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Savings & Loan Crisis of the 1980s Kaitlin Hunter.

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Presentation on theme: "Savings & Loan Crisis of the 1980s Kaitlin Hunter."— Presentation transcript:

1 Savings & Loan Crisis of the 1980s Kaitlin Hunter

2 Causes Pre-1980s Borrowing short to lend long ◦ Fixed rate mortgages  Increasing interest rates ◦ Negative spreads

3 Causes Pre-1980s Regulation Q ◦ Extended to S&Ls in 1966 ◦ Limited interest paid on deposits ◦ Phased out in 1980 by DIDMCA  Rapid growth risky investments could be pursued Federal deposit insurance ◦ All S&Ls charged same premium

4 Problems in the 1980s Trigger events ◦ Oil prices doubled increasing inflation ◦ Growth of money supply restricted Deregulation ◦ Tried to offset the damage of fixed-rate mortgages ◦ Expanded assets

5 Problems in the 1980s Percent of S&L assets in mortgages

6 Problems in the 1980s Regulatory forbearance ◦ Allowed badly managed insolvent S&Ls to continue operating ◦ FHLBB attempted to hide insolvent S&Ls  Not enough money in insurance fund  Wanted to escape blame & protect careers ◦ Eliminated maximum limits on loan-to-value ratios in 1983 ◦ Permitted excessive lending to one borrower  Leads to principal/agent problems

7 Lincoln Savings & Loan Scandal Charles Keating ◦ 1984 acquired Lincoln Saving & Loan ◦ Pursued high risk investments ◦ Exceeded 10% equity investment limit by $600 M ◦ Accused examiners of bias ◦ Keating Five Keating Five ◦ Failed in 1989

8 Bailout 1989 George W. Bush inaugurated Congress passed the Financial Institutions Reform Recovery & Enforcement Act (FIRREA) ◦ Abolished FHLBB ◦ Shifted regulation to the Office of Thrift Supervision (OTS) ◦ Transferred deposit insurance from FSLIC to FDIC ◦ Reinstituted regulatory provisions ◦ Created Resolution Trust Corporation (RTC)

9 Economic Effect

10 What to takeaway from S&L Crisis… Regulation ◦ Created initial competitive advantage ◦ Forced into risky strategies to survive Need proactive approach to regulation

11 Sources 1) Acharya, Viral V., Thomas Cooley, Matthew Richardson, and Ingo Walter. "MARKET FAILURES AND REGULATORY FAILURES: LESSONS FROM PAST AND PRESENT FINANCIAL CRISES." Stern School of Business, 5 Dec Web. 10 Apr ) "Appendix 1 to Chapter 11: The Savings and Loan Crisis and Its Aftermath." Web. 10 Apr ) Bert Ely, "Savings and Loan Crisis." The Concise Encyclopedia of Economics Library of Economics and Liberty. 10 April ) Moysich, Alane. "Chapter 4. The Savings and Loan Crisis and Its Relationship to Banking." History of the Eighties- Lessons for the Future. N.p.: n.p., n.d FDIC. Web. 10 Apr ) Nash, Nathaniel. "Collapse of Lincoln Savings Leaves Scars for Rich, Poor and the Faithful." The New York Times 30 Nov. 1989: n. pag. The New York Times. Web. 10 Apr

12 Questions

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