Savings Loan Crisis of the 1980 s Kaitlin

Causes Pre-1980 s �Borrowing short to lend long ◦ Fixed rate mortgages �Increasing interest

Causes Pre-1980 s �Regulation Q ◦ Extended to S&Ls in 1966 ◦ Limited interest

Problems in the 1980 s �Trigger events ◦ Oil prices doubled increasing inflation ◦

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

Problems in the 1980 s �Regulatory forbearance ◦ Allowed badly managed insolvent S&Ls to

Lincoln Savings & Loan Scandal �Charles Keating ◦ 1984 acquired Lincoln Saving & Loan

Bailout � 1989 George W. Bush inaugurated �Congress passed the Financial Institutions Reform Recovery

What to takeaway from S&L Crisis… �Regulation ◦ Created initial competitive advantage ◦ Forced

Sources 1) 2) 3) 4) 5) Acharya, Viral V. , Thomas Cooley, Matthew Richardson,

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Savings & Loan Crisis of the 1980 s Kaitlin Hunter

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

Causes Pre-1980 s �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 1980 s �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 1980 s �Percent of S&L assets in mortgages

Problems in the 1980 s �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-tovalue 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) 2) 3) 4) 5) 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>. "Appendix 1 to Chapter 11: The Savings and Loan Crisis and Its Aftermath. " 4451. Web. 10 Apr. 2011. <http: //wps. aw. com/wps/media/objects/7529/7710171/appendixes/ch 11 apx 1. pdf>. 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/Savingsand. Loan. Crisis. html>. 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>. 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=950 DE 1 D 81131 F 933 A 05752 C 1 A 96 F 948260>.

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