Savings and Loan Debacle

Savings and Loan Debacle. The insolvencies of hundreds of savings and loan associations (S&Ls) in the 1980s, one of the major financial disasters of American history, cost American taxpayers about $150 billion. The debacle's origins lay in federal and state regulation of S&Ls, which restricted them to accepting savings deposits and making long‐term fixed‐interest residential mortgage loans (“borrowing short and lending long”). When interest rates rose sharply in the late 1970s, these institutions faced a financial squeeze.

In the early 1980s the government acted to help S&Ls by allowing them to engage in riskier ventures and to increase interest rates paid on deposits. Though reasonable, these reforms lacked the strengthening of safety‐and‐soundness regulation necessary to prevent S&Ls from undue risk‐taking (at the expense of federal deposit insurance, which had been raised to $100,000 per account in 1980). Instead, the government weakened its prudential regulation. Armed with new opportunities and reduced restraints, hundreds of S&Ls grew rapidly between 1983 and 1985. They made risky loans and investments in commercial real estate, much of it dependent on the expectation of rising oil prices. A majority of S&Ls acted prudently but were nevertheless tarred by association with the more reckless institutions.

Though federal regulation had tightened considerably by 1986, too many S&Ls had already made imprudent loans and investments. When oil prices fell after 1981 and federal tax reform in 1986 made commercial real estate a poorer investment, the weaker S&Ls collapsed. Such failures were inevitable, though historical cost‐based accounting methods delayed the recognition of losses and the legal insolvencies of many S&Ls until the late 1980s. One of the most spectacular collapses, that of California's Lincoln Savings and Loan, involved the notorious Charles H. Keating Jr., who spent five years in prison after his conviction on fraud charges. In 1989 and 1991 legislators appropriated the funds to honor federal deposit insurance guarantees and further tightened prudential regulation. A major episode in American financial history had ended.
See also Banking and Finance; Economic Regulation; Reagan, Ronald.

Bibliography

Lawrence J. White , The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation, 1991.

Lawrence J. White