Published on May 3rd, 2014 | by Ian


The Crisis of Savings and Loans

With a view to help people to own homes, in an affordable way, specialized banks, called Savings and Loans, were created. This banking industry was helped by the government, after the Second World War, through insurance of savings account deposits. Because of this, though interest rates were low, people started saving money. The funds thus accumulated came handy to Savings and Loans to offer loans to prospective home owners, through mortgage for a period of 30 years. Interest rates on such loans were more, but still people went for these loans because of the affordability of the monthly payments.

Erosion of the capital

During the two decades, sixties and seventies, many homeowners availed this mortgage facility offered by Savings and Loans. Unfortunately, high interest rates in seventies, combined with the popularity enjoyed by money market accounts, in eighties resulted in the diminution of attraction in savings accounts.  Result? Erosion of capital, which meant Savings and Loans had to mobilize funds to offer fresh loans at . Realizing the need of the industry, the government came forward with relaxation on the activities of Savings and Loans. The banks were allowed to make investments in commercial ventures even though some of them were risky. These investments proved fatal, resulting in collapse. It ultimately led to the crisis of Savings and Loans.

The crisis thus created by Savings and Loans was labeled the “Greatest Banking Collapse” since 1929 Great Depression. Around the end of 1980s, more than half of the Savings and Loans banks failed; the FSLIC fund, which was created to insure the deposits failed too. Empire Savings in Texas came out with revelations of ‘flips’ and other ‘criminal activities.’ Since majority of the S&Ls were from Texas, the State had to face recession. Because of the measures taken, such as auctioning of bad land investments, prices of real estate came down heavily, spurt in office vacancy and the fall in prices of crude oil. The failure of Ohio and State S&L cost the state heavily.

As an aftermath of these failures and, since the state  smelt some wrong doings, it ordered investigation of five senators, popularly known as the ‘Keating Five.’  The investigation was carried out by the Senate Ethics Committee. It was revealed that these five senators had accepted around $1.5 million towards campaign contributions from the Head of the Lincoln Savings and Loan Association. Apart from this, it came to be known that they applied pressure on the Federal Home Loan Banking Board; this Board was investigating into the possible criminal activities at Lincoln.

Remedial measures by the Government

Due to waning of attraction in savings accounts, the banks sought for certain relaxations, which were granted. Emboldened by the relaxations, S&Ls started investing in ‘speculative’ real estates and commercial loans. However, in the 80s, investments were proved unworthy and most of them fetched big losses, which wee only growing bigger! Realizing the urgency, the government came out with a bail out measure which helped in closing the failed banks and stopping further losses. A new Agency, Resolution Trust Corporation (RTC) was set up to resell Savings and Loans assets, to pay back the depositors. Like ‘becoming wise after the event’, it also changed the regulations pertaining to Savings and Loans, to prevent any further bad investments and fraud.

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