Insolvent at Inception, Expensive at

Rebirth
How Myopia at the Establishment of the Federal
Savings and Loan Industry, and Failures to Adapt
Regulations thereof Forced George H.W. Bush to
Implement the Largest Government Bailout of the
Twentieth Century

Andrew S. Terrell

Dr. James Kirby Martin

HIST 6363 - Fall 2009
Department of History
University of Houston

2
 EPIGRAPH

While we have the quick exposure here, let me just thank you all,
Mr. Speaker, Leader Mitchell, Dole, Bob Michel, for coming down
here. This is a listening session. We've got a big problem in this
savings and loan. There are no easy answers and no worrying
about the blame -- plenty to go around. I want to see the problem
solved. We've had a lot of consultation up on the Hill, and good
consultation. And Treasury will come, I think, to meet me
tomorrow to present their views, but they're not being presented
here with this stacked deck. We need ideas, and if we're
overlooking something, we want to know what it is.

But I think we all agree that it's time to get on with the problem.
And so, what I wanted to do this morning is simply ask your
advice and listen. And whatever we come up with will not be
popular. And I expect then whatever you come up with will not be
popular, but we've got to get on and get the problem solved. And
I appreciate your coming down here early to discuss this today,
and then I'll be meeting, as I say, some more today. And then
tomorrow I think we have more final recommendations. I'll go out
with it publicly probably early next week -- I think that's the plan --
and see where we go from there.

George Herbert Walker Bush

Public Papers of the Presidents of the United States

“Remarks on the Savings and Loan Crisis”

8:04 a.m. Cabinet Room

3 February 1989

3
 ABSTRACT

The Savings and Loan thrift industry (S&L) has a cyclical history of under and over

regulatory periods. When the market crashed in 1929, hundreds of millions of dollars vanished,

including investments in individual S&Ls. Presidents Herbert Hoover and Franklin Roosevelt

first addressed the problem by creating the S&L federal pyramid and establishing federal

insurance on deposits. With federal regulation and insurance, S&Ls thrived in their limited real

estate market. Because S&Ls were originally locked into long term, residential mortgage loans,

market rate hikes caused individuals S&Ls to pay out more in interest to depositors than they

received in interest payments from existing loans. In the 1960s and 1970s, successive

administrations failed to address adequately the industry's expanding vulnerability.

Unfortunately, escalating inflation rates coupled with decreasing deposits further threatened to

bankrupt many S&Ls. Deregulation of the S&L industry in the 1980s allowed for subsequent

lines of questionable investments by a once fiscally conservative and sturdy entity. When

George H.W. Bush entered the White House in 1989, S&Ls were failing in record numbers.

Merely eighteen days into his presidency, Bush introduced the Financial Institutions Reform

Recovery and Enforcement act (FIRREA) which aimed to solve the crisis through what has

become known as the S&L bailout.

4
Introduction

The Savings and Loan Crisis of the 1980s and early 1990s was a direct result of corporate

and state myopia in addition to failures to adapt regulations to the changing economy.

Shortsighted regulations that ruined the thrift industry included slow, reactive policies during the

aftermath of the 1929 market crash, a failure to implement policy that made S&Ls less

susceptible to the expanding economy of the mid-twentieth century, and deregulation policies

amid a period of inflation and rising interest rates in the 1970s and 1980s.1 President George

Herbert Walker Bush inherited a fifty-year-old economic crisis and became the first executive to

propose and follow through on a comprehensive solution.

The proposal was too little, too late, however. By 1989, an inclusive bailout of the S&L

depositors seemed to be the only resolution to the S&L crisis.2 Federal insurance caps on S&Ls

had increased incrementally since the establishment of the Federal Savings and Loan Insurance

Corporation (FSLIC) in 1934 from five thousand to one hundred thousand in 1982. Because of

the increases in the amount insured in S&L deposits, Bush faced the largest federal insurance gap

in U.S. history. To make things worse, the country elected Bush on a platform of no new taxes

while decreasing the federal deficit. The deficit issue was significant because it doubled in the

eight years of Ronald Reagan’s administration from 1981 to 1989. In order to secure the desired

comprehensive solution, the Bush administration enacted the Financial Institutions Reform,

Recovery, and Enforcement Act of 1989 (FIRREA). The plan was expensive, nonetheless,

1 Thrift Industry is often used synonymously with savings institutions. For our purposes, the U.S. thrift
industry in the twentieth century is the Savings and Loan institution.
2 In some conservative accounts, the bailout is construed as a cleanup. See Timothy Curry and Lynn Shibut,
“The Cost of the Savings and Loan Crisis: Truth and Consequences,” FDIC Bankings Review 13, no. 2 (2000).

5
necessary by 1989. The bailout and FIRREA were the inevitable culminations of an industry

mismanaged for five decades.3

Administrations before the Great Depression failed to grant early S&Ls the same security

given banks with the creation of the Federal Reserve System in 1913-insurance on deposits for

consumer confidence. As a result, over 1,700 thrifts failed when the market crashed in 1929. Up

to $200,000,000 in savings dissolved. Though there were 12,000 individual S&Ls in operation

during the 1920s, they were not integrated into a sole industry; they were largely regulated by

individual states if regulated at all. This calamity prompted President Herbert Hoover to sign the

Federal Home Loan Bank Act of 1932 that created a federal S&L pyramid and developed the

Federal Savings and Loan Associations. Under the bank act, Hoover appointed five citizens to

the Federal Home Loan Bank Board (FHLBB) which supervised twelve district Federal Home

Loan Banks (FHLB). To help launch newer S&Ls, the Treasury Department agreed to contribute

up to $125,000,000 dollars. At the bottom of the federal S&L pyramid structure were local,

individual institutions located within communities.4

The Great Depression caused many savings to be lost, and moreover, it devastated the

housing market. As Franklin Delano Roosevelt (FDR) entered office in 1933, part of his first

New Deal legislation was the National Housing Act of 1934. For the S&L industry, FDR’s act

created the Federal Savings and Loan Insurance Corporation (FSLIC) that insured thrift deposits

much like the FDIC did for bank accounts. Because S&Ls were federally insured then, tight

3 Dwight M. Jaffee, “Symposium on Federal Deposit Insurance for S&L Institutions,” The Journal of
Economic Perspectives 3, no. 4 (Autumn, 1989): 3-7; U.S. Senate Republican Policy Committee, Dealing
with the S&L Bailout, William L. Armstrong, Chairman, 101st Congress. 16 July 1990 and Briefing Material:
The Savings and Loan Crisis, George H.W. Bush Presidential Library: White House Chief of Staff Collection,
John Sununu Files, Box 86, Folder: Savings and Loan Industry(1990).
4 J.E. McDonough, “The Federal Home Loan Bank System,” The American Economic Review 24,
no. 4 (December, 1934): 668-671; Stephen Pizzo, Mary Fricker and Paul Muolo, Inside Job: The Looting of
America's Savings and Loans (New York: McGraw-Hill Publishing Company, 1989), 9-12.

6
regulations controlled the industry. S&Ls were mostly limited to making home loans, and

individual branches were confined to issuing these mortgages only to properties within a fifty-

mile radius of the S&L office. In addition to the obvious limitations to future expansionist

investments was the acceptance of short-term deposits while offering fixed-rate, long-term loans.

As the real estate market recovered and grew after WWII, S&Ls began paying more in interest to

their depositors than they received in interest payments from their loans.5 These cases composed

the first cycle of the thrift industry from under regulation to over regulation in the twentieth

century. It is important to recognize that the shortsighted regulations were quintessential of most

new deal legislation; the early enactments were temporary fixes.

The 1950s housing boom, caused by increasing family incomes and stable employment,

allowed real estate prices to soar. By the mid-1950s long-term savings of individuals within the

S&L associations increased exponentially. S&Ls marked the second largest dollar increase from

1945-1953 among savings, bonds, and life insurance reserves ($15.5 billion). Such a large

growth demonstrated how extensive postwar demand for housing was. Additionally, FSLIC

liability increased from five to ten thousand dollars per account by 1951. Confidence in S&L

deposits grew along with the increases in federal insurance. Home mortgages reached a new

high at $19.7 billion during 1953, and S&Ls provided 37% of this figure.6 These were the

golden days of S&Ls. The industry was still vulnerable to any increase in interest rates, but the

economic boom after WWII concealed the threat for another decade. Proactive adaptation to the

changing real estate market and rising interest rates did not occur during this period, however. In

5 Henry N. Pontell and Kitty Calavita, “The Savings and Loan Industry,” Crime and Justice 18 (1993):
203-6; Briefing Material: The Savings and Loan Crisis, George H.W. Bush Presidential Library: White
House Chief of Staff Collection, John Sununu Files, Box 86, Folder: Savings and Loan Industry(1990).
6 Harold W. Torgerson, “Developments in Savings and Loan Associations, 1945-1953,” The Journal of
Finance 9, no. 3 (September, 1954): 283-93; James R. Barth, The Great Savings and Loan Debacle,
American Enterprise Institute for Public Policy Research Special Analysis, (Washington, D.C.: AEI Press, 1991), 17.

7
essence, because of the expanding economy, regulations remained untouched. This may be

attributed to the rationale that warns to avoid fixing things that are not broken.

The S&L Crisis that faced President Bush in 1989 was not solely a result of deregulation

and risky investments throughout the 1980s, but also was a product of corporate and state

mismanagement. For example, federal enforcement of regulations were lax because S&Ls had

histories of safe investing. Furthermore, examiners had restricted compensation and limits on

allowable personnel numbers. Interest hikes hurt profit margins throughout the industry. The few

demand deposits that had variable interest rates were limited by federal regulations; only a small

amount of variable interest accounts could be offered at each individual S&L. Once President

James Carter deregulated the industry in 1980, thrift executives looted their institutions and

exploited the new regulations by indulging in risky ventures formerly forbidden.7

The S&L industry’s evolution can be likened to that of a maturing human. S&Ls were

born out of Great Depression legislation and nurtured into initial success. As the industry

graduated into the postwar era, additional insurance monies allotted to deposits fostered a false

sense of confidence and security. During the 1960s and 1970s, S&Ls saw how inflation and

rising interest rates could negate capital revenue from long-term, fixed-rate loans. S&Ls ended

up paying more in interest to depositors than they were receiving from loan interest. Like so

many industries before it, S&Ls deregulated in 1980. Carter hoped this move would allow the

industry to fix itself. However, deposits in the failing industry were federally insured. As long

as the FSLIC had funds to help in the recovery of insolvent S&Ls, there was minimal risk.

Unfortunately, deregulation allowed S&Ls to invest in higher risk loans, such as 100% financing

7 Federal Deposit Insurance Corporation, The Savings and Loan Crisis and Its Relationship to
Banking, History of the 80s, Volume 1, Chapter 4 (1997): 170-171, Available On-line,
http://www.fdic.gov/bank/historical/history/vol1.html.

8
for commercial real estate developments. Not many banks rendered such loans. The common

practice was for banks to finance the short-term building on commercial property, then sell to

insurance companies who would finance the long-term repayment. Those in places of power

splurged in risky ventures, mostly in commercial real estate. S&Ls wanted to diversify and

exploit their new freedom because inflation was rampant and the traditional home mortgage

investments were not profitable enough to compete against commercial real estate revenue.8

The federal S&L industry was insolvent at inception and a victim to unchanging

regulations. Bush recognized how regulations since the 1930s had not addressed the core

problem with the S&L industry: the vulnerability of institutions based on long-term, fixed-rate

mortgages that accepted short-term deposits. S&Ls had never been allowed a diversified

portfolio because they were federally insured. Bush had chaired a task force in 1984 that

investigated the regulations of financial institutions. Reagan disregarded Bush’s

recommendations, probably because Reagan--like his predecessors--knew how large a

comprehensive solution would be and thus did not want it occur on his watch. Bush, however,

had a track record of going against popular opinion as his conscience dictated. Thereby, he felt a

moral obligation to interdict and protect the innocent depositors who were afraid the FSLIC

would not be able to reimburse insured monies.

Ergo, we will first explore the extent to which the federal government’s interjection into

the S&L industry in the 1930s introduced shortsighted regulations that limited thrift revenue.

Second, this paper will briefly address S&Ls’ vulnerability to interest rate hikes, inflation, and

the expanding economy in the postwar United States. Furthermore, one will engage how

deregulation in the 1980s exacerbated an already failing industry which culminated in the mass

8 Ibid, 168-177; Pontell and Calavita “White-Collar Crime in the Savings and Loan Scandal,” 33.

9
insolvency crisis as Bush entered office in January 1989. Ultimately, the government’s largest

bailout in the twentieth century was that of the S&L industry which resulted in the federal

government essentially usurping regulatory authority in 1932 yet failed to address the escalating

problems for the subsequent five decades. Bush was forced to act in 1989 with FIRREA because

the severity of the S&L industry-wide insolvency was exposed.

10
Savings and Loan Inaugurations

“...a long habit of not thinking a thing wrong, gives it a superficial

appearance of being right, and raises at first a formidable outcry in defense
of custom.”9

From 1831 to the early 1930s, thrifts were loosely regulated by individual state

inspectors. After the market crash of 1929 that liquidated most commercial banks, many S&L

members withdrew their savings. S&Ls were largely invested in home mortgage loans, but if

members could not make their payments, S&Ls could not meet withdrawal requests. This was

the atmosphere that threatened individual S&Ls at the onset of the Great Depression. While the

S&L industry faltered, President Herbert Hoover and Franklin Roosevelt enacted two key pieces

of legislation in 1932 and 1934 respectively. The acts established the federal S&L structure and

regulatory board that lasted until 1989. Roosevelt went so far as to offer federal insurance to

deposits to help revitalize confidence in the thrift industry. However ambitious and well-

intended these early attempts were at regulating S&Ls, they lacked foresight in encouraging and

insuring an industry largely based on long-term, fixed-rate mortgage loans.

Before expounding on the fallacies of the early federal S&L structure, it seems

appropriate to explain what S&Ls are, and how they operate. S&Ls are savings institutions

where depositors create the cash flow needed for loans. Interest payments on existing loans

supply revenue for the S&L and depositors. Before 1932, S&Ls were often known as building

and loan institutions because they supplied mortgage loans for community development. S&Ls

largely dealt in residential real estate. Early mortgage loans from banks were short-term

contracts that concluded with a large balloon payment to secure the property. If a borrower could

9 Thomas Paine, Common Sense (1776; repr., New York: Willey Book Co., 1942), 1.

11
not pay off the mortgage loan with the balloon payment, the property was foreclosed. S&Ls,

thus, were friendlier alternatives when a borrower decided to build a house or remodel because

the institution dealt with 15-30 year mortgages, mostly with low, fixed-rate interest. S&Ls

offered limited variable interest rate loans--especially in the 1980s--but variable-interest rates

hurt depositors and the institution both as the latter half of the century unfolded. In most cases,

the variable interest loans were offered when mortgage applications were more risky. The rating

system used by most S&Ls when calculating variable against fixed-rates took into consideration

the type of proposed construction, age of the property, its location, and the “moral and financial

risk elements inherent in the borrower.”10 Working with variable-interest rates was a gamble at

any point. For instance, if one signed a $10,000 fifteen-year mortgage in 1945 at 6% fixed APR,

minimum payments would net the loan institution 50% of the initial loan amount: $5,000 in

revenue, just from interest payments. Variable-rate loans would produce even more profit, but

they could also net less which left their long-term loans at the mercy of the economy and the real

estate market.11

Prior to 1932, individual states regulated thrifts within their boundaries. The collapsed

housing market in the early 1930s, however, motioned the federal government to enter S&L

management. President Hoover signed the Federal Home Loan Bank Act on 22 July 1932 that

established the Federal Home Loan Bank System. The new system consisted of twelve Federal

Home Loan banks directly under one Federal Home Loan Bank Board (FHLBB). Hoover

10 “Aid to Home Owner Sped by Roosevelt,” New York Times, 13 April 1933; “Cities Benefits in Home
Loan Act,” New York Times, 7 August 1932; David Lawrence Mason, From Buildings and Loans to Bail-
Outs: A History of the American Savings and Loan Industry, 1831-1995 (Cambridge: Cambridge
University Press, 2004), 17-63; Fred T. Greene, “Significant Post-Depression Changes in Savings and Loan
Practices,” The Journal of Land & Public Utility Economics 16, no. 1 (February, 1940): 32-33.
11 This hypothetical scenario is calculated by monthly direct reduction loan practices rather than fixed
monthly payment practices. Direct reduction loans became more popular by the mid 1930s because it constantly
recalculated the amount of interest owed the lender after each month’s payment. For more information see Greene,
“Significant Post-Depression Changes in Savings and Loan Practices,” 30-33.

12
wanted to give S&Ls access to funds to promote the housing market. The system was a pyramid

structure. The Bank Board supervised the regional banks which then advanced funds to

individual S&Ls at low interest rates. In essence, the board received $125,000,000 of initial

capital to distribute among individual S&Ls. Hoover recognized that many citizens could make

either interest or principal payments on their mortgages, not both. Foreclosing property was not

benefitting any institution. Foreclosure rates dropped, but these were only the beginning years of

the Great Depression.12

Among the first New Deal legislation under FDR was the National Housing Act of 1934,

signed 27 June. Pertaining to Savings and Loan was Title IV which established the Federal

Savings and Loan Insurance Corporation (FSLIC). The FHLBB administered the insurance

corporation for S&Ls. The significance of FSLIC’s establishment was that it created equal

protection by the federal government of commercial banks under the Federal Deposit Insurance

Corporation for S&Ls.13 Insurance coverage on deposits created a greater sense of security and

confidence from S&L members. The chief goal of the Hoover and FDR administrations was to

encourage private deposits so S&Ls could start offering fixed-rate mortgages again at prices the

suffering public could afford. To this end, they were successful.

The early acts that brought S&Ls under the federal umbrella also perpetuated a

catastrophic flaw within the industry. An overwhelming majority of policies and programs

enacted during the Great Depression were geared toward massive spending in hopes of restarting

the economy. In the housing market, S&Ls realized steady rises in investment returns as their

12 “Home Loan Banks Open Doors Today,” New York Times, 14 October 1932 and “Cites Benefits in
Home Loan Act,” New York Times, 6 August 1932 and “Home Loan Measure is Passed by House,” New York
Times, 15 June 1932 and Barth, The Great Savings and Loan Debacle, 13-17.
13 “Aid to Home Owner Sped by Roosevelt,” New York Times, 13 April 1933; “Summary of Housing Bill
as Passed by the Senate,” New York Times, 16 June 1934 and “Savings Shares Insured,” New York Times, 12
November 1934.

13
capital revenue returned from the earlier withdrawal phase. As WWII drew to a close, the

payments on mortgages from the Great Depression era did not increase. However, interest rates

for the S&Ls to borrow money from their pyramid structure did increase as did dividend

payments to depositors. Inflation affected interest rates, and monetary exchange.14

As the country shifted into the 1960s, the future of S&Ls was questionable at best.

Because presidential administrations from Hoover to Eisenhower failed to grasp the vulnerability

of the S&L industry, the threat increased as time passed on. The initial acts that created the

federally regulated S&L industry worked well for the 1930s. Hoover and FDR both recognized

the necessity in expanding a housing market amid the Great Depression. The main problem with

the S&L industry was not a lack of well-intended prospects, but a dereliction of the FHLBB and

presidential administrations to adapt S&L structures to the drastic change in the economy from

the Great Depression to postwar America. The amount of mortgage loans from S&Ls made

many individual depositors and investors wealthy as the 1950s continued. Nevertheless, the

majority of the revenue for S&Ls were interest payments on 15-30 year loans at fixed interest

rates. A point of diminishing returns for such a market became more apparent as the country

coasted into the 1960s.

Interest Spikes Hurt

Although 1959 and 1960 showed considerable growth in public savings accounts and

mortgages, contemporary economists such as Charles M. Torrance, who also worked for FSLIC

at the time, expected to the see the rising value of S&Ls and other financial institutions level off

in latter 1960. The number of S&Ls did level off in 1960, but total assets doubled from 1959 to

14 Harold W. Torgerson, “Developments in Savings and Loan Associations, 1945-1953,” The Journal of
Finance 9, no. 3 (September, 1954): 283-93.

14
1965. See table below.15 The FHLB expanded to include forty-six hundred institutions, of whom

four thousand were members of the FSLIC.16 This meant that an overwhelming number of S&Ls

were federally insured and entering a period of inflation and rising interest rates.

Year Individual S&Ls Assets

1945 6,149 $8,747,000,000

1952 6,004 $22,585,000,000

1959 6,223 $63,401,000,000

1965 6,071 $129,442,000,000

After three decades (1930-1960) of fostering the American dream of home ownership,

S&Ls were still vulnerable to vagaries of the market. Being federally insured and regulated had

its perks, but it also limited portfolio expansion. Until the 1960s, interest rates and inflation were

generally stable which allowed mortgage loaners to benefit from steady payments. Mortgage

rates were slightly higher than deposit rates in order to keep an S&L solvent. The system in

place from the Great Depression era worked well enough until the recessions of the 1960s and

1970s. In an attempt to avoid the recessions, the Federal Reserve instituted contractionary fiscal

policies or “tight money policies.” In such situations, the Federal Reserve raises its funds rate to

decrease the supply of money. Doing so causes higher mortgages rates and diverts inflation. In

the case of the 1960s, it did not work. Vietnam exacerbated the tough times and inflated the

dollar further leading to a floating exchange rate and the end of the Bretton Woods system by

1973. This mattered to the S&L industry because the dollar was no longer fixed in value with

gold at $35 an ounce. Stagflation also contributed to the declining stability of the S&L industry;

15 Table figures from Savings and Loan Fact Book 1966, (Chicago: United States Savings and Loan
League, 1966): 92-94.
16 Charles M. Torrance, “Gross Flows of Funds Through Savings and Loan Associations,” The Journal of
Finance 15, no.2 (May, 1960): 157-160.

15
interest rates soared as inflation devalued what funds were available. Meanwhile unemployment

peaked at 7.5% in 1973-1975 recession.17 The S&Ls that held long-term assets from many years

before the 1960s and 1970s interest rate adjustments were the most susceptible to sudden

insolvency.18 No presidential administration wanted to adapt regulations of the S&L industry,

perhaps because they focused on commercial banks believing S&Ls to be safer because of their

limited portfolios.

The John F. Kennedy, Lyndon B. Johnson, and Richard Nixon administrations received

reports of the effects the changing economy had on the thrift industry. In each successive report,

committees recommended permitting federal savings institutions to engage in broader

investments. The aim was to allow for a more flexible portfolio of individual S&Ls. President

Nixon’s Commission (known as the Hunt Commission) stated, “Without additional investment

powers, thrift institutions would not be able to survive.”19 So the administrations knew of the

problems facing the S&L industry as early as 1962. However, little more than commission

recommendations came of the committees who investigated the situation.

By the late 1970s, the gold standard was abandoned and inflation rates skyrocketed to

13%. Typically, S&Ls never leant higher than 6% fixed-rate interest. S&Ls were more

susceptible to the these hikes in interest rates because depositors were receiving higher dividends

17 U.S. Department of the Treasury, Sources of Secular Increases in the Unemployment Rate,
1969-82, Bureau of Labor Statistics, Available On-line, http://www.bls.gov/opub/mlr/1984/07/art4full.pdf; F. Steb
Hipple, “Fiscal Policy vs. Monetary Policy,” College of Business and Technology East Tennessee State University,
Available On-line, http://faculty.etsu.edu/hipples/fpvsmp.htm; David H. Papell, “Monetary Policy in the United
States Under Flexible Exchange Rates,” The American Economic Review 79, no. 5 (December, 1989), 1106-
1109; Michael D. Bordo and Barry Eichengreen, eds., A Retrospective on the Bretton Woods System:
Lessons for International Monetary Reform, (Chicago: University of Chicago Press, 1993), v-xiii.
18 Michael J. Boskin, Chairman, President’s Council of Economic Advisers, The S&L Mess: What
Caused it and How it’s being fixed, Presented before Citizens for a Sound Economy Washington, D.C., 9
August 1990, George H.W. Bush Presidential Library: White House Office of Cabinet Affairs, Case Studies File,
Folder: S&L Strategy Group August 1990.
19 U.S. Senate Republican Policy Committee, Dealing with the S&L Bailout, William L. Armstrong,
Chairman, 101st Congress. 16 July 1990.

16
than S&Ls were collecting from interest payments. One must recognize that even Nixon and

LBJ’s executive interventions could not stop the rising insolvency crisis. What made matters

worse, was S&Ls that were insolvent but masked their problems by way of poor accounting

methods. These questionable banking records were possible because of the lax enforcement

protocols within the FHLBB.20

Another remnant of the 1933 banking act was Regulation Q. This regulation limited the

interest rates that S&Ls were allowed to offer on savings accounts: 5.5%. However, treasury

bills were yielding over 8% in 1970 and 15% by 1980. To buy a treasury bill requires $10,000,

thus many depositors who could afford the price tag withdrew from their S&Ls. The richer

depositors who left the S&L industry during these years left individual S&Ls with less wealthy

depositors and less cash flow for new loans. The Federal Reserve realized how the interest

yields in treasury bills attracted only individuals who had the $10,000 to buy in, so the Reserve

Fund created money market mutual funds that allowed the less wealthy to pool their money. The

process of moving low yielding savings accounts to higher yielding money market funds is

known as disintermediation. However, the S&L industry could not compete with the rising

interest yields; they were capped. Individual S&Ls slowly moved to insolvency.21

Even with the enormity of the escalating crisis. President Jimmy Carter and his cabinet

agreed deregulation of the thrift industry would best serve the situation. This was one of the
20 Michael J. Boskin, Chairman, President’s Council of Economic Advisers, The S&L Mess: What
Caused it and How it’s being fixed, Presented before Citizens for a Sound Economy Washington, D.C., 9
August 1990, George H.W. Bush Presidential Library: White House Office of Cabinet Affairs, Case Studies File,
Folder: S&L Strategy Group August 1990.
21 Kirby R. Cundiff, “Monetary Policy Disasters of the Twentieth Century,” The Freeman Online 57,
no.1 (January, 2007). 6-8; U.S. Government Printing Office, Part 217: Prohibition against the Payment of
Interest on Demand Deposits (Regulation Q), Electronic Code of Federal Regulations, Available On-Line,
http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&tpl=/ecfrbrowse/Title12/12cfr217_main_02.tpl; David H. Pyle,
“The Losses on Savings Deposits from Interest Rate Regulation,” School of Business Administration
University of California, Berkeley, Available On-line,
http://www.haas.berkeley.edu/groups/finance/WP/rpf018.pdf.

17
greatest blunders of the entire S&L crisis. The S&L industry had gone full circle. In Carter’s

defense, deregulation did seem to be the only option aside from additional government monies

that would cause tax increases. From the early 20th century loosely-watched thrifts developed

their communities. The Great Depression forced early thrifts into insolvency fallout by the early

1930s. The federal government stepped in with Hoover and FDR establishing a possibly too

firm grip on the S&L industry. Then for three decades, nothing happened -- or at least on the

surface.

The eventual bailout in 1989 could have been implemented with greater success

sometime in the 1960s. The evidential problems with the S&L industry during this decade were

new, and a greater awareness of the complications would have allowed for a remodeled S&L

structure years before individual S&Ls became desperate. From this angle, deregulation in

1980-1982 only exacerbated the core problem with the S&L industry: they could not compete

with high interest yields by only offering low-interest mortgages and savings accounts.

However, such practices were all the bankers in S&Ls knew.

18
Risky Business

The 1980 deregulation of the S&L industry allowed corporate leaders to have free reign

on short-term, high-return, but high-risk endeavors. In addition to deregulation, federal

insurance on S&Ls increased 150%. This was another poor decision. S&Ls fell to insolvency in

historic numbers, and Congress increased the amount of savings insurance. A first attempt at

aiding federal bank regulators by expanding available aid was in 1981. The bill passed through

the House, but the Senate never voted.22 Deregulation was a last effort to help the S&L industry

fix itself. After all, the majority of the debate at the time focused on S&Ls’ inability to compete.

However, the ability to compete ended up as a double-edged sword.

In the late 1970s, prime interest rates hit 21%. However, Regulation Q still limited

deposit interest and more prospective investors bypassed S&Ls in favor of Treasury bills and the

growing commercial real estate market. On a mark-to-mark basis, hundreds, if not thousands of

individual S&Ls were bankrupt. Thus, in 1979, President Carter formed a task force that

concluded regulation was the best course of action. The Depository Institutions Deregulation

and Monetary Control Act (DIDMCA) passed congress in 1980. DIDMCA provided for a

phased elimination of Regulation Q in hopes of attracting depositors back into S&Ls who could

then offer higher yield returns. Additionally, Carter’s act allowed federally-chartered thrifts to

engage in commercial lending, which was the largest growing market in 1980. Of most

significance, was how DIDMCA increased FSLIC insurance on deposits from $40,000 to

$100,000. These drastic changes in regulations forced the FHLBB to permit expansion of S&Ls

beyond a certain comfort level.23

22 Savings and Loan Chronology, White House Prep Copy. George H.W. Bush Presidential Library:
White House Office of Cabinet Affairs, Case Studies File, Folder: S&L Strategy Group October 1990.
23 Briefing Material: The Savings and Loan Crisis, George H.W. Bush Presidential Library: White
House Chief of Staff Collection, John Sununu Files, Box 86, Folder: Savings and Loan Industry (1990), 1-3.

19
 Despite the efforts by Carter and DIDMCA, interest rates continued to clim, and savings

institutions continued to lose money. Some estimated that up to two-thirds of the S&L industry

was insolvent by 1982. President Ronald Reagan responded in 1982 with the signing of the

Garn-St. Germain Act. This legislation furthered the deregulation motion started by DIDMCA

two years earlier. First, it gave regulators “new emergency powers to deal with insolvent

institutions.” For instance, allowing S&L regulators to arrange for interstate acquisitions of

weaker S&Ls. Secondly, Garn-St. Germain Act gave agencies new powers to provide financial

assistance to failing thrifts. Finally, the act authorized federally-chartered institutions “to engage

in several additional bank-like powers, such as the authority to make a limited amount of

commercial loans.” The S&L industry finally received fulfillment of its requests. It is important

to recognize that Garn-St. Germain only targeted federally-chartered thrifts, not state-Chartered

institutions. However, a number of State laws gave even broader powers to their S&Ls,

“Including the authority to make direct equity investments in speculative ventures, from wind

mill farms, to hamburger franchises.” California, Texas, and Florida deregulated their thrifts

before Congress passed Garn-St. Germain even. The mistakes were apparent by 1988 and 1989:

over three-fourths of FSLIC losses were the result of mismanaged State-chartered thrifts.24

Merely two years after Garn-St. Germain, the FHLBB attempted to address ongoing

abuses by individual S&Ls. However, many in Congress felt the FHLBB was acting

prematurely, over half of the members of the House of Representatives co-sponsored the bill to

delay the FHLBB in 1984. A year later, in 1985, the FHLBB requested $15-20 billion to aid the

FSLIC fund. Congress underestimated the amount of insolvent institutions, and deregulation as

a cure was not working. In 1987 the Senate and House Banking Committees recommended re-

24 U.S. Senate Republican Policy Committee, Dealing with the S&L Bailout, William L. Armstrong,
Chairman, 101st Congress. 16 July 1990, 1-2.

20
funding plans for the FSLIC that totaled only $7.5 billion and $5 billion respectively. Congress

aimed to prevent the FHLBB from closing insolvent thrifts, even as late as 1987. Essentially, the

end $10.8 billion funding amount was a form of forbearance. The final legislation actually

authorized S&Ls to use “phony” accounting techniques to “artificially bolster their capital, and

specifically authorized the use of ‘goodwill’ in meeting capital requirements.” Furthermore, the

forbearance funding required the FHLBB to allow tangibly insolvent institutions to remain open

if “their financial condition resulted from loans in economically depressed regions.” This was

another example of how slow the government was with reacting to changing climates. Money

was released to the FHLBB and FSLIC eighteen months after requested on 29 July 1987. It was

literally too little, too late. The late funding bill was the target of criticism in 1989 when

committee members tried to blame the S&L crisis on members of the opposite parties.25

Vice President George H.W. Bush led a commission on Regulations of Financial Services

in 1984. The commission produced its report, entitled Blueprint for Reform. Bush’s task

group made recommendations for the Reagan administration along the same lines as former

reports had since Kennedy’s commission in 1962. Bush called for more effective regulation

through the elimination of overlapping regulatory structures, uniform capital and accounting

standards aimed at ending low capital levels and “dubious accounting standards in the thrift

industry.” Furthermore, Bush recommended that the FDIC and FSLIC institute systems of risk-

based insurance premiums. Finally, the report requested that a portfolio test be taken in order to

determine “whether a thrift industry is in fact essentially engaged in traditional specialized thrift

activities. Those not meeting the test would be required to be regulated as a bank and obtain

25 Ibid, 3-4.

21
deposit insurance from the FDIC.” 26 The mass insolvency issue was not cured in the 1980s. Not

on Reagan’s watch, especially as the deficit had doubled from 1980-1988. The responsibility to

resolve the S&L crisis fell to the former vice president task group chair, George Bush.

26 Briefing Material: The Savings and Loan Crisis, George H.W. Bush Presidential Library: White
House Chief of Staff Collection, John Sununu Files, Box 86, Folder: Savings and Loan Industry (1990), 4.

22
FIRREA & The Cost to Taxpayers

President Bush asserted his intention to permanently fix the S&L crisis in February 1987,

only eighteen days after his inauguration. The Financial Institution Reform Recovery and

Enforcement Act (FIRREA) was the comprehensive solution. FIRREA was introduced more as a

cleanup rather than a bailout. However, it was a legitimate bailout because tax payers did front

much of the burden throughout the early 1990s. The near $200 billion bailout price tag was not

only forced onto Bush by decades of neglect, myopia, and mismanagement, but it also forced

Bush to eat his own words with his 1988 campaign slogan, “Read my lips, no new taxes.” In a

period of large deficits, Bush aimed to balance the budget and the S&L bailout did not allow him

to keep his promise.

The primary focus of FIRREA was to protect depositor savings. Thousands of S&Ls

were insolvent by 1989, but FSLIC insured up to $100,000 on each deposit thanks to President

Carter ten years previously. The figures in November 1990 stated “approximately 10 million

deposit accounts and $100 billion in deposits were protected” by FIRREA. FIRREA instituted

tougher capital standards that required thrift owners to increase capital at risk. Seventy-five

percent of all thrifts with $750 billion in deposits were operating on a solvent basis, however, by

November 1990. Bush also had the Department of Justice pursue major thrift crimes along with

the Federal Bureau of Investigation.27

Misinformation about the total cost worried many citizens in 1989 and 1990. Published

estimates placed the cost between $100-$500 billion. The Resolution Trust Corporation (RTC),

27 Oversight Board, Resolution Trust Corporation, Bush Administration’s S&L Cleanup Goals and
Results, Current as of 13 November 1990. George H.W. Bush Presidential Library: White House Office of
Records Management, Folder: S&L Strategy Group, August 1990, OA/ID 03565 [1 of 4].

23
an agency created by Bush in 1989 to aid in closing insolvent thrifts, finished its work in 1995.

By then, 747 thrifts in addition to the 296 formerly closed by the FSLIC were gone. From 1

January 1986 through 1995, federally-insured S&Ls declined from 3,234 to 1,645, roughly by 50

percent. How much did this cost the taxpayers? Estimates were based on varied information and

statistics perpetuating a public outcry. The Department of the Treasury initially reported a $50

billion expected cost to solidify the S&L industry. This rose to a range of $100 billion to $160

billion in June 1991. The rising costs made it difficult to comprehend for Representatives and

citizens. Analysts independent of the Treasury Department based their estimated on Thrift

Financial Report data that was inaccurate, or even outdated. It was also likely that no one

expected a 50% failure of the entire industry in 1989. The Bush administration expected thrifts

with assets of over $400 billion to be turned over to the RTC. Misinformation abounded because

such a large bailout had never been executed in American history. Furthermore, some estimates

included expected interest payments over a few years which compounded the number

significantly. Ultimately, the final number indicated that all direct and indirect losses totaled

$152.9 billion. The thrift industry itself covered 19% of that figure, leaving the burden of $123.8

billion to the taxpayers.28 The S&L bailout of 1989-1995 was the largest fund of its kind to

bailout an entire industry and its federal insurance corporation until 2008.

28 Curry and Shibut, “The Cost of the Savings and Loan Crisis: Truth and Consequences,” 26-33.

24
Conclusion

The Savings and Loan Crisis and subsequent bailout were the direct results of Federal,

State, and Corporate myopia, neglect, and mismanagement. The federal S&L industry as set up

in the early 1930s remained constant through a tumultuous five decades. The bailout in 1989

was not popular for any politician in Washington and in part forced Bush to retract on his

promise to avoid new taxes. Why did the problem fall to Bush’s administration? Because

successive administrations did not want to have their tenure tarnished with the inevitable cost

and publicity of a failed institution. Nevertheless, since no overhaul of the system took place,

the federal S&L industry was insolvent at its inception in 1932.

The thrift industry before 1932 was a community-based effort to develop real estate.

Though the industry was not hit as hard as commercial banks with the 1929 market crash, it still

succumbed to the will of its depositors and many individual thrifts closed. Presidents Hoover

and FDR established a pyramid structure to better protect and insure the industry with a key

limitation: that it largely deal with low interest, long term home mortgage loans. The early

federal S&L system worked throughout the remainder of the Great Depression but met

increasingly competitive markets and inflation in the postwar years. Administrations in the

1960s and 1970s were more than aware of the problems with the S&L industry, but did not act

until Carter in 1980 who deregulated the industry and hiked up federal insurance amounts to

bolster confidence in thrifts. All of his efforts backfired. Deregulation was too loose and the

already weak FHLBB had little enforcement protocols to deal with surmounting troubles.

Though the S&L crisis was not an issue in the 1988 presidential election campaign, Bush

must have considered the problem significant enough to deal with early in his administration as

25
shown by his announce eighteen days after his inauguration. Had Bush maintained the status

quo of neglect and ignorance as shown by earlier administrations, who know what may have

come to pass. Nonetheless, for acting on a national crisis thus forcing Bush to recall his no new

taxes pledge, he was denigrated. One can make the case that the S&L bailout was a major factor

in his failure to be reelected in 1992. From any vantage, the S&L crisis was a national tragedy

on many fronts. First, we see the inability of a federally-regulated institution to last. Secondly,

utter disbelief in the U.S. government that began with Vietnam fomented a revived sense of

incredulity towards Washington, State boards, and the S&L industry as a whole. Finally, one

sees how an industry-wide bailout became commonplace.

26
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29