Before the fateful year of 1989, there exist two main federal insurance funds. The first one was managed and administered by the Federal Deposit Insurance Corporation (FDIC). The Federal Deposit Insurance Corporation was also in charge of insuring deposits of both the state chartered savings banks as well as the commercial banks. The other one was under the management of the Federal Savings and Loan Insurance Corporation (FSLIC). The FSLIC had the role of insuring both the state deposits and the federally chartered savings. However, in the year 1989, it was resolved through the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) that the roles of insuring federal deposits of all savings associations and the commercial banks were granted to the Federal Deposit Insurance Corporation (FDIC). The Federal Deposit Insurance Corporation (FDIC) was also given the mandate by the same Act to administer not only the FDIC funds, but also and the Federal Savings and Loan Insurance Corporation (FSLIC) funds. It is worth noting that the FDIC was renamed as the Bank Insurance Fund (BIF) while the FSLIC was renamed as the Savings Association Insurance Fund. These agencies were given, the role of addressing the famous Savings and Loans Failures (Sinkey & Benston, 2010).
The United States financial sector experienced a great distress in regards to the loans and savings in the wake of the 1980s. As a result, this distress was famously referred to as the savings and loan crisis. The events that occurred towards the end of the 1970s, such as high rate of inflation that was coupled with the high interest rates had a lion share towards the occurrence of this crisis. The main industry that was directly affected by this crisis was the savings and loan industry that was commonly known as the S&L. The savings and loan industry experienced a difficult period that was culminated by two major events. The first event was the setting up of the interest rates on the deposits by the federal government. The bad news was that the imposed interest rates were very low as compared to the amount that they were to receive in the event that they could have opted for an alternative(Sinkey & Benston, 2010).
As a result, the investors decided to withdraw their deposited funds. The second event that was greatly impacted by the event is the fact that the majority of the savings and loan industry invested in the long term fixed rate mortgages. Therefore, when the country experienced a rise in the interest rates, their mortgages realized a sudden decline in value. As a result, the savings and loan industries had no alternative, but realized big losses in their net income.The policy makers responded by instituting and passing of the Depository Institutions Deregulation and the Monetary Act of the year 1980 instead of directly dealing with the problems that the savings and loan industry was facing. This is because the federals lacked the financial capability of meeting the savings and loans industry’s predicaments. The Act did less to revert the trend, instead the crisis became worse. Consequently, both the citizens as well as the congress were forced to lend hand in the hope of salvaging the situation. Therefore, towards the end of the 1980s, the legislatures had no option but to come up with the legislative reforms that targeted long term solution to this problem. On the other hand, the citizens were called upon to provide a bailout as one of the short term solutions to the crisis(Sinkey & Benston, 2010).
1989 Savings and Loan Failures
The savings and loan crisis,which was also referred to as the S&L crisis was associated with the inability of over 1,043 from a total of the 3,234 S&Ls from meeting their objectives. The origin of the savings and loan industries can be traced from the Pennsylvania in the year 1813. The main objective of the savings and loan industry was to meet the homeownership that was in high demand. As a result, group of individuals that wanted to buy homes but had little finance and savings decided to come together with the aim of pooling their resources. Another reason that pushed for the formation of the savings and loan industry is the fact that the financial institutions such as the banks were not offering financial aid for the purposes of the residential mortgages during the 1800s. Therefore, the members found it necessary to pool their resources with the aim of buying themselves homes(Sinkey & Benston, 2010).
However, the borrowed amount was to be repaid after an agreed period for other members to access the same services. It is important to note that the saving and loans institutions were different from the banks. This is because they were smaller in their number together with the number of the assets that they were controlling as compared to the banks. Nevertheless, the S&Ls had a positive influence on the overall America’smortgage market. It is worth noting that by the year 1980, America had a total number of the 4,000 S&Ls that were controlling a massive $600 billion. Out of the $600 billion more than $480 billion were locked in the form of the mortgage loans(Sinkey & Benston, 2010).
Causes of the savings and loan crisis
Savings and loans operated just like the ordinary banks, but the only difference came in the form that they were insured by the federal and were specialized in financing mortgages. They dominated the market until the year 1980 when the money market accounts took the center stage because they offered a more lucrative interest rates on the savings. As a result, investors found it more profitable dealing with the money market accounts as opposed to the savings and loans. This sudden shift contributed to the depletion of the savings and loan industry source of funds(Sinkey & Benston, 2010).
Another factor that caused the savings and loan crisis is the competition from the banks that also ventured in offering mortgage loans from 1982. By that time, the banks were allowed to provide both the commercial and consumer loans purposefully for the mortgages. Even though the savings and loans were allowed to raise the interest rates on their savings following the famous Garn St Germaine Depository institution Act of the year 1982, they still could not overcome the crisis. Besides, the removal of the interest rates restriction, the federal government decided to reduce the budget that they were granting to the savings and loans. This further added miseries to the plight of this industry that was undergoing difficult time(Sinkey & Benston, 2010).
Political influence also had a lion share towards the occurrence of this crisis. Some politicians also participated in causing the crisis. The famous five united states of American senators that were commonly referred to as the Keating Five are example of such politicians that contributed towards the existence of the crisis. It was alleged that the five accepted around $1.5 million from Charles Keating as a campaign contribution. Charles Keating was the Lincoln Savings and Loan Association head. As this was not enough, the five senators also intimidated the Federal Home Banking Loan Board that was given a responsibility of currying out investigations of their case. Their aim of intimidating this agency was to put pressure on them so that they can overlook any activity that could be a potential suspicion(Sinkey & Benston, 2010).
Another potential cause of this crisis could be linked with the emergence of the new generation that was associated with the opportunistic savings. Most of them were indulging in the fraudulent operations that contributed to the financial losses of the institution.
Resolution to salvage the crisis
The crisis was helped in the year 1989 when the congress together with the President George W. Bush decided to bail out the industry. They decided to institute an Act called Financial Institutions Reform, Recovery, and Enforcement. Through this Act, they decided to give the industry a staggering $50 billion with the aim of stopping the industry from making further losses. The Act also instituted an agency that was called the Resolution Trust Corporation. This government agency was mandated with the role of reselling of the assets that belonged to the savings and loans. Besides selling the assets, the agency was also given the role of using the proceeds gained from the selling to compensate the depositors. Moreover, the agency also participated in coming up with the regulations that were geared towards preventing future fraud and any related poor investment(Sinkey & Benston, 2010).
The savings and loan industry made various attempts with the aim of overcoming the difficulties that they were facing. One of such attempts included indulging in the speculative real estate together with the commercial loans the aim of raising capital. It happened between the years 1982 and 1985. This event resulted in the raising of the assets by a margin of 56%. In Texas alone, the savings and loan industry experienced a rapid growth with some realizing an amazing 100% growth while forty of them also realized tripled growth in their sizes. However from the year 1983 the S&Ls fortunes began to change to the negative with most of them unable to make profit. In addition, the federal insurance also became limited and the S&Ls having no money to refund their depositors. The bad news is that most of the savings and loans refused to close down the business regardless of the fact that they were making what can be said to be bad losses(Sinkey & Benston, 2010).
Another attempt made to salvage the crisis apart from the establishment of the agency is the abolishment of the Federal Home Loan Bank Board that was mandated to the overall regulation of the savings and loan industry. On its place, another body was instituted by the congress by the name the Office of Thrift Supervision and Placed Thrift’s insurance that operated under the FDIC. Moreover, another body by the name Resolution Trust Corporation was also formed with the aim of resolving any potential problems that were facing the savings and loan industry. As a way of asserting their authority, Resolution Trust Corporation laid down 747 S&LS that controlled assets worth over $407 billion. It should be noted that the Resolution Trust Corporation was dissolved in the year 1995 following the end of the savings and loan crisis. It was estimated that the crisis impacted the American population negatively with the tax payers losing more than the $124 billion. Not only did the savings and loan industry suffered a crisis, but also the commercial banking industry. However, the crisis that rocked the S&Ls was more severe(Sinkey & Benston, 2010).
Consequences of the Savings and Loan Crisis
The crisis can be blamed to be behind the failing of numerous banks between the years 1980 and 1994. Between these years, a record 3,234 banks that were insured by the FDIC got closed. Moreover, between the years 1970 and 1990, the Savings and Loan market share experienced a drastic drop from 53% to 30% for the single family mortgage loans. The report that was released by the United States General Accounting Office revealed that the overall cost of the crisis was in the region of the $160.1 billion. Out of this amount, $124.6 was paid by the American government between the years 1986 to the year 1996. However, it did not cover the insurance fund together with the amount paid for the bailout. In addition to these funds, the federal government also issued $105 billion to assist in resolving of the crisis. On the other hand, the tax payers realized a net loss of about 132.1 billion even after the banks repaid their loans(Sinkey & Benston, 2010).
Moreover, the crisis led to the concomitant decline in the growth of the financial industry as well as the real estate market during the period of the crisis. Particularly, between the years 1986 and 1991, America realized a drop in the construction of new homes by nearly a half. This is because the new homes that were constructed dropped from 1.8 million to 1 million. It marked the lowest rates of real estate growth since the end of the Second World War. It can also be argued that the crisis could be behind the economic recession of the years 1990 to 1991. This is because, it slowed down the overall economy. Some sectors of the financial experts believe that using the taxpayers’ money to bail out the paved way for the famous 2007 subprime mortgage financial crisis. They argued that government bailing out of the S&Ls using the taxpayers’ money paved way for the existence of the moral hazard and created avenues for the lenders to indulge in high risk loans in future(Sinkey & Benston, 2010).
The savings and loan crisis can be argued to be the greatest bank collapse since the year 1929 when the globe experienced the great depression. The idea behind the Savings and Loan Industry was very noble because it provided the low income citizens the luxury of buying a home. However, as events unfolded, the noble idea turned to be one of the major crisis ever to occur in the American history. Both the state and the taxpayers lost their money while the general economy also suffered. Even though some of the causes of this crisis were unavoidable, most of them were out of sheer negligence. It took good governance and courage to overcome the crisis. From the crisis, the Americans can come up with valuable lessons of how to avoid or handle similar crisis in future.
Sinkey, J. F., & Benston, G. J. (2010). An Analysis of the Causes of Savings and Loan
Association Failures. Journal of Money, Credit and Banking,21(1), 130.