Personal Finance

Savings and Loan Crisis – What Was It All About?

The Savings and Loan crisis, also popularly known as “S&L” was one of the largest scandals in the financial history of the United States of America. This crisis mainly emerged in the late 1970s. It was at its top in the 1980 and finally ended in 1990s. During the 1970s, the interest rate remained extremely volatile. As a result, a large number of depositors lost their trust and started removing their funds from the savings and loan institutions. They started putting their funds in the money market funds. At that point of time, the money market funds were offering quite a high interest rate. The rates offered were high because at that point of time, the money market funds were not governed by Regulation Q. This Regulation Q capped the interest offered by the savings and loan institutions.  As a result, the savings and loan institutions which could easily offer low interest mortgages to people, could not offer a high interest returns to people who kept funds with them.

Cash Loans

In the 1980s, the interest rate ceilings were dropped and the savings and loan institutions engaged in increasingly risk-prone activities like junk bond investments, commercial real estate lending etc. This led to the crisis as by 1989, most of the savings and loan institutions have collapsed along with the FSLIC funds which were established in order to insure the deposits of the borrowers. During the early and middle 1980s, the assets of most of the savings and loan institutions got increased by around 56%. In Texas alone, there were 40 S&Ls which tripled in size. Moreover, there were certain institutions, which grew 100% each year.

But with time, the market started collapsing. Around 1983, there were around 35% of the S&L institutions which were not profitable. Apart from this, around 9% were more or less bankrupt. With time, the banks started to collapse. So the onus came upon Federal insurance to pay them off. But with time it also started running out of funds in order to refund the people. But, still the S&L institutions kept on lending money through bad loans and the losses kept on increasing.

Here, it should be noted that most of the failed institutions were from the State of Texas which pushed the state into recession. Millions of funds were lost and the FSLIC had to be declared bankrupt. The Senate Ethics Committee conducted an investment against 5 U.S. Senators for improper conduct in regards to this crisis.

In the year 1989, the Congress and the President understood that it is high time to bail out the industry. Thus, they came up with a bailout option known as FIRREA. This helped in closing down most of the failed banks by providing them with $50 billion. It also helped in preventing more such poor investments and other types of frauds. Also, the Resolution Trust Corporation was set up in order to sell off the assets of Savings and Loans institutions in order to pay off the people who had deposited money with them.

Tags

Related Articles

Close