turn, contributed to the severe budget deficits of the early 1990’s, as well as to a major slowdown in both the finance and the real estate markets, and arguably to the 1990-1991 economic recession.
Bibliography
Adams, James R. The Big Fix: Inside the S&L Scandal—How an Unholy Alliance of Politics and Money Destroyed America’s Banking System. New York: Wiley, 1990. The author, a well-known freelance journalist, examines the savings and loan crisis by looking at the history of American banking dating back to the Great Depression.
Barth, James, Susanne Trimeth, and Glenn Yago. The Savings and Loan Crisis: Lessons from a Regulatory Failure. New York: Springer, 2004. Claims to set the record straight about the poorly supervised banking practices of the 1980’s that resulted in the S&L crisis. Includes the contributions of a diverse group of former regulators and scholars.
Calavita, Kitty. Big Money Crime: Fraud and Politics in the Savings and Loan Crisis. Berkeley: University of California Press, 1999. Attempts to addresses the often confusing and conflicting accounts of the 1980’s S&L crisis and posits effective arguments about its causes.
Talley, Pat L. The Savings and Loan Crisis: An Annotated Bibliography. Westport, Conn.: Greenwood Press, 1993. Annotated bibliography that includes more than 360 titles on the S&L crisis published between 1980 and 1992. Includes scholarly and popular articles and should appeal to anyone researching the crisis. Includes dissertations and both author and subject indexes.