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Savings _ Loan Crisis of the 1980s

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					Savings & Loan Crisis of the
           1980s
         Kaitlin Hunter
Causes Pre-1980s
   Borrowing short to lend long
    ◦ Fixed rate mortgages
      Increasing interest rates
    ◦ Negative spreads
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
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
Problems in the 1980s
   Percent of S&L assets in mortgages
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
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
    ◦ Failed in 1989
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)
Economic Effect
       What to takeaway from S&L
                Crisis…
   Regulation
    ◦ Created initial competitive advantage
    ◦ Forced into risky strategies to survive

   Need proactive approach to regulation
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.
     <http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/market_failures.pdf>.
2)   "Appendix 1 to Chapter 11: The Savings and Loan Crisis and Its Aftermath." 44-51. Web.
     10 Apr. 2011.
     <http://wps.aw.com/wps/media/objects/7529/7710171/appendixes/ch11apx1.pdf>.
3)   Bert Ely, "Savings and Loan Crisis." The Concise Encyclopedia of Economics. 2008. Library of
     Economics and Liberty. 10 April 2011.
     <http://www.econlib.org/library/Enc/SavingsandLoanCrisis.html>.
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.
     <http://www.fdic.gov/bank/historical/history/167_188.pdf>.
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.
     <http://query.nytimes.com/gst/fullpage.html?res=950DE1D81131F933A05752C1A96F948
     260>.
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