The Savings and Loans Crisis of the 1980’s and early 90’s created the greatest banking collapse since the Great Depression in 1929. Over half the S & L’s failed, along with the FSLIC fund that was created to insure their deposits.
From 1986 to 1989, the Federal Savings and Loan Insurance Corp. (FSLIC) closed 296 institutions with assets totaling $125 billion. With the creation of the Resolution Trust Corp. (RTC) in 1989 an additional 747 thrifts with assets totaling $394 billion were closed. That is a combined total of $519 billions in assets that contributed to a massive restructuring of the number of firms in the industry as stated by Curry & Shibut (2000).
A resolution passed by Congress was the Financing Corp. (FICO), created in 1987 to provide funding to the FSLIC. FICO contributed $8.2 billion in financing. Then came the enactment of FIRREA, The Financial Institutions Reform, Recovery and Enforcement Act by Congress in 1989, which began the taxpayer’s involvement. The large number of failures overwhelmed the resources of the FSLIC, so US taxpayers were required to back up the commitment extended to insured depositors of the failed institutions. As of Dec. 31, 1999, the thrift crisis had cost taxpayers approximately $124 billion. ( Curry et al. 2000)
FIRREA abolished the FSLIC and transferred its assets, liabilities and operations to the newly created FRF, Federal Resolution Fund, to be administered by the FDIC. The remainders of the monies were from the US Treasury and the Federal Home Loan Banks.
Instead of the current administration making a swift and decisive action to deal with these insolvent institutions, there were many bureaucratic attempts to delay action so that the problems would not become a political issue on their watch.
The following causes all contributed to a lack of net worth for many institutions:
Deregulation of the S & L’s created the need to take on riskier investments, since the investments were now government insured, the institution would be saved. By 1983, 35% of the country's S&L's weren't profitable and 9% were technically bankrupt. As banks went under, the state and Federal insurance began to run out of the money needed to refund depositors. However, S&L's remained open, making bad loans and the losses kept mounting. (Amadeo, Para. 6 & 7)
The Tax Reform Act of 1986 removed many tax shelters for real estate investments. It reduced the value of these investments by limiting the amount of losses to be deducted from gross income. This encouraged the holders of loss-generating properties to unload them, which further contributed to the problem of sinking real estate values.
Non-qualified real estate lending contributed to the demise. Taking advantage of the real estate boom and high interest rates of the late 70’s and early 80’s, led S & L’s to lend far more money than was judicious.
According to William Seidman (1996), prior to the 1980’s US banks’ real estate loans were less...