Bush like Reagan, incurred massive federal deficits and waged war to enrich their fat cat buddies. We are left to pick up the pieces. The Bastards!
Economic policy
Main article: Economic policy of the George W. Bush administration
Facing opposition in Congress, Bush held town hall-style public meetings across the U.S. in 2001 to increase public support for his plan for a $1.35 trillion tax cut program—one of the largest tax cuts in U.S. history.[42] Bush argued that unspent government funds should be returned to taxpayers, saying "the surplus is not the government’s money. The surplus is the people’s money."[42] With reports of the threat of recession from Federal Reserve Chairman Alan Greenspan, Bush argued that such a tax cut would stimulate the economy and create jobs.[82] Others, including the Treasury Secretary at the time Paul O'Neill, were opposed to some of the tax cuts on the basis that they would contribute to budget deficits and undermine Social Security.[83] By 2003, the economy showed signs of improvement, though job growth remained stagnant.[42]
Under the Bush Administration, real GDP grew at an average annual rate of 2.5%,[84] considerably below the average for business cycles from 1949 to 2000.[85][86] Bush entered office with the Dow Jones Industrial Average at 10,587, and the average peaked in October 2007 at over 14,000. When Bush left office, the average was at 7,949, one of the lowest levels of his presidency.[87] Unemployment originally rose from 4.2% in January 2001 to 6.3% in June 2003, but subsequently dropped to 4.5% as of July 2007.[88] Adjusted for inflation, median household income dropped by $1,175 between 2000 and 2007,[89] while Professor Ken Homa of Georgetown University has noted that "after-tax median household income increased by 2%"[90] The poverty rate increased from 11.3% in 2000 to 12.3% in 2006 after peaking at 12.7% in 2004.[91] By October 2008, due to increases in domestic and foreign spending,[92] the national debt had risen to $11.3 trillion,[93][94] an increase of over 100% from the start of the year 2000 when the debt was $5.6 trillion.[95][96] By the end of Bush's presidency, unemployment climbed to 7.2%.[97] The perception of President Bush's effect on the economy is significantly affected by partisanship.[98]
In December 2007, the United States entered the longest post-World War II recession,[99] which included a housing market correction, a subprime mortgage crisis, soaring oil prices, and a declining dollar value.[100] In February, 63,000 jobs were lost, a five-year record.[101][102] To aid with the situation, Bush signed a $170 billion economic stimulus package which was intended to improve the economic situation by sending tax rebate checks to many Americans and providing tax breaks for struggling businesses. The Bush administration pushed for significantly increased regulation of Fannie Mae and Freddie Mac in 2003,[103] and after two years, the regulations passed the House but died in the Senate. Many Republican senators, as well as influential members of the Bush Administration, feared that the agency created by these regulations would merely be mimicking the private sector’s risky practices.[104][105] In September 2008, the crisis became much more serious beginning with the government takeover of Fannie Mae and Freddie Mac followed by the collapse of Lehman Brothers[106] and a federal bailout of American International Group for $85 billion.[107]
Many economists and world governments determined that the situation became the worst financial crisis since the Great Depression.[108][109] Additional regulation over the housing market would have been beneficial, according to former Federal Reserve Chairman Alan Greenspan.[110] President Bush, meanwhile, proposed a financial rescue plan to buy back a large portion of the U.S. mortgage market.[111] Vince Reinhardt, a former Federal Reserve economist now at the American Enterprise Institute, said "it would have helped for the Bush administration to empower the folks at Treasury and the Federal Reserve and the comptroller of the currency and the FDIC to look at these issues more closely", and additionally, that it would have helped "for Congress to have held hearings".[105]
In November 2008, over 500,000 jobs were lost, which marked the largest loss of jobs in the United States in 34 years.[112] The Bureau of Labor Statistics reported that in the last four months of 2008, 1.9 million jobs were lost.[113] By the end of 2008, the U.S. had lost a total of 2.6 million jobs.[114]
Main article: Economic policy of the George W. Bush administration
Facing opposition in Congress, Bush held town hall-style public meetings across the U.S. in 2001 to increase public support for his plan for a $1.35 trillion tax cut program—one of the largest tax cuts in U.S. history.[42] Bush argued that unspent government funds should be returned to taxpayers, saying "the surplus is not the government’s money. The surplus is the people’s money."[42] With reports of the threat of recession from Federal Reserve Chairman Alan Greenspan, Bush argued that such a tax cut would stimulate the economy and create jobs.[82] Others, including the Treasury Secretary at the time Paul O'Neill, were opposed to some of the tax cuts on the basis that they would contribute to budget deficits and undermine Social Security.[83] By 2003, the economy showed signs of improvement, though job growth remained stagnant.[42]
Under the Bush Administration, real GDP grew at an average annual rate of 2.5%,[84] considerably below the average for business cycles from 1949 to 2000.[85][86] Bush entered office with the Dow Jones Industrial Average at 10,587, and the average peaked in October 2007 at over 14,000. When Bush left office, the average was at 7,949, one of the lowest levels of his presidency.[87] Unemployment originally rose from 4.2% in January 2001 to 6.3% in June 2003, but subsequently dropped to 4.5% as of July 2007.[88] Adjusted for inflation, median household income dropped by $1,175 between 2000 and 2007,[89] while Professor Ken Homa of Georgetown University has noted that "after-tax median household income increased by 2%"[90] The poverty rate increased from 11.3% in 2000 to 12.3% in 2006 after peaking at 12.7% in 2004.[91] By October 2008, due to increases in domestic and foreign spending,[92] the national debt had risen to $11.3 trillion,[93][94] an increase of over 100% from the start of the year 2000 when the debt was $5.6 trillion.[95][96] By the end of Bush's presidency, unemployment climbed to 7.2%.[97] The perception of President Bush's effect on the economy is significantly affected by partisanship.[98]
In December 2007, the United States entered the longest post-World War II recession,[99] which included a housing market correction, a subprime mortgage crisis, soaring oil prices, and a declining dollar value.[100] In February, 63,000 jobs were lost, a five-year record.[101][102] To aid with the situation, Bush signed a $170 billion economic stimulus package which was intended to improve the economic situation by sending tax rebate checks to many Americans and providing tax breaks for struggling businesses. The Bush administration pushed for significantly increased regulation of Fannie Mae and Freddie Mac in 2003,[103] and after two years, the regulations passed the House but died in the Senate. Many Republican senators, as well as influential members of the Bush Administration, feared that the agency created by these regulations would merely be mimicking the private sector’s risky practices.[104][105] In September 2008, the crisis became much more serious beginning with the government takeover of Fannie Mae and Freddie Mac followed by the collapse of Lehman Brothers[106] and a federal bailout of American International Group for $85 billion.[107]
Many economists and world governments determined that the situation became the worst financial crisis since the Great Depression.[108][109] Additional regulation over the housing market would have been beneficial, according to former Federal Reserve Chairman Alan Greenspan.[110] President Bush, meanwhile, proposed a financial rescue plan to buy back a large portion of the U.S. mortgage market.[111] Vince Reinhardt, a former Federal Reserve economist now at the American Enterprise Institute, said "it would have helped for the Bush administration to empower the folks at Treasury and the Federal Reserve and the comptroller of the currency and the FDIC to look at these issues more closely", and additionally, that it would have helped "for Congress to have held hearings".[105]
In November 2008, over 500,000 jobs were lost, which marked the largest loss of jobs in the United States in 34 years.[112] The Bureau of Labor Statistics reported that in the last four months of 2008, 1.9 million jobs were lost.[113] By the end of 2008, the U.S. had lost a total of 2.6 million jobs.[114]
see also,
Reagan revered as a "god"!
Air traffic controllers' strike
Main article: Professional Air Traffic Controllers Organization (1968)
Only a short time into his administration, federal air traffic controllers went on strike, violating a regulation prohibiting government unions from striking.[90] Declaring the situation an emergency as described in the 1947 Taft Hartley Act, Reagan held a press conference in the White House Rose Garden, where he stated that if the air traffic controllers "do not report for work within 48 hours, they have forfeited their jobs and will be terminated."[91] Despite fear from some members of his cabinet over a potential political backlash,[92] on August 5, Reagan fired 11,345 striking air traffic controllers who had ignored his order to return to work,[93] busting the union.[94] According to Charles Craver, a labor law professor at George Washington University Law School, the move gave Americans a new view of Reagan, who "sent a message to the private employer community that it would be all right to go up against the unions."[94]
Main article: Professional Air Traffic Controllers Organization (1968)
Only a short time into his administration, federal air traffic controllers went on strike, violating a regulation prohibiting government unions from striking.[90] Declaring the situation an emergency as described in the 1947 Taft Hartley Act, Reagan held a press conference in the White House Rose Garden, where he stated that if the air traffic controllers "do not report for work within 48 hours, they have forfeited their jobs and will be terminated."[91] Despite fear from some members of his cabinet over a potential political backlash,[92] on August 5, Reagan fired 11,345 striking air traffic controllers who had ignored his order to return to work,[93] busting the union.[94] According to Charles Craver, a labor law professor at George Washington University Law School, the move gave Americans a new view of Reagan, who "sent a message to the private employer community that it would be all right to go up against the unions."[94]
REAGANOMICS or Voodoo Economics
During Jimmy Carter's last year in office (1980), inflation averaged 12.5%, compared to 4.4% during Reagan's last year in office (1988).[95] Over those eight years, the unemployment rate declined from 7.1% to 5.5%.[95] Reagan implemented policies based on supply-side economics and advocated a classical liberal and laissez-faire philosophy,[96] seeking to stimulate the economy with large, across-the-board tax cuts.[97][98] Citing the economic theories of Arthur Laffer, Reagan promoted the proposed tax cuts as potentially stimulating the economy enough to expand the tax base, offsetting the revenue loss due to reduced rates of taxation, a theory that entered political discussion as the Laffer curve. Reaganomics was the subject of debate with supporters pointing to improvements in certain key economic indicators as evidence of success, and critics pointing to large increases in federal budget deficits and the national debt. His policy of "peace through strength" (also described as "firm but fair") resulted in a record peacetime defense buildup including a 40% real increase in defense spending between 1981 and 1985.[99]
During Reagan's presidency, federal income tax rates were lowered significantly with the signing of the bipartisan Economic Recovery Tax Act of 1981.[100] Real gross domestic product (GDP) growth recovered strongly after the 1982 recession and grew during his eight years in office at an annual rate of 3.4% per year.[101] Unemployment peaked at 10.8% percent in December 1982—higher than any time since the Great Depression—then dropped during the rest of Reagan's presidency.[98] Sixteen million new jobs were created, while inflation significantly decreased.[102] The net effect of all Reagan-era tax bills was a 1% decrease in government revenues when compared to Treasury Department revenue estimates from the Administration's first post-enactment January budgets.[103] However, federal Income Tax receipts almost doubled from 1980 to 1989, rising from $308.7Bn to $549.0Bn.[104] Reagan also revised the tax code with the bipartisan Tax Reform Act of 1986.[105]
During Reagan's presidency, federal income tax rates were lowered significantly with the signing of the bipartisan Economic Recovery Tax Act of 1981.[100] Real gross domestic product (GDP) growth recovered strongly after the 1982 recession and grew during his eight years in office at an annual rate of 3.4% per year.[101] Unemployment peaked at 10.8% percent in December 1982—higher than any time since the Great Depression—then dropped during the rest of Reagan's presidency.[98] Sixteen million new jobs were created, while inflation significantly decreased.[102] The net effect of all Reagan-era tax bills was a 1% decrease in government revenues when compared to Treasury Department revenue estimates from the Administration's first post-enactment January budgets.[103] However, federal Income Tax receipts almost doubled from 1980 to 1989, rising from $308.7Bn to $549.0Bn.[104] Reagan also revised the tax code with the bipartisan Tax Reform Act of 1986.[105]
Reagan's policies proposed that economic growth would occur when marginal tax rates were low enough to spur investment,[106] which would then lead to increased economic growth, higher employment and wages. Critics labeled this "trickle-down economics"—the belief that tax policies that benefit the wealthy will create a "trickle-down" effect to the poor.[107] Questions arose whether Reagan's policies benefitted the wealthy more than those living in poverty,[108] and many poor and minority citizens viewed Reagan as indifferent to their struggles.[108]
Following his less-government intervention views, Reagan cut the budgets of non-military[109] programs[110] including Medicaid, food stamps, federal education programs[109] and the EPA.[111] He protected entitlement programs, such as Social Security and Medicare,[112] however, his administration attempted to purge many allegedly disabled people from Social Security disability rolls.[113]
The administration's stance toward the Savings and Loan industry contributed to the Savings and Loan crisis.[114] It is also suggested, by a minority of Reaganomics critics, that the policies partially influenced the stock market crash of 1987,[115] but there is no consensus regarding a single source for the crash.[116] In order to cover newly spawned federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion.[117] Reagan described the new debt as the "greatest disappointment" of his presidency.[117]
He reappointed Paul Volcker as Chairman of the Federal Reserve, and in 1987 he appointed monetarist Alan Greenspan to succeed him. Reagan ended the price controls on domestic oil which had contributed to energy crises in the 1970s.[118][119] The price of oil subsequently dropped, and the 1980s did not see the fuel shortages that the 1970s had.[120] Reagan also fulfilled a 1980 campaign promise to repeal the Windfall profit tax in 1988, which had previously increased dependence on foreign oil.[121] Some economists, such as Nobel Prize winners Milton Friedman and Robert A. Mundell, argue that Reagan's tax policies invigorated America's economy and contributed to the economic boom of the 1990s.[122] Other economists, such as Nobel Prize winner Robert Solow, argue that the deficits were a major reason why Reagan's successor, George H. W. Bush, reneged on a campaign promise and raised taxes.[122]
Following his less-government intervention views, Reagan cut the budgets of non-military[109] programs[110] including Medicaid, food stamps, federal education programs[109] and the EPA.[111] He protected entitlement programs, such as Social Security and Medicare,[112] however, his administration attempted to purge many allegedly disabled people from Social Security disability rolls.[113]
The administration's stance toward the Savings and Loan industry contributed to the Savings and Loan crisis.[114] It is also suggested, by a minority of Reaganomics critics, that the policies partially influenced the stock market crash of 1987,[115] but there is no consensus regarding a single source for the crash.[116] In order to cover newly spawned federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion.[117] Reagan described the new debt as the "greatest disappointment" of his presidency.[117]
He reappointed Paul Volcker as Chairman of the Federal Reserve, and in 1987 he appointed monetarist Alan Greenspan to succeed him. Reagan ended the price controls on domestic oil which had contributed to energy crises in the 1970s.[118][119] The price of oil subsequently dropped, and the 1980s did not see the fuel shortages that the 1970s had.[120] Reagan also fulfilled a 1980 campaign promise to repeal the Windfall profit tax in 1988, which had previously increased dependence on foreign oil.[121] Some economists, such as Nobel Prize winners Milton Friedman and Robert A. Mundell, argue that Reagan's tax policies invigorated America's economy and contributed to the economic boom of the 1990s.[122] Other economists, such as Nobel Prize winner Robert Solow, argue that the deficits were a major reason why Reagan's successor, George H. W. Bush, reneged on a campaign promise and raised taxes.[122]
The savings and loan crisis of the 1980s and 1990s (commonly referred to as the S&L crisis) was the failure of 745 savings and loan associations (S&Ls aka thrifts). A Savings and Loan is a financial institution in the United States that accepts savings deposits and makes mortgage, car and other personal loans to individual members. The ultimate cost of the crisis is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by the US government—that is, the US taxpayer, either directly or through charges on their savings and loan accounts[1]—which contributed to the large budget deficits of the early 1990s.
The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990–1991 economic recession. Between 1986 and 1991, the number of new homes constructed per year dropped from 1.8 million to 1 million, which was at the time the lowest rate since World War II. [2]
Contents[hide]
1 Background
2 Causes
2.1 Tax Reform Act of 1986
2.2 Deregulation
2.3 Imprudent real estate lending
2.4 Brokered deposits
2.5 End of inflation
2.6 Major causes according to United States League of Savings Institutions
3 Failures
3.1 Home State Savings Bank of Cincinnati
3.2 Midwest Federal Savings & Loan of Minneapolis, Minnesota
3.3 Lincoln Savings and Loan
3.4 Silverado Savings and Loan
4 Financial Institutions Reform, Recovery, and Enforcement Act of 1989
5 Consequences
6 See also
7 Notes
8 References
9 External links
//
[edit] Background
The thrift industry has its origins in the British building society movement that emerged in the late 18th century. American thrifts (known then as "building and loans" or "B&Ls") shared many of the same basic goals: to help working-class men and women save for the future and purchase homes. Thrifts were not-for-profit cooperative organizations that were typically managed by the membership and local institutions that served well-defined groups of aspiring homeowners. While banks offered a wide array of products to individuals and businesses, thrifts often made only home mortgages primarily to working-class men and women. Thrift leaders believed they were part of a broader social reform effort and not a financial industry. According to thrift leaders, B&Ls not only helped people become better citizens by making it easier to buy a home, they also taught the habits of systematic savings and mutual cooperation which strengthened personal morals.[3]
The first thrift was formed in 1831, and for 40 years there were few B&Ls, found in only a handful of Midwestern and Eastern states. This situation changed in the late 19th century as urban growth and the demand for housing related to the Second Industrial Revolution caused the number of thrifts to explode. The popularity of B&Ls led to the creation of a new type of thrift in the 1880s called the "national" B&L. The "nationals" were often for-profit businesses formed by bankers or industrialists that employed promoters to form local branches to sell shares to prospective members. The "nationals" promised to pay savings rates up to four times greater than any other financial institution.
The Depression of 1893 (the Panic of 1893) caused a decline in members, and so "nationals" experienced a sudden reversal of fortunes. Because a steady stream of new members was critical for a "national" to pay both the interest on savings and the hefty salaries for the organizers, the falloff in payments caused dozens of "nationals" to fail. By the end of the 19th century, nearly all the "nationals" were out of business (National Building and Loans Crisis). This led to the creation of the first state regulations governing B&Ls, to make thrift operations more uniform, and the formation of a national trade association to not only protect B&L interests, but also promote business growth. The trade association led efforts to create more uniform accounting, appraisal, and lending procedures. It also spearheaded the drive to have all thrifts refer to themselves as "savings and loans" not B&Ls, and to convince managers of the need to assume more professional roles as financiers.[3]
In the 20th century, the two decades that followed the end of World War II were the most successful period in the history of the thrift industry. The return of millions of servicemen eager to take up their prewar lives led to a dramatic increase in new families, and this "baby boom" caused a surge in new mostly suburban home construction. By the 1940s S&Ls (the name change occurred in the late 1930s) provided most of the financing for this expansion. The result was strong industry expansion that lasted through the early 1960s.
An important trend involved raising rates paid on savings to lure deposits, a practice that resulted in periodic rate wars between thrifts and even commercial banks. These wars became so severe that in 1966 the US Congress took the highly unusual move of setting limits on savings rates for both commercial banks and S&Ls. From 1966 to 1979, the enactment of rate controls presented thrifts with a number of unprecedented challenges, chief of which was finding ways to continue to expand in an economy characterized by slow growth, high interest rates and inflation. These conditions, which came to be known as stagflation, wreaked havoc with thrift finances for a variety of reasons. Because regulators controlled the rates thrifts could pay on savings, when interest rates rose depositors often withdrew their funds and placed them in accounts that earned market rates, a process known as disintermediation. At the same time, rising rates and a slow growth economy made it harder for people to qualify for mortgages, which in turn limited people's ability to generate income.[3]
In response to these complex economic conditions, thrift managers came up with several innovations, such as alternative mortgage instruments and interest-bearing checking accounts, as a way to retain funds and generate lending business. Such actions allowed the industry to continue to record steady asset growth and profitability during the 1970s even though the actual number of thrifts was falling. Despite such growth, there were still clear signs that the industry was chafing under the constraints of regulation. This was especially true with the large S&Ls in the western US that yearned for additional lending powers to ensure continued growth. Despite several efforts to modernize these laws in the 1970s, few substantive changes were enacted.[3]
In 1979, the financial health of the thrift industry was again challenged by a return of high interest rates and inflation, sparked this time by a doubling of oil prices. Because the sudden nature of these changes threatened to cause hundreds of S&L failures, Congress finally acted on deregulating the thrift industry. It passed two laws, the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn–St. Germain Depository Institutions Act of 1982. The deregulation not only allowed thrifts to offer a wider array of savings products, but also significantly expanded their lending authority. These changes were intended to allow S&Ls to "grow" out of their problems, and as such represented the first time that the government explicitly sought to increase S&L profits as opposed to promoting housing and homeownership. Other changes in thrift oversight included authorizing the use of more lenient accounting rules to report their financial condition, and the elimination of restrictions on the minimum numbers of S&L stockholders. Such policies, combined with an overall decline in regulatory oversight (known as forbearance), would later be cited as factors in the later collapse of the thrift industry. [3]
[edit] Causes
[edit] Tax Reform Act of 1986
By enacting 26 U.S.C. § 469 (relating to limitations on deductions for passive activity losses and limitations on passive activity credits) to remove many tax shelters, especially for real estate investments, the Tax Reform Act of 1986 significantly decreased the value of many such investments which had been held more for their tax-advantaged status than for their inherent profitability. This contributed to the end of the real estate boom of the early to mid '80s and facilitated the Savings and Loan crisis. Prior to 1986, much real estate investment was done by passive investors. It was common for syndicates of investors to pool their resources in order to invest in property, commercial or residential. They would then hire management companies to run the operation. TRA 86 reduced the value of these investments by limiting the extent to which losses associated with them could be deducted from the investor's gross income. This, in turn, encouraged the holders of loss-generating properties to try and unload them, which contributed further to the problem of sinking real estate values. This turmoil and repositioning in real estate markets was caused not by changes in market conditions.[citation needed]
[edit] Deregulation
The deregulation of S&Ls gave them many of the capabilities of banks, without the same regulations as banks. Savings and loan associations could choose to be under either a state or a federal charter. Immediately after deregulation of the federally chartered thrifts, state-chartered thrifts rushed to become federally chartered, because of the advantages associated with a federal charter. In response, states such as California and Texas changed their regulations so to be similar to federal regulations.
[edit] Imprudent real estate lending
In an effort to take advantage of the real estate boom (outstanding US mortgage loans: 1976 $700 billion; 1980 $1.5 trillion)[citation needed] and high interest rates of the late 1970s and early 1980s, many S&Ls lent far more money than was prudent, and too-risky ventures which many S&Ls were not qualified to assess. L. William Seidman, former chairman of both the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation, stated, "The banking problems of the '80s and '90s came primarily, but not exclusively, from unsound real estate lending."[4]
[edit] Brokered deposits
One of the most important contributors to the problem was deposit brokerage.[citation needed] Deposit brokers, somewhat like stockbrokers, are paid a commission by the customer to find the best certificate of deposit (CD) rates and place their customers' money in those CDs. These CDs, however, are usually short-term $100,000 CDs.[citation needed] Previously, banks and thrifts could only have five percent of their deposits be brokered deposits; the race to the bottom caused this limit to be lifted. A small one-branch thrift could then attract a large number of deposits simply by offering the highest rate. To make money off this expensive money, it had to lend at even higher rates, meaning that it had to make more, riskier investments. This system was made even more damaging when certain deposit brokers instituted a scam known as "linked financing." In "linked financing", a deposit broker would approach a thrift and say he would steer a large amount of deposits to that thrift if the thrift would lend certain people money (the people, however, were paid a fee to apply for the loans and told to give the loan proceeds to the deposit broker). This caused the thrifts to be tricked into taking on bad loans.[neutrality disputed]
[edit] End of inflation
Another factor was the efforts of the federal reserve to wring inflation out of the economy, marked by Paul Volcker's speech of October 6, 1979, with a series of rises in short-term interest rates. This led to increases in the short-term cost of funding to be higher than the return on portfolios of mortgage loans, a large proportion of which may have been fixed rate mortgages (a problem that is known as an asset-liability mismatch). This effort failed and interest rates continued to skyrocket, placing even more pressure on S&Ls as the 1980s dawned and led to increased focus on high interest-rate transactions. Zvi Bodie, professor of finance and economics at Boston University School of Management, writing in the St. Louis Federal Reserve Review wrote, "asset-liability mismatch was a principal cause of the Savings and Loan Crisis".[1]
[edit] Major causes according to United States League of Savings Institutions
The following is a detailed summary of the major causes for losses that hurt the savings and loan business in the 1980s:[5]
Lack of net worth for many institutions as they entered the '80s, and a wholly inadequate net worth regulation.
Decline in the effectiveness of Regulation Q in preserving the spread between the cost of money and the rate of return on assets, basically stemming from inflation and the accompanying increase in market interest rates.
Absence of an ability to vary the return on assets with increases in the rate of interest required to be paid for deposits.
Increased competition on the deposit gathering and mortgage origination sides of the business, with a sudden burst of new technology making possible a whole new way of conducting financial institutions generally and the mortgage business specifically.
Savings and Loans gained a wide range of new investment powers with the passage of the Depository Institutions Deregulation and Monetary Control Act and the Garn-St. Germain Depository Institutions Act. A number of states also passed legislation that similarly increased investment options. These introduced new risks and speculative opportunities which were difficult to administer. In many instances management lacked the ability or experience to evaluate them, or to administer large volumes of nonresidential construction loans.
Elimination of regulations initially designed to prevent lending excesses and minimize failures. Regulatory relaxation permitted lending, directly and through participations, in distant loan markets on the promise of high returns. Lenders, however, were not familiar with these distant markets. It also permitted associations to participate extensively in speculative construction activities with builders and developers who had little or no financial stake in the projects.
Fraud and insider transaction abuses were the principal cause for some 20% of savings and loan failures the past three years[clarification needed] and a greater percentage of the dollar losses borne by the Federal Savings and Loan Insurance Corporation (FSLIC).
A new type and generation of opportunistic savings and loan executives and owners—some of whom operated in a fraudulent manner — whose takeover of many institutions was facilitated by a change in FSLIC rules reducing the minimum number of stockholders of an insured association from 400 to one.
Dereliction of duty on the part of the board of directors of some savings associations. This permitted management to make uncontrolled use of some new operating authority, while directors failed to control expenses and prohibit obvious conflict of interest situations.
A virtual end of inflation in the American economy, together with overbuilding in multifamily, condominium type residences and in commercial real estate in many cities. In addition, real estate values collapsed in the energy states — Texas, Louisiana, Oklahoma particularly due to falling oil prices — and weakness occurred in the mining and agricultural sectors of the economy.
Pressures felt by the management of many associations to restore net worth ratios. Anxious to improve earnings, they departed from their traditional lending practices into credits and markets involving higher risks, but with which they had little experience.
The lack of appropriate, accurate, and effective evaluations of the savings and loan business by public accounting firms, security analysts, and the financial community.
Organizational structure and supervisory laws, adequate for policing and controlling the business in the protected environment of the 1960s and 1970s, resulted in fatal delays and indecision in the examination/supervision process in the 1980s.
Federal and state examination and supervisory staffs insufficient in number, experience, or ability to deal with the new world of savings and loan operations.
The inability or unwillingness of the Bank Board and its legal and supervisory staff to deal with problem institutions in a timely manner. Many institutions, which ultimately closed with big losses, were known problem cases for a year or more. Often, it appeared, political considerations delayed necessary supervisory action.
[edit] Failures
The United States Congress granted all thrifts in 1980, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts. Designed to help the thrift industry retain its deposit base and to improve its profitability, the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 allowed thrifts to make consumer loans up to 20 percent of their assets, issue credit cards, accept negotiable order of withdrawal (NOW) accounts from individuals and nonprofit organizations, and invest up to 20 percent of their assets in commercial real estate loans.
The damage to S&L operations led Congress to act, passing a bill in September 1981 allowing S&Ls to sell their mortgage loans and use the cash generated to seek better returns;[citation needed]http://www.fdic.gov/bank/Historical/s&l/ the losses created by the sales were to be amortized over the life of the loan, and any losses could also be offset against taxes paid over the preceding 10 years. This all made S&Ls eager to sell their loans. The buyers—major Wall Street firms—were quick to take advantage of the S&Ls' lack of expertise, buying at 60%-90% of value and then transforming the loans by bundling them as, effectively, government-backed bonds (by virtue of Ginnie Mae, Freddie Mac, or Fannie Mae guarantees). S&Ls were one group buying these bonds, holding $150 billion by 1986, and being charged substantial fees for the transactions.
In 1982, the Garn-St Germain Depository Institutions Act was passed and increased the proportion of assets that thrifts could hold in consumer and commercial real estate loans and allowed thrifts to invest 5 percent of their assets in commercial loans until January 1, 1984, when this percentage increased to 10 percent.[6]
A large number of S&L customers' defaults and bankruptcies ensued, and the S&Ls that had overextended themselves were forced into insolvency proceedings themselves.
The US government agency FSLIC, which at the time insured S&L accounts in the same way the Federal Deposit Insurance Corporation insures commercial bank accounts, then had to repay all the depositors whose money was lost. From 1986 to 1989, FSLIC closed or otherwise resolved 296 institutions with total assets of $125 billion. An even more traumatic period followed, with the creation of the Resolution Trust Corporation in 1989 and that agency’s resolution by mid-1995 of an additional 747 thrifts. [7]
A Federal Reserve Bank panel stated the resulting taxpayer bailout ended up being even larger than it would have been because moral hazard and adverse selection incentives that compounded the system’s losses. [8]
There also were state-chartered S&Ls that failed. Some state insurance funds failed, requiring state taxpayer bailouts.
[edit] Home State Savings Bank of Cincinnati
In March 1985, it came to public knowledge that the large Cincinnati, Ohio-based Home State Savings Bank was about to collapse. Ohio Gov. Dick Celeste declared a bank holiday in the state as Home State depositors lined up in a "run" on the bank's branches to withdraw their deposits. Celeste ordered the closure of all the state's S&Ls. Only those that were able to qualify for membership in the Federal Deposit Insurance Corporation were allowed to reopen.[9] Claims by Ohio S&L depositors drained the state's deposit insurance funds. A similar event took place in Maryland.
[edit] Midwest Federal Savings & Loan of Minneapolis, Minnesota
Midwest Federal Savings & Loan was a federally chartered savings and loan based in Minneapolis, Minnesota until its failure in 1990.[10] The St. Paul Pioneer Press called the bank's failure the "largest financial disaster in Minnesota history."[citation needed]
The chairman, Hal Greenwood Jr., his daughter, Susan Greenwood Olson, and two former executives, Robert A. Mampel, and Charlotte E. Masica, were convicted of racketeering that lead to the institution's collapse. The failure cost taxpayers $1.2 billion.[11]
[edit] Lincoln Savings and Loan
The Lincoln Savings led to the Keating five political scandal, in which five US senators were implicated in an influence-peddling scheme. It was named for Charles Keating, who headed Lincoln Savings and made $300,000 as political contributions to them in the 1980s. Three of those senators—Alan Cranston (D-CA), Don Riegle (D-MI), and Dennis DeConcini (D-AZ)—found their political careers cut short as a result. Two others—John Glenn (D-OH) and John McCain (R-AZ)—were rebuked by the Senate Ethics Committee for exercising "poor judgment" for intervening with the federal regulators on behalf of Keating.[12]
[edit] Silverado Savings and Loan
Silverado Savings and Loan collapsed in 1988, costing taxpayers $1.3 billion. Neil Bush, son of then Vice President of the United States George H. W. Bush, was Director of Silverado at the time. Neil Bush was accused of giving himself a loan from Silverado, but he denied all wrongdoing.[13]
The US Office of Thrift Supervision investigated Silverado's failure and determined that Neil Bush had engaged in numerous "breaches of his fiduciary duties involving multiple conflicts of interest." Although Bush was not indicted on criminal charges, a civil action was brought against him and the other Silverado directors by the Federal Deposit Insurance Corporation; it was eventually settled out of court, with Bush paying $50,000 as part of the settlement, the Washington Post reported.[14]
As a director of a failing thrift, Bush voted to approve $100 million in what were ultimately bad loans to two of his business partners. And in voting for the loans, he failed to inform fellow board members at Silverado Savings & Loan that the loan applicants were his business partners.[citation needed]
Neil Bush paid a $50,000 fine and was banned from banking activities for his role in taking down Silverado, which cost taxpayers $1.3 billion. A Resolution Trust Corporation Suit against Bush and other officers of Silverado was settled in 1991 for $26.5 million.
[edit] Financial Institutions Reform, Recovery, and Enforcement Act of 1989
As a result,[clarification needed] the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) dramatically changed the savings and loan industry and its federal regulation. The highlights of the legislation, signed into law August 9, 1989, were:[15]
The Federal Home Loan Bank Board (FHLBB) and the Federal Savings and Loan Insurance Corporation (FSLIC) were abolished.
The Office of Thrift Supervision (OTS), a bureau of the Treasury Department, was created to charter, regulate, examine, and supervise savings institutions.
The Federal Housing Finance Board (FHFB) was created as an independent agency to oversee the 12 federal home loan banks (also called district banks).
The Savings Association Insurance Fund (SAIF) replaced the FSLIC as an ongoing insurance fund for thrift institutions (like the FDIC, the FSLIC was a permanent corporation that insured savings and loan accounts up to $100,000). SAIF is administered by the Federal Deposit Insurance Corp.
The Resolution Trust Corporation (RTC) was established to dispose of failed thrift institutions taken over by regulators after January 1, 1989. The RTC will make insured deposits at those institutions available to their customers.
FIRREA gives both Freddie Mac and Fannie Mae additional responsibility to support mortgages for low- and moderate-income families.
[edit] Consequences
While not part of the savings and loan crisis, many other banks failed. Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance.[16]
From 1986 to 1995, the number of US federally insured savings and loans in the United States declined from 3,234 to 1,645.[7] This was primarily, but not exclusively, due to unsound real estate lending.[17]
The market share of S&Ls for single family mortgage loans went from 53% in 1975 to 30% in 1990.[2] US General Accounting Office estimated cost of the crisis to around USD $160.1 billion, about $124.6 billion of which was directly paid for by the US government from 1986 to 1996.[1] That figure does not include thrift insurance funds used before 1986 or after 1996. It also does not include state run thrift insurance funds or state bailouts.
The US government ultimately appropriated 105 billion dollars to resolve the crisis. After banks repaid loans through various procedures, there was a net loss to taxpayers of approximately $124 billion dollars by the end of 1999.[18]
The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990–1991 economic recession. Between 1986 and 1991, the number of new homes constructed dropped from 1.8 to 1 million, the lowest rate since World War II. [2]
Some commentators believe that a taxpayer-funded government bailout related to mortgages during the savings and loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans during the 2007 subprime mortgage financial crisis.[19]
The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990–1991 economic recession. Between 1986 and 1991, the number of new homes constructed per year dropped from 1.8 million to 1 million, which was at the time the lowest rate since World War II. [2]
Contents[hide]
1 Background
2 Causes
2.1 Tax Reform Act of 1986
2.2 Deregulation
2.3 Imprudent real estate lending
2.4 Brokered deposits
2.5 End of inflation
2.6 Major causes according to United States League of Savings Institutions
3 Failures
3.1 Home State Savings Bank of Cincinnati
3.2 Midwest Federal Savings & Loan of Minneapolis, Minnesota
3.3 Lincoln Savings and Loan
3.4 Silverado Savings and Loan
4 Financial Institutions Reform, Recovery, and Enforcement Act of 1989
5 Consequences
6 See also
7 Notes
8 References
9 External links
//
[edit] Background
The thrift industry has its origins in the British building society movement that emerged in the late 18th century. American thrifts (known then as "building and loans" or "B&Ls") shared many of the same basic goals: to help working-class men and women save for the future and purchase homes. Thrifts were not-for-profit cooperative organizations that were typically managed by the membership and local institutions that served well-defined groups of aspiring homeowners. While banks offered a wide array of products to individuals and businesses, thrifts often made only home mortgages primarily to working-class men and women. Thrift leaders believed they were part of a broader social reform effort and not a financial industry. According to thrift leaders, B&Ls not only helped people become better citizens by making it easier to buy a home, they also taught the habits of systematic savings and mutual cooperation which strengthened personal morals.[3]
The first thrift was formed in 1831, and for 40 years there were few B&Ls, found in only a handful of Midwestern and Eastern states. This situation changed in the late 19th century as urban growth and the demand for housing related to the Second Industrial Revolution caused the number of thrifts to explode. The popularity of B&Ls led to the creation of a new type of thrift in the 1880s called the "national" B&L. The "nationals" were often for-profit businesses formed by bankers or industrialists that employed promoters to form local branches to sell shares to prospective members. The "nationals" promised to pay savings rates up to four times greater than any other financial institution.
The Depression of 1893 (the Panic of 1893) caused a decline in members, and so "nationals" experienced a sudden reversal of fortunes. Because a steady stream of new members was critical for a "national" to pay both the interest on savings and the hefty salaries for the organizers, the falloff in payments caused dozens of "nationals" to fail. By the end of the 19th century, nearly all the "nationals" were out of business (National Building and Loans Crisis). This led to the creation of the first state regulations governing B&Ls, to make thrift operations more uniform, and the formation of a national trade association to not only protect B&L interests, but also promote business growth. The trade association led efforts to create more uniform accounting, appraisal, and lending procedures. It also spearheaded the drive to have all thrifts refer to themselves as "savings and loans" not B&Ls, and to convince managers of the need to assume more professional roles as financiers.[3]
In the 20th century, the two decades that followed the end of World War II were the most successful period in the history of the thrift industry. The return of millions of servicemen eager to take up their prewar lives led to a dramatic increase in new families, and this "baby boom" caused a surge in new mostly suburban home construction. By the 1940s S&Ls (the name change occurred in the late 1930s) provided most of the financing for this expansion. The result was strong industry expansion that lasted through the early 1960s.
An important trend involved raising rates paid on savings to lure deposits, a practice that resulted in periodic rate wars between thrifts and even commercial banks. These wars became so severe that in 1966 the US Congress took the highly unusual move of setting limits on savings rates for both commercial banks and S&Ls. From 1966 to 1979, the enactment of rate controls presented thrifts with a number of unprecedented challenges, chief of which was finding ways to continue to expand in an economy characterized by slow growth, high interest rates and inflation. These conditions, which came to be known as stagflation, wreaked havoc with thrift finances for a variety of reasons. Because regulators controlled the rates thrifts could pay on savings, when interest rates rose depositors often withdrew their funds and placed them in accounts that earned market rates, a process known as disintermediation. At the same time, rising rates and a slow growth economy made it harder for people to qualify for mortgages, which in turn limited people's ability to generate income.[3]
In response to these complex economic conditions, thrift managers came up with several innovations, such as alternative mortgage instruments and interest-bearing checking accounts, as a way to retain funds and generate lending business. Such actions allowed the industry to continue to record steady asset growth and profitability during the 1970s even though the actual number of thrifts was falling. Despite such growth, there were still clear signs that the industry was chafing under the constraints of regulation. This was especially true with the large S&Ls in the western US that yearned for additional lending powers to ensure continued growth. Despite several efforts to modernize these laws in the 1970s, few substantive changes were enacted.[3]
In 1979, the financial health of the thrift industry was again challenged by a return of high interest rates and inflation, sparked this time by a doubling of oil prices. Because the sudden nature of these changes threatened to cause hundreds of S&L failures, Congress finally acted on deregulating the thrift industry. It passed two laws, the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn–St. Germain Depository Institutions Act of 1982. The deregulation not only allowed thrifts to offer a wider array of savings products, but also significantly expanded their lending authority. These changes were intended to allow S&Ls to "grow" out of their problems, and as such represented the first time that the government explicitly sought to increase S&L profits as opposed to promoting housing and homeownership. Other changes in thrift oversight included authorizing the use of more lenient accounting rules to report their financial condition, and the elimination of restrictions on the minimum numbers of S&L stockholders. Such policies, combined with an overall decline in regulatory oversight (known as forbearance), would later be cited as factors in the later collapse of the thrift industry. [3]
[edit] Causes
[edit] Tax Reform Act of 1986
By enacting 26 U.S.C. § 469 (relating to limitations on deductions for passive activity losses and limitations on passive activity credits) to remove many tax shelters, especially for real estate investments, the Tax Reform Act of 1986 significantly decreased the value of many such investments which had been held more for their tax-advantaged status than for their inherent profitability. This contributed to the end of the real estate boom of the early to mid '80s and facilitated the Savings and Loan crisis. Prior to 1986, much real estate investment was done by passive investors. It was common for syndicates of investors to pool their resources in order to invest in property, commercial or residential. They would then hire management companies to run the operation. TRA 86 reduced the value of these investments by limiting the extent to which losses associated with them could be deducted from the investor's gross income. This, in turn, encouraged the holders of loss-generating properties to try and unload them, which contributed further to the problem of sinking real estate values. This turmoil and repositioning in real estate markets was caused not by changes in market conditions.[citation needed]
[edit] Deregulation
The deregulation of S&Ls gave them many of the capabilities of banks, without the same regulations as banks. Savings and loan associations could choose to be under either a state or a federal charter. Immediately after deregulation of the federally chartered thrifts, state-chartered thrifts rushed to become federally chartered, because of the advantages associated with a federal charter. In response, states such as California and Texas changed their regulations so to be similar to federal regulations.
[edit] Imprudent real estate lending
In an effort to take advantage of the real estate boom (outstanding US mortgage loans: 1976 $700 billion; 1980 $1.5 trillion)[citation needed] and high interest rates of the late 1970s and early 1980s, many S&Ls lent far more money than was prudent, and too-risky ventures which many S&Ls were not qualified to assess. L. William Seidman, former chairman of both the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation, stated, "The banking problems of the '80s and '90s came primarily, but not exclusively, from unsound real estate lending."[4]
[edit] Brokered deposits
One of the most important contributors to the problem was deposit brokerage.[citation needed] Deposit brokers, somewhat like stockbrokers, are paid a commission by the customer to find the best certificate of deposit (CD) rates and place their customers' money in those CDs. These CDs, however, are usually short-term $100,000 CDs.[citation needed] Previously, banks and thrifts could only have five percent of their deposits be brokered deposits; the race to the bottom caused this limit to be lifted. A small one-branch thrift could then attract a large number of deposits simply by offering the highest rate. To make money off this expensive money, it had to lend at even higher rates, meaning that it had to make more, riskier investments. This system was made even more damaging when certain deposit brokers instituted a scam known as "linked financing." In "linked financing", a deposit broker would approach a thrift and say he would steer a large amount of deposits to that thrift if the thrift would lend certain people money (the people, however, were paid a fee to apply for the loans and told to give the loan proceeds to the deposit broker). This caused the thrifts to be tricked into taking on bad loans.[neutrality disputed]
[edit] End of inflation
Another factor was the efforts of the federal reserve to wring inflation out of the economy, marked by Paul Volcker's speech of October 6, 1979, with a series of rises in short-term interest rates. This led to increases in the short-term cost of funding to be higher than the return on portfolios of mortgage loans, a large proportion of which may have been fixed rate mortgages (a problem that is known as an asset-liability mismatch). This effort failed and interest rates continued to skyrocket, placing even more pressure on S&Ls as the 1980s dawned and led to increased focus on high interest-rate transactions. Zvi Bodie, professor of finance and economics at Boston University School of Management, writing in the St. Louis Federal Reserve Review wrote, "asset-liability mismatch was a principal cause of the Savings and Loan Crisis".[1]
[edit] Major causes according to United States League of Savings Institutions
The following is a detailed summary of the major causes for losses that hurt the savings and loan business in the 1980s:[5]
Lack of net worth for many institutions as they entered the '80s, and a wholly inadequate net worth regulation.
Decline in the effectiveness of Regulation Q in preserving the spread between the cost of money and the rate of return on assets, basically stemming from inflation and the accompanying increase in market interest rates.
Absence of an ability to vary the return on assets with increases in the rate of interest required to be paid for deposits.
Increased competition on the deposit gathering and mortgage origination sides of the business, with a sudden burst of new technology making possible a whole new way of conducting financial institutions generally and the mortgage business specifically.
Savings and Loans gained a wide range of new investment powers with the passage of the Depository Institutions Deregulation and Monetary Control Act and the Garn-St. Germain Depository Institutions Act. A number of states also passed legislation that similarly increased investment options. These introduced new risks and speculative opportunities which were difficult to administer. In many instances management lacked the ability or experience to evaluate them, or to administer large volumes of nonresidential construction loans.
Elimination of regulations initially designed to prevent lending excesses and minimize failures. Regulatory relaxation permitted lending, directly and through participations, in distant loan markets on the promise of high returns. Lenders, however, were not familiar with these distant markets. It also permitted associations to participate extensively in speculative construction activities with builders and developers who had little or no financial stake in the projects.
Fraud and insider transaction abuses were the principal cause for some 20% of savings and loan failures the past three years[clarification needed] and a greater percentage of the dollar losses borne by the Federal Savings and Loan Insurance Corporation (FSLIC).
A new type and generation of opportunistic savings and loan executives and owners—some of whom operated in a fraudulent manner — whose takeover of many institutions was facilitated by a change in FSLIC rules reducing the minimum number of stockholders of an insured association from 400 to one.
Dereliction of duty on the part of the board of directors of some savings associations. This permitted management to make uncontrolled use of some new operating authority, while directors failed to control expenses and prohibit obvious conflict of interest situations.
A virtual end of inflation in the American economy, together with overbuilding in multifamily, condominium type residences and in commercial real estate in many cities. In addition, real estate values collapsed in the energy states — Texas, Louisiana, Oklahoma particularly due to falling oil prices — and weakness occurred in the mining and agricultural sectors of the economy.
Pressures felt by the management of many associations to restore net worth ratios. Anxious to improve earnings, they departed from their traditional lending practices into credits and markets involving higher risks, but with which they had little experience.
The lack of appropriate, accurate, and effective evaluations of the savings and loan business by public accounting firms, security analysts, and the financial community.
Organizational structure and supervisory laws, adequate for policing and controlling the business in the protected environment of the 1960s and 1970s, resulted in fatal delays and indecision in the examination/supervision process in the 1980s.
Federal and state examination and supervisory staffs insufficient in number, experience, or ability to deal with the new world of savings and loan operations.
The inability or unwillingness of the Bank Board and its legal and supervisory staff to deal with problem institutions in a timely manner. Many institutions, which ultimately closed with big losses, were known problem cases for a year or more. Often, it appeared, political considerations delayed necessary supervisory action.
[edit] Failures
The United States Congress granted all thrifts in 1980, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts. Designed to help the thrift industry retain its deposit base and to improve its profitability, the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 allowed thrifts to make consumer loans up to 20 percent of their assets, issue credit cards, accept negotiable order of withdrawal (NOW) accounts from individuals and nonprofit organizations, and invest up to 20 percent of their assets in commercial real estate loans.
The damage to S&L operations led Congress to act, passing a bill in September 1981 allowing S&Ls to sell their mortgage loans and use the cash generated to seek better returns;[citation needed]http://www.fdic.gov/bank/Historical/s&l/ the losses created by the sales were to be amortized over the life of the loan, and any losses could also be offset against taxes paid over the preceding 10 years. This all made S&Ls eager to sell their loans. The buyers—major Wall Street firms—were quick to take advantage of the S&Ls' lack of expertise, buying at 60%-90% of value and then transforming the loans by bundling them as, effectively, government-backed bonds (by virtue of Ginnie Mae, Freddie Mac, or Fannie Mae guarantees). S&Ls were one group buying these bonds, holding $150 billion by 1986, and being charged substantial fees for the transactions.
In 1982, the Garn-St Germain Depository Institutions Act was passed and increased the proportion of assets that thrifts could hold in consumer and commercial real estate loans and allowed thrifts to invest 5 percent of their assets in commercial loans until January 1, 1984, when this percentage increased to 10 percent.[6]
A large number of S&L customers' defaults and bankruptcies ensued, and the S&Ls that had overextended themselves were forced into insolvency proceedings themselves.
The US government agency FSLIC, which at the time insured S&L accounts in the same way the Federal Deposit Insurance Corporation insures commercial bank accounts, then had to repay all the depositors whose money was lost. From 1986 to 1989, FSLIC closed or otherwise resolved 296 institutions with total assets of $125 billion. An even more traumatic period followed, with the creation of the Resolution Trust Corporation in 1989 and that agency’s resolution by mid-1995 of an additional 747 thrifts. [7]
A Federal Reserve Bank panel stated the resulting taxpayer bailout ended up being even larger than it would have been because moral hazard and adverse selection incentives that compounded the system’s losses. [8]
There also were state-chartered S&Ls that failed. Some state insurance funds failed, requiring state taxpayer bailouts.
[edit] Home State Savings Bank of Cincinnati
In March 1985, it came to public knowledge that the large Cincinnati, Ohio-based Home State Savings Bank was about to collapse. Ohio Gov. Dick Celeste declared a bank holiday in the state as Home State depositors lined up in a "run" on the bank's branches to withdraw their deposits. Celeste ordered the closure of all the state's S&Ls. Only those that were able to qualify for membership in the Federal Deposit Insurance Corporation were allowed to reopen.[9] Claims by Ohio S&L depositors drained the state's deposit insurance funds. A similar event took place in Maryland.
[edit] Midwest Federal Savings & Loan of Minneapolis, Minnesota
Midwest Federal Savings & Loan was a federally chartered savings and loan based in Minneapolis, Minnesota until its failure in 1990.[10] The St. Paul Pioneer Press called the bank's failure the "largest financial disaster in Minnesota history."[citation needed]
The chairman, Hal Greenwood Jr., his daughter, Susan Greenwood Olson, and two former executives, Robert A. Mampel, and Charlotte E. Masica, were convicted of racketeering that lead to the institution's collapse. The failure cost taxpayers $1.2 billion.[11]
[edit] Lincoln Savings and Loan
The Lincoln Savings led to the Keating five political scandal, in which five US senators were implicated in an influence-peddling scheme. It was named for Charles Keating, who headed Lincoln Savings and made $300,000 as political contributions to them in the 1980s. Three of those senators—Alan Cranston (D-CA), Don Riegle (D-MI), and Dennis DeConcini (D-AZ)—found their political careers cut short as a result. Two others—John Glenn (D-OH) and John McCain (R-AZ)—were rebuked by the Senate Ethics Committee for exercising "poor judgment" for intervening with the federal regulators on behalf of Keating.[12]
[edit] Silverado Savings and Loan
Silverado Savings and Loan collapsed in 1988, costing taxpayers $1.3 billion. Neil Bush, son of then Vice President of the United States George H. W. Bush, was Director of Silverado at the time. Neil Bush was accused of giving himself a loan from Silverado, but he denied all wrongdoing.[13]
The US Office of Thrift Supervision investigated Silverado's failure and determined that Neil Bush had engaged in numerous "breaches of his fiduciary duties involving multiple conflicts of interest." Although Bush was not indicted on criminal charges, a civil action was brought against him and the other Silverado directors by the Federal Deposit Insurance Corporation; it was eventually settled out of court, with Bush paying $50,000 as part of the settlement, the Washington Post reported.[14]
As a director of a failing thrift, Bush voted to approve $100 million in what were ultimately bad loans to two of his business partners. And in voting for the loans, he failed to inform fellow board members at Silverado Savings & Loan that the loan applicants were his business partners.[citation needed]
Neil Bush paid a $50,000 fine and was banned from banking activities for his role in taking down Silverado, which cost taxpayers $1.3 billion. A Resolution Trust Corporation Suit against Bush and other officers of Silverado was settled in 1991 for $26.5 million.
[edit] Financial Institutions Reform, Recovery, and Enforcement Act of 1989
As a result,[clarification needed] the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) dramatically changed the savings and loan industry and its federal regulation. The highlights of the legislation, signed into law August 9, 1989, were:[15]
The Federal Home Loan Bank Board (FHLBB) and the Federal Savings and Loan Insurance Corporation (FSLIC) were abolished.
The Office of Thrift Supervision (OTS), a bureau of the Treasury Department, was created to charter, regulate, examine, and supervise savings institutions.
The Federal Housing Finance Board (FHFB) was created as an independent agency to oversee the 12 federal home loan banks (also called district banks).
The Savings Association Insurance Fund (SAIF) replaced the FSLIC as an ongoing insurance fund for thrift institutions (like the FDIC, the FSLIC was a permanent corporation that insured savings and loan accounts up to $100,000). SAIF is administered by the Federal Deposit Insurance Corp.
The Resolution Trust Corporation (RTC) was established to dispose of failed thrift institutions taken over by regulators after January 1, 1989. The RTC will make insured deposits at those institutions available to their customers.
FIRREA gives both Freddie Mac and Fannie Mae additional responsibility to support mortgages for low- and moderate-income families.
[edit] Consequences
While not part of the savings and loan crisis, many other banks failed. Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance.[16]
From 1986 to 1995, the number of US federally insured savings and loans in the United States declined from 3,234 to 1,645.[7] This was primarily, but not exclusively, due to unsound real estate lending.[17]
The market share of S&Ls for single family mortgage loans went from 53% in 1975 to 30% in 1990.[2] US General Accounting Office estimated cost of the crisis to around USD $160.1 billion, about $124.6 billion of which was directly paid for by the US government from 1986 to 1996.[1] That figure does not include thrift insurance funds used before 1986 or after 1996. It also does not include state run thrift insurance funds or state bailouts.
The US government ultimately appropriated 105 billion dollars to resolve the crisis. After banks repaid loans through various procedures, there was a net loss to taxpayers of approximately $124 billion dollars by the end of 1999.[18]
The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990–1991 economic recession. Between 1986 and 1991, the number of new homes constructed dropped from 1.8 to 1 million, the lowest rate since World War II. [2]
Some commentators believe that a taxpayer-funded government bailout related to mortgages during the savings and loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans during the 2007 subprime mortgage financial crisis.[19]
Proof that when you elect Republicans, you get financial chicanery, corruption of our system of government, misuse of the military, massive deficits and a destruction of the banking system to which wall street insiders and the rich profit handsomely.
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