The Savings and Loan crisis of the 1980s was a wave of savings and loan association failures in the United States in which over 1,000 savings and loan institutions failed in "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time."^[1] The ultimate cost of the crisis is estimated to have totaled around USD$150 billion, about $125 billion of which was consequently and directly subsidized by the U.S. government, 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. The 1980s refers to the years from 1980 to 1989. ... A savings and loan association is a financial institution which specializes in accepting savings deposits and making mortgage loans. ... A budget deficit occurs when an entity (often a government) spends more money than it takes in. ... For the band, see 1990s (band). ... MCMXC redirects here; for the Enigma album, see MCMXC a. ...

Background

Savings and loan institutions (also known as S&Ls or thrifts) have existed since the 1800s. They originally served as community-based institutions for savings and mortgages. In the United States, S&Ls were tightly regulated until the 1980s. For example, there was a ceiling on the interest rates they could offer to depositors. A savings and loan association is a financial institution which specializes in accepting savings deposits and making mortgage loans. ... Beginning of the Napoleonic Wars (1805 - 1815). ...

In the late 1970s, many banks, but particularly S&Ls, were experiencing a significant outflow of low-rate deposits, as interest rates were driven up by Federal Reserve actions to restrict the money supply, a move Federal Reserve Chairman Paul Volcker instituted to wring inflation out of the economy, and as depositors moved their money to the new high-interest money-market funds. At the same time, the institutions had much of their money tied up in long-term mortgage loans that were written at fixed interest rates, and with market rates rising, were worth far less than face value. That is, in order to sell a 5% mortgage to pay requests from depositors for their funds in a market asking 10%, a savings and loan would have to discount their asking price. This meant that the value of these loans, which were the institution's assets, was less than the deposits used to make them and the savings and loan's net worth was being eroded. The 1970s decade refers to the years from 1970 to 1979, In the Western world, the focus shifted from the social activism of the sixties to social activities for ones own pleasure, save for environmentalism, which continued in a very visible way. ... BRD-SG in IaÅŸi - A small branch dedicated to retail services For other uses, see Bank (disambiguation). ... The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. ... Economist Paul Adolph Volcker (September 5, 1927 - ) born in Cape May, New Jersey, is best-known as the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987). ... For short-term mutual funds investing in money market securities, see Money fund The money market is the financial market for short-term borrowing and lending, typically up to thirteen months. ... Mortgage loan is the generic term for a loan secured by a mortgage on real property; the mortgage refers to the legal security, but the terms are often used interchangeably to refer to the mortgage loan. ...

Under financial institution regulation which had its roots in the Depression era, federally chartered S&Ls were only allowed to make a narrowly limited range of loan types. Late in the administration of president Jimmy Carter, this range was expanded when the Federal Home Loan Bank Board eased up on some of its restrictions pertaining to S&Ls, specifically to try to remedy the impact rising interest rates were having on S&L net worth. And it was the status of an institution's net worth that could trigger a requirement that the Federal Home Loan Bank declare an S&L insolvent and take it over for liquidation. Also in 1980, Congress raised the limits on deposit insurance from $40,000 to $100,000 per account. This was significant because a failed S&L by definition had a negative net worth and thus would likely not be able to pay off depositors in full from its loans. Increasing FDIC coverage also permitted managers to take more risk to try to work their way out of insolvency so that the government would not have to take over an institution. With that goal in mind, early in the Reagan administration, the deregulation of federally chartered S&Ls accelerated rapidly (see the Garn - St Germain Depository Institutions Act of 1982), putting them on a more equal footing with commercial banks. S&Ls could now pay higher market rates for deposits, borrow money from the Federal Reserve, make commercial loans, and issue credit cards. They were also allowed to take an ownership position in the real estate and other projects to which they made loans and they began to rely on brokered funds to a considerable extent. This was a departure from their original mission of providing savings and mortgages. James Earl Jimmy Carter, Jr. ... The Federal Home Loan Banks are an essential source of stable, low-cost funds to financial institutions for home mortgage, small business, rural and agricultural loans. ... 1980 (MCMLXXX) was a leap year starting on Tuesday. ... Explicit Deposit insurance is a measure introduced by policy makers in many countries to protect deposits, in full or in part, in the event of a run on a bank or banks. ... President Reagan, with his Cabinet and staff, in the Oval Office (February 4, 1981) Headed by U.S. President Ronald Reagan from 1981 to 1989, the Reagan Administration was conservative, steadfastly anti-Communist and in favor of tax cuts and smaller government. ... The Garn-St Germain Depository Institutions Act of 1982 was a law passed by the U.S. Congress in 1982 that deregulated the Savings and Loan industry. ... The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. ...

Deregulation and other causes

Although the deregulation of S&Ls gave them many of the capabilities of banks, it did not bring them under the same regulations as banks. First, thrifts could choose to be under either a state or a federal charter. Immediately after deregulation of the federally chartered thrifts, the state-chartered thrifts rushed to become federally chartered, because of the advantages associated with a federal charter. In response, states (notably, California and Texas) changed their regulations so that they would be similar to the federal regulations. States changed their regulations because state regulators were paid by the thrifts they regulated, and they didn't want to lose that money. This is similar to the concept of a race to the bottom^{[citation needed]}. It has been suggested that this article be split into multiple articles accessible from a disambiguation page. ... Official language(s) English Capital Sacramento Largest city Los Angeles Area  Ranked 3rd  - Total 158,302 sq mi (410,000 km²)  - Width 250 miles (400 km)  - Length 770 miles (1,240 km)  - % water 4. ... Official language(s) No Official Language See languages of Texas Capital Austin Largest city Houston Area  Ranked 2nd  - Total 261,797 sq mi (678,051 km²)  - Width 773 miles (1,244 km)  - Length 790 miles (1,270 km)  - % water 2. ... In government regulation, a race to the bottom is a theoretical phenomenon which occurs when competition between nations or states (over investment capital, for example) leads to the progressive dismantling of regulatory standards. ...

In an effort to take advantage of the real estate boom (outstanding US mortgage loans: 1950 $55bn; 1976 $700bn; 1980 $1.2tn) and high interest rates of the early 1980s, many S&Ls lent far more money than was prudent, and to risky ventures which many S&Ls were not qualified to assess. Whereas insolvent banks in the United States were typically detected and shut down quickly by bank regulators, the Congress and the Reagan Administration sought to change regulatory rules so S&L's would not have to acknowledge insolvency and the FHLB would not have to close them down. The 1980s refers to the years from 1980 to 1989. ... This article is in need of attention. ...

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 $100,000.00 CDs. 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. In order to make money off this expensive money, it had to lend at even higher rates, meaning that it had to make more risky 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 that they would steer a large amount of deposits to that thrift if the thrift would loan 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]} Michael Milken of Drexel, Burnham and Lambert packaged brokered funds for several savings and loans on the condition that the institutions would invest in the junk bonds of his clients. A certificate of deposit or CD is, in the United States, a time deposit, a familiar financial product, commonly offered to consumers by banks, thrift institutions, and credit unions. ... Michael Robert Milken (born July 4, 1946 in Encino, California) is an American financier who was highly influential in developing the market for junk bonds (a. ... Drexel Burnham Lambert was one of the most profitable Wall Street investment banking firms during the late 1970s and most of the 1980s. ... High yield debt (non-investment grade or junk bond) is a business term referring to a corporate debt instrument, usually a bond, that has a higher yield (compared to investment grade debt) because of a high perceived credit risk (default risk). ...

Another factor was the efforts of the federal government 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. 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). Zvi Bodie, professor of finance and economics at Boston University School of Management, writing in the St. Louis Federal Reserve Review wrote that "asset-liability mismatch was a principal cause of the Savings and Loan Crisis."[1] Economist Paul Adolph Volcker (September 5, 1927 - ) born in Cape May, New Jersey, is best-known as the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987). ... This article or section does not cite any references or sources. ... A fixed rate mortgage (FRM) is a mortgage loan where the interest rate on the note remains the same through the term of the loan, or for a defined period established at the outset, and is initially based on an index. ... In finance, and particularly banking, an asset-liability mismatch occurs when the financial terms of the assets and liabilities do not correspond. ...

Fallout

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; the losses created by the sales were to be amortised over the life of the loan and any losses could also be offset against taxes paid over the preceding ten 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 GNMA, FHLMC, or FNMA guarantees). S&Ls were one group buying these bonds, holding $150bn by 1986, and being charged substantial fees for the transactions.

A large number of S&L customer's defaults and bankruptcies ensued, and the S&Ls that had overextended themselves were forced into insolvency proceedings themselves. In 1980 there were 4002 S&Ls trading, by 1983 962 of them had collapsed Notice of closure stuck on the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared bankruptcy (strictly, put into administration - see text) in the UK. Bankruptcy is a legally declared inability or impairment of ability of an individual or organizations to pay their...

For example, in March 1985, it came to public knowledge that the large Cincinnati, Ohio-based Home State Savings Bank was about to collapse. Ohio Gov. Richard F. Celeste declared a bank holiday in the state as Home State depositors lined up in a "run" on the bank's branches in order 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 FDIC were allowed to reopen. Claims by Ohio S&L depositors drained the state's deposit insurance funds. A similar event also took place in Maryland. Nickname: Location in Hamilton County, Ohio, USA Coordinates: Country United States State Ohio County Hamilton Founded 1788 Incorporated 1802 (village) - 1819 (city) Government  - Type Strong mayor  - Mayor Mark L. Mallory (D) Area  - City  79. ... Official language(s) None Capital Columbus Largest city Columbus Largest metro area Cleveland Area  Ranked 34th  - Total 44,825 sq mi (116,096 km²)  - Width 220 miles (355 km)  - Length 220 miles (355 km)  - % water 8. ... Richard Frank Dick Celeste (born November 11, 1937, in Cleveland, Ohio) is an American politician from Ohio, and a member of the Democratic Party. ... The FDIC logo The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. ... Official language(s) None (English, de facto) Capital Annapolis Largest city Baltimore Area  Ranked 42nd  - Total 12,407 sq mi (32,133 km²)  - Width 90 miles (145 km)  - Length 249 miles (400 km)  - % water 21  - Latitude 37°53N to 39°43N  - Longitude 75°4W to 79°33...

The U.S. government agency Federal Savings and Loan Insurance Corporation, 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. The Federal Savings and Loan Insurance Corporation (FSLIC) administered the deposit insurance for savings and loans in the United States. ... The FDIC logo The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. ...

Charles Keating and Lincoln Savings

The most notorious figure in the S&L crisis was probably Charles Keating, who headed Lincoln Savings of Irvine, California. Keating was convicted of fraud, racketeering, and conspiracy in 1993, and spent four and one-half years in prison before his convictions were overturned. In a subsequent plea agreement, Keating admitted committing bankruptcy fraud by extracting $1 million from the parent corporation of Lincoln Savings while he knew the corporation would collapse within weeks.Another character that was just as instrumental in the failure of S&L's was Herman K. Beebe. He was a convicted felon and Mafia associate. He had many connections to the intelligence community and was considered godfather of the dirty Texas S&Ls. He initially started his career in the insurance business and eventually banking, specifically; Savings and Loan Banks. Herman Beebe played a key role in the Savings and Loan scandals. Houston Post reporter Pete Brewton linked Beebe to a dozen failed S & L's. Altogether, Herman Beebe controlled, directly or indirectly, at least 55 banks and 29 S & L's in eight states. What is particularly interesting about Beebe's participation in these banks and savings and loans is his unique background. Herman Beebe had served nine months in federal prison for bank fraud and had impeccable credentials as a financier for New Orleans-based organized crime figures, including Vincent and Carlos Marcello. Charles Humphrey Keating Jr. ... Location of Irvine within Orange County, California. ... Organized crime is crime carried out systematically by formal criminal organizations. ... In the criminal law, a conspiracy is an agreement between natural persons to break the law at some time in the future, and, in some cases, with at least one overt act in furtherance of that agreement. ... 1993 (MCMXCIII) was a common year starting on Friday of the Gregorian calendar and marked the Beginning of the International Decade to Combat Racism and Racial Discrimination (1993-2003). ... A plea agreement or plea bargain is an agreement in a criminal case in which a prosecutor and a defendant arrange to settle the case against the defendant. ... Herman K. Beebe, from Louisiana, was a convicted felon and Mafia associate. ... The Mafia (also referred to as Cosa Nostra or the Mob), is a criminal secret society which first developed in the mid-19th century in Sicily. ... A savings and loan association is a financial institution which specializes in accepting savings deposits and making mortgage loans. ... Carlos Marcello (born Calogero Minacore Tunis 6 February 1910 – Metairie 3 March 1993) was born to Sicilian parents in Tunis. ...

Keating's attempts to escape regulatory sanctions led to the Keating five political scandal, in which five U.S. senators were implicated in an influence-peddling scheme to assist Keating. Three of those senators — Alan Cranston, Don Riegle, and Dennis DeConcini — found their political careers cut short as a result. Two others — John Glenn and John McCain — were exonerated of all charges and escaped relatively unscathed. The Keating Five (or Keating Five Scandal) refers to a Congressional scandal related to the collapse of most of the Savings and Loan institutions in the United States in the late 1980s. ... Alan MacGregor Cranston (June 19, 1914 – December 31, 2000) was a U.S. journalist and politician. ... Donald Wayne Riegle Jr. ... Dennis DeConcini Credited to the United States Senate Historical Office Dennis Webster DeConcini (born May 8, 1937, in Tucson) is a former Democratic U.S. Senator from Arizona. ... For other persons named John Glenn, see John Glenn (disambiguation). ... John Sidney McCain III (born August 29, 1936, in Panama Canal Zone, Panama) is an American Republican politician, currently the senior U.S. Senator from Arizona. ...

Neil Bush and Silverado Savings and Loan

Neil Bush was director of Silverado Savings and Loan when the institution collapsed in 1988, costing taxpayers $1.6 billion. Neil Bush was accused of giving himself a loan from Silverado with the coooperation of Ken Good, of Good International,although Bush stated it was not a conflict of interest. Neil Bush Neil Mallon Bush (born January 22, 1955 in Midland, Texas) is the third of five children of former President George Herbert Walker Bush and Barbara Bush (Barbara Lane Pierce). ...

Reform legislation

The Federal Home Loan Bank Board reported in 1988 that fraud and insider abuse were the worst aggravating factors in the wave of S&L failures. The Federal Home Loan Banks are an essential source of stable, low-cost funds to financial institutions for home mortgage, small business, rural and agricultural loans. ... 1988 (MCMLXXXVIII) was a leap year starting on Friday of the Gregorian calendar. ...

In 1989 Congress passed the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA) and set up the Resolution Trust Corporation to liquidate assets of failed Savings and Loans. The Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA) is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s. ... The Resolution Trust Corporation was a US government owned asset management company mandated to sell assets (primarily real estate) that had been held as collateral against most of the bad loans of savings and loan associations. ...

See also

• Fractional-reserve banking
• Tax Reform Act of 1986
• Cottage Savings Association v. Commissioner, a United States Supreme Court case dealing with the tax consequences of the S&L crisis

Fractional-reserve banking refers to the common banking practice of issuing more money than the bank holds as reserves. ... President Ronald Reagan signs the Tax Reform Act of 1986 on the South Lawn. ... Holding Gain or loss under the Internal Revenue Code is realized and recognized when property is disposed of for property which is materially different, i. ... The Supreme Court Building, Washington, D.C. The Supreme Court Building, Washington, D.C., (large image) The Supreme Court of the United States, located in Washington, D.C., is the highest court (see supreme court) in the United States; that is, it has ultimate judicial authority within the United States... A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, tribes, secessionist movements or revolutionary movements). ...

External links

• FDIC: The S&L Crisis: A Chrono-Bibliography
• The Cost of Savings & Loan Crisis: Truth & Consequences
• Classic Financial and Corporate Scandals

References

• Inside Job, by Steven Pizzo, Mary Fricker, and Paul Muolo. ISBN 0-07-050230-7
• "The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation," by Lawrence White(1991)
• "High Rollers: Inside the Savings and Loan Debacle" by Michael Lowy(1991)
• United States v. Winstar Corp., 518 U.S. 839(1996), a US Supreme Court case to be found on FindLaw.com that gives a concise but useful history of the crisis and the accounting practices that aggravated that crisis.