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. 2005. Web. 10 Apr. 2011.. 2) "Appendix 1 to Chapter 11: The Savings and Loan Crisis and Its Aftermath." 44-51. Web. 10 Apr. 2011.. 3) Bert Ely, "Savings and Loan Crisis." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. 10 April 2011.. 4) 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. 167-88. FDIC. Web. 10 Apr. 2011.. 5) 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. 2011..

12. Questions