7) The S&L Crisis

This section will examine the cause and effect of the failure of the saving and loan industry, which became evident in the late l980s. The first Savings and Loan in the United States was established in the 1831 in Frankford, Pennsylvania. It was called “building and loan.” By the l920’s there were 12,000 savings and loans in operation, which were primarily interested in making consumer and commercial loans, not home loans. Each state regulated its own S&Ls, and competition between thrifts and banks was creating friction between the two kinds of financial institutions. In this environment a movement began to initiate federal regulation of thrifts, but before Congress could take solid action the stock market crashed in 1929, and the Great Depression followed. During this catastrophe, over 1,700 thrifts failed, and depositors lost $200 million in savings. Thrifts were desperate for help, and president Herbert Hoover responded to industry pressure and signed the Federal Home Loan Bank Act in 1932. This act allied the savings and loan industry with the federal government, providing greater prestige to the industry and confidence for depositors. In 1934 Congress created the Federal Savings and Loan Insurance Corporation which insured depositor’s money up to $5,000. From that period on the S&Ls successfully engaged in providing home loans on a local basis into the late ‘70s . Federal regulations restricted the S&Ls to this role.

(1) However the inflationary period in the late 70’s created severe problems for the industry. Ostensibly, to meet this challenge the Government, under Reagan, in the early eighties engaged in a restructuring, and deregulation program for the S&Ls which transformed the industry. The deposit insurance, and the scope of operations allowed S&Ls was greatly expanded. At the same time regulation was decreased!

(2) This latter effort apparently led to the downfall of the S&L industry, and possibly the greatest economic disaster ever to strike the United States of America. The crisis became so extensive, that it is estimated that it would take 40 years, and $1 trillion to cleanup the situation.

(3) When Ronald Reagan signed the Garn-St .Germain Act of 1982, which would cut savings and loans loose from the” tight girdle of old-fashioned, restrictive, federal regulations” Reagan believed was preventing thrifts from competing in the complex, sophisticated, financial marketplace of the 1980’s, he said, “I think we hit the jackpot!”

(4) Apparently, these words were not lost on almost every banker, entrepreneur, charlatan, and con artist in the country. Now anyone with the capital could buy an S&L, and use the depositor’s insured money to engage in almost the wildest of speculative schemes.

(5) With the immensely expanded scope of operations allowed, and the lack of supervision and regulation, it seemed that there was no end to the various ways for an S&L manipulator to enrich himself. The failure in adequate supervision, was also enhanced by the rapidly increasing demand for funds to run for political office. Political influence to ward off regulators was often paid for by S&L owners, at a heavy cost to taxpayers. Charles Keating was, of course, a prime example of influence-peddling. He paid, about $850,000. to Sen. Cranston,

(6) and various amounts to the campaigns of other U.S. senators to forestall investigative efforts of regulators on his S&L, Lincoln Savings of California. When the S&L eventually went under, it’s estimated that the delay aided by the lawmakers may have cost the taxpayers over a billion dollars! Another method of extricating money, frequently used, and aptly demonstrated in the Keating case, was to award outlandishly high salaries to bank officers and officials, often relatives of the owner. One of Charles Keating’s sons, hired with no experience in the banking industry, is reported to have received $500,000. per year. Other relatives purportedly received as high as $1,000,000. a year. The total amount dished out to relatives came to about $34,000,000. in salaries and bonuses.

(7) When the bank goes “belly-up” they keep the salaries paid for by the depositor’s money (which in some cases may well have been their own), and the government, through the Federal Deposit Insurance Corporation pays off the depositors! One of the most common operations, involved the under -collateralized loan. A banker, taking advantage of the shortage of government supervision, could lend the depositor’s money to a friend or crony with false or insufficient collateral to cover the loan. The borrower would default on the loan, keep the money for himself, and “kickback some of the cash to the banker. Again, when the bank goes bankrupt, only the taxpayers have to pay. Of course, the operations are generally more complex than this, but they follow the general plan. Neil Bush, the president’s own son, was apparently involved in machinations which went on at Silverado S&L in Denver. Neil Bush was awarded a position on the board of directors of this S&L, in spite of the fact that he was lacking in banking experience. As a director he voted to approve a questionable loan to a business associate of his, a builder named Bill Walters. Walters, in turn, granted Bush a loan of $100,000. with the stipulation, Neil Bush admits, didn’t have to be paid back. Walters defaulted on the loan from Silverado, and when the S&L went bankrupt in 1988, the taxpayers were taken for a billon dollars!

(8) It must be noted, that although the federal deposit insurance program (FDIC) was designed to pay depositors from a fund collected from the S&Ls themselves, that when that fund runs dry, as it has, we, the taxpayers, are ultimately responsible for the bill, since the fund is Federally guaranteed.

(9) When it finally comes down to putting the finger on the real cause of the S&Ls? collapse, bankers will often tell you that it was primarily due to the sudden drop in real estate market values. Although it could be argued that this was part of the picture, it is an obviously insufficient explanation. The real estate market has had ups and downs through the years as long as the S&Ls have existed. It’s always been the business of bankers to take that into account in their operations. So, what really went wrong? William Seidman, FDIC chairman, reports that fraud was involved in at least 60% of the failed S&Ls.

(10) If one takes into account the facts cited in this paper, they seem to point to one overriding cause ; and that would be the overwhelming naivete ostensibly possessed by Ronald Reagan, and members of Congress to think that bankers could be trusted with billions of dollars of federal deposit insurance money without any effective supervision on the part of the government. Then again, the explanation could run even deeper. It must be recognized that not a few members of Congress, and many of Reagan’s supporters accrued financial gains from the S&L situation. But, what about the ordinary taxpayer’s and voter’s naivete in trusting the judgement of the men they elected to office, who possessed the power, but not enough inclination to control the situation. It might be worth considering: that if every American voter were required to take a course in economics, and in political science, such tragedies as this might be avoided in the future.

Sadly, and in conclusion, we must now consider the final effects of the S&L disasters ,some probable, some already realized. The Government has several options when confronted with a failing thrift. It could attempt to bail out the institution with a loan, or it could take over the S&L and run it, or it could simply attempt to liquidate the assets of the S&L to help offset some of the losses incurred in paying off the insured deposits

The Resolution Trust Corporation was set up to handle the liquidation cases.(11) Of course, the auctioning off of all this land and property recently acquired by the Government had to affect, to some extent, the values in the real estate market, depressing them,(12) which, in turn, would contribute to the general downturn of the U.S. economy, leading to the serious recession we began to experience in the early ?90s.

Thus, the real cost of the S&L collapse cannot be measured only by the bailout and deposit insurance debt, plus the interest accruing over the years ;all of which is estimated to reach about one trillion dollars. The disaster must also be viewed in terms of the immeasurable cost of its overall effect on the country’s economic health!


1) Stephan Pizzo, “Inside Job”, pp 9_10

2) Stephan Pizzo, “Inside Job”, pp 11_13

3) Time Mag. 8_13_90, “No End In Sight”, p 50

4) The Nation 11_19_90, “S&Ls”, Robert Sherrill, p 597

5) “ “ “ “

6) Martin Mayer, “The Greatest Ever Bank Robbery”, p 201

7) The Nation 11_19_90, “S&Ls”, Robert Sherrill, p 604

8) Time Magazine 7_23_90, “It’s A Family Affair”, p 22

9) Newsweek 1_15_90, “Has Uncle Sam Got A Deal For You”, p 52

10) The Nation 11_19_90, “S&Ls,” Robert Sherrill, p 618

11) Time Mag. 3_12_90, “This Is A Rescue?”, p 58

12) “ “ “ “


We have thus examined in the preceding instance how unchecked reliance on “Free Enterprise” fashions our ethical inclinations as well as our economic future. Next we’ll deal with the relation that system has to foreign policy – particularly, our participation in the Gulf War.

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