Just Like Ol' Times In Lending

Readers who hear references these days to the S&L crisis of the '80's may not have been through that period, and I was in my job pretty up close and personal, so think it may be helpful to recall that debacle.

S&L's were not regulated strongly, as they were originally community institutions, with savers subsidizing local small loans and getting the returns on those loans to keep savings rates attractive. Originally, that worked well. S&L's became attractive to investors (remember Keating?) who found the loose regulation and small reserve funds attractive, and worked their way into those S&L's and began to 'grow' them. That misnamed 'growth' consisted for the most part in risky loans to associates and in outright theft.

.....in testimony before the Senate Banking Committee last week (2/20/1989), Attorney General Richard Thornburgh said most of the lost money is long gone. "In many cases, the assets have been dissipated through laundering schemes or taken out of the country, and are beyond the reach of federal authorities," he said. "We'd be fooling ourselves to think that any substantial portion of these assets is going to be recovered." Besides the money that was simply stolen, billions of dollars were lost on high-risk investments and frittered away by paying excessively high interest rates to attract depositors.
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In 1980 Congress lifted restrictions on interest rates that S & Ls could pay. But regulators waited a year before freeing the other side of the balance sheet by allowing S & Ls to grant adjustable-rate mortgages. The delay left the thrifts in a bind, because interest rates had rocketed from 13% at the end of 1979 to more than 20% a year later.
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Congress passed a sweeping deregulatory law in 1982 that permitted S & Ls to make loans for a raft of new businesses. At the same time, some states allowed their locally chartered thrifts to run wild. Suddenly no venture was too farfetched: ethanol plants, wind farms, Las Vegas casinos and commuter airlines. S & L managers who were accustomed to making simple residential mortgages were ill prepared to evaluate the new kinds of credit risks. The great mistake in deregulation was not so much the easing of rules but the failure of the federal and state governments to boost supervision at the same time.

At that point, 'creative' financing came into play far beyond the original purposes of the S&L's. There were moves to step in, but by now the S&L's had apotheosized, and lobbyists fought for the moral grounds of preserving the holy homeowner as if that were the actual composition of the shaky loans that had launched whole developments and airlines. The final costs was supposedly $126 Billion spread over 10 years.

I recall a friend having to take her two daughters out of grad school for a year because their funds were in a closed S&L and although at the end of the year she got those funds back, the costs of a year of uncertainty can't be x'd out. I had stood in a long line to take out my daughter's funds because I had less trust in the word of our local officials who had been claiming that our Community Savings and Loan was sound, and would not be affected.

Under the 'self-fulfilling prophecy' theory, of course, I was partly responsible. As I had not taken out loans that I could not repay, forcing the S&L to absorb and take out of depositor's funds those bad loans, I eschew responsibility.

In order to create public confidence in an industry that deserved none, a lot of the leaders of those times lied. I came to believe, and still believe, that telling what is fact is required of our officials. The role of financial officials in creating valueless capitol by creating a business climate that fools investors is wrong, and culpable.

Rep. Marcy Kaptur has suggested that financial institutions' executives might be required to return the salaries and bonuses they received without earning. I applaud that concept.