The savings and loan crisis, arguably the most disastrous collapse of the banking industry since the Great Depression, was a bomb with a lot of time on its clock, starting its ticker in the early 1980s. It wouldn’t go off until years later, in the latter half of the decade.
DID YOU KNOW?
Nearly a third (1000 of 3,234 savings and loans associations) failed between 1986-1995.
Fluctuating interest rates, stagflation (stagnation + inflation), and lagging growth all contributed to the eventual savings and loan crisis. In the 80s, the effort to revitalize the economy brought about regulations that failed to match the market conditions and speculation, as well as created ample opportunities for corruption and fraud. In short, lending standards loosened to the point where the amount of available capital was incommensurate with the risk.
A Potential Problem Area
“It is high time that Congress declares savings and loan crooks public enemy no.1”
Capitalism without theft means bailouts do not have to happen. That creates massive damage to the public. Estimates of the savings and loan bailout come out to be around $500 billion (in 1990 money).
The bailout costed more money than it took to run the entire U.S. government in 1989, including all federal worker salaries, government programs, military, and intelligence services, social programs and welfare, and interest payments on the national debt. The crisis ended what had once been a secure source of home mortgages and destroyed the idea of state-run bank insurance funds.
In this first part of the Zero Theft Movement’s examination of the savings and loan crisis, we will shed light on what led to the disastrous event, the cost of resolution, and the damage it caused to you, the American taxpayer.
KEY QUESTIONS
- What caused the savings and loan crisis?
- How much did it cost in total? How much of that did the American taxpayers have to shell out?
- Did the U.S. productive capital take a significant hit due to the crisis?
The Zero Theft Movement unites citizens in the fight against the rigged layer of the economy. See how much crony capitalists and corrupt officials are ripping off from us, according to the public.
What are Savings and Loan Associations?
Before we dive deeper into the savings and loan crisis, many of you might not know what savings and loan associations are. This information is, of course, a crucial piece of information if you want to understand the downfall of S&Ls.
DEFINITION
Savings and loan associations (a.k.a S&L, a thrift, or a savings and loan) refers to a financial institution that, while similar to a bank, specializes in helping individuals get residential mortgages.
Customers or shareholders can own savings and loan associations, but the primary purpose of these institutions was to enable the average person to pool their money so that members could finance purchases of homes.
What Caused Savings and Loan Institutions to Fail?
The Lead-up
The prospects for savings and loans institutions looked bleak under the economic conditions in the early 80s. In order to assist thrifts, then-President Ronald Reagan signed the Garn-St. Germain Depository Institutions Act, eliminating the loan-to-value ratios and interest rate caps for S&Ls, as well as allowing these institutions to hold 30% of their assets in consumer loans and 40% in commercial loans.
‘Zombie thrifts/banks’ emerged, paying progressively higher rates to bring in funds. Savings and loan institutions started investing in high-reward, supposedly high-risk commercial real estate and junk bonds. These high-reward investments did not come with the high risk because taxpayers, not the S&Ls or its officials, would have to shoulder the losses via the Federal Savings and Loan Insurance Corporations (FSLIC)
The reward had been effectively severed from risk—at least as far as the thrifts were concerned. S&Ls knew this opportunity existed and capitalized.
A Mountain of Risk
The Garn-St. Germain Depository Institutions Act had its intended effect, perhaps not with the consequences legislators wanted. While more than a third of S&Ls remained unprofitable, the rest of the thrifts experienced a significant boost in assets, which had shot up by ~56% between 1982-1985. Some state legislators encouraged the growth further by granting S&Ls permission to invest in speculative real estate.
S&Ls were piling on risk. Even failing institutions received permission to keep lending. The FSLIC, by 1987, had become insolvent (i.e. unable to pay the debts owed). Instead of letting the savings and loans associations and the FSLIC to fail, the federal government decided to step in and recapitalize the latter. This, in effect, extended the investing window for S&Ls.
Corruption and Fraud
The lax restrictions led to some S&Ls allegedly committing fraud. A common scheme involved two partners colluding with an appraiser to purchase and flip land with S&L loans.
Partner A purchases a parcel at its appraised market value. The two partners then collude with the appraiser to evaluate the same parcel at a much higher price. Partner B buys the parcel using a loan from an S&L loan, which then gets defaulted on. The three parties involved share the profits. Allegedly some S&Ls not only knew of but also enabled these fraudulent schemes.
INVESTIGATIONS INTO THE FINANCE SECTOR
➤ AIG: The One-Way Bet Behind the 2008 Financial Crisis?
➤ Corporate Tax Evasion: Individuals vs. Big Business
➤ Dark Pool Trading: An Introduction to ‘Invisible’ Exchanges
The Total Cost of the S&L Crisis
We have compiled a list of estimates of the total cost of the savings and loan crisis from various sources. These figures should give you at least a rough idea of the great monetary damages the U.S. experienced.
Keep in mind one point: calculating the total cost proves much easier than pinpointing exactly how much of it was caused by fraud. Furthermore, your personal view of what constitutes fraud will likely alter your calculation.
As stated by Kitty Calavita (criminologist), Henry N. Pontell (sociologist), and Robert Tillman (sociologist) in their collaborative book Big Money Crime: Fraud and Politics in the Savings and Loan Crisis: “It is hard to determine the precise cost of fraud in the thrift debacle or the exact percentage of failures whose primary cause was a fraud. What we do know is that fraud and insider abuse were central components of this financial disaster.”
Long-Term Capital Management’s trading strategies eventually failed catastrophically and led to a $3.65 billion bailout in 1998. Should the government have intervened as the lender of last resort? See what the ZT community has uncovered…
G. Christian Hill’s estimate in the Stanford Law and Policy Review
Cost of the bailout by year 2000
Old Cases Expense (up to Jan. 1990): $68,000,000,000
New Cases Expense (after Jan. 1990): $124,000,000,000
Savings Assoc. Insurance Fund: $8,800,00,000
Administrative Costs: $19,000,000,000
Lost Tax Revenue from FSLIC Deals: $9,000,000,000
Zero Coupon Bonds to Repay Non-Treasury Debt: $11,000,000
Interest Expenses*
Treasury Interest: $95,800,000,000
Non-Treasury Interest: $92,700,000,000
Interest on Working Capital: $28,000,000,000
Total: $456,300,000,000
*Assumes Treasury borrowing at 8.5% and non-Treasury borrowing at 8.75% interest.
CNN’s reported estimate
“Tracking $147 billion … … and how it grows — Consultant Bert Ely calculates the government could resolve the S&L mess tomorrow by writing a check for $147 billion. Financing that sum over 40 years at 8.5%, however, adds $500 billion in interest and lifts the total to $647 billion. For a fair comparison with other government expenses, most experts say to ignore interest.”
New York Times reported estimate
“The cost, which seems to mount daily, will stretch out for decades. By one current measurement, paying for the collapse of the savings and loan industry could cost American taxpayers as much as $500 billion ($500,000,000,000), or about $5,000 for every household.”
From Calavita, Pontell, and Tillman’s Big Money Crime
“The estimated cost to taxpayers, not counting the interest payments on government bonds sold to finance the industry’s bailout, is $150 to $175 billion. If interest over the next 30 years is added to this, the cost approaches $500 billion.”
Who Paid for the S&L Bailout?
Removing interest from the equation, many sources (including the Federal Deposit Insurance Corporation (FDIC)) estimate the total cost of the bailout to be around $160 billion (including the FDIC). We (i.e. taxpayers) have been slated to pay as high as $124 billion of that, according to the Federal Reserve History website.
A document from The George H.W. Bush Library states, “[the $124 billion]… was directly paid for by the federal government via a financial bailout under the leadership of President George H.W. Bush— that is, the American taxpayer provided the funding for the bailout, either directly or through charges on their savings and loan accounts and increased taxes—which contributed to the large budget deficits of the early 1990s.”
The reason why taxpayers were and remain liable for bailouts of banks and S&Ls is due to federal government insurance of up to $100,000 (at least in 1990). In other words, when an S&L couldn’t pay back its depositors’ funds, the federal government did so in its stead.
In 1990, the National Center for Policy Analysis (NCPA) published a report arguing for the reform of Federal Deposit Insurance. The now-defunct agency claims, “Most of the borrowed funds used to bail out S&Ls are being financed by 30-or40-year bonds. When the interest on these bonds is considered, the total cost will…approach $1.4 trillion [by 2029].”
Dark pool trading accounts for ~30% of all trading. Do you think billions of concealed trades could be happening without us even knowing it?
A full cost breakdown from December 1995
In order to resolve the savings and loan crisis, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). As one of a handful of reforms, the legislation established the Resolution Trust Corporation (RTC), an agency tasked with closing failed S&Ls that regulators had taken over.
A 1995 audit of the RTC’s work reveals the costs of resolving the S&L crisis ( specific time).
| Direct costs (dollars in billions) | Total | Taxpayer | Private Sources |
|---|---|---|---|
| Resolution Trust Corporation | $87.9 | $81.9 | $6.0 |
| FSLIC costs | $64.7 | $42.7 | $22.0 |
| Supervisory goodwill claims | - | - | - |
| Total direct costs | $152.6 | $124.6 | $28.0 |
| Indirect costs (in billions) | 7.5 | 7.5 | 0 |
| Total indirect costs | $7.5 | $7.5 | 0 |
| Direct + indirect costs | $160.1 | $132.1 | $28.0 |
| Known Interest Expenses (in billions) | Total | Taxpayer | Private Sources |
|---|---|---|---|
| Interest Expense on FICO bonds | $23.8 | $0.0 | $23.8 |
| Interest Expense on REFCORP bonds | 88.0 | 76.2 | 11.8 |
| Total known interest expense on bonds | $111.8 | $76.2 | $35.6 |
| Estimated interest expense (in billions) | Total | Taxpayer | Private Sources |
|---|---|---|---|
| Estimate interest expense on appropriations | 209.0 | 209.0 | 0 |
| Total estimated interest expense on bonds | $209.0 | $209.0 | $0.0 |
Thus, according to this audit, the cost for taxpayers (as of 1995) was $132.1 billion (direct + indirect costs) + $76.2 billion (known interest expense on bonds) + $209.0 (total estimated interest expense on bonds) = $417.3 billion in costs for taxpayers, including interest.
Damages to Economic Production
The Congressional Budget Office (CBO) published a study in 1992 examining the economic effects of the savings and loan crisis.
The agency claims:
“…little of the forgone production can be attributed to the federal financing of the taxpayers’ cost of the S&L failures, as most of the cost stems from the initial losses in productive capital. The cumulative loss in GNP in 1990 dollars for the years 1981 through 1990 could be as large as a whopping $200 billion. An additional loss approaching $300 billion of forgone GNP is likely to occur during the years 1991 through 2000 as a consequence of the S&L breakdown.”
The data presented below is the amount the CBO estimates the losses in productive capital due to the savings and loan crisis. The CBO notes that the following numbers are a rough estimate, and the actual figures could be much lower or higher.
| Year | Dollars (in billions) |
|---|---|
| 1981 | 21.82 |
| 1982 | 22.35 |
| 1983 | 28.08 |
| 1984 | 34.45 |
| 1985 | 50.8 |
| 1986 | 25.43 |
| 1987 | 43.21 |
| 1988 | 41.7 |
| 1989 | 49.86 |
| 1990 | 41.2 |
| 1991 | 31.78 |
| 1992 | 7.57 |
*in 1990 dollars
The Next Part of the Story Awaits…
We have yet to get deep into the weeds of the alleged corruption and fraud involved in the savings and loans crisis. Find out all about how the potential schemes were executed in part II.
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