Using Wiki? LOL.. you know anybody can change that right?

FDIC disagrees with Wiki.

The story

The S&L industry was an unlikely candidate for the nation's largest-ever financial scandal. At its roots it was a conservative residential mortgage sector, surrounded by legislation put in place in the 1930s to promote home ownership.

The sector had its own regulator, the Federal Savings & Home Loan Banking Board, and its own insurance fund to protect depositors, the Federal Savings and Loan Insurance Corporation (FSLIC), which was funded by the S&L industry and backed by the US taxpayer.

But the sleepy S&L industry was the child of a particular regulatory and interest rate environment, and between 1960 and 1980 that environment changed out of recognition. From the early 1960s there were growing worries that the S&L industry was not competing effectively for funds with commercial banks and securities markets, leading to large swings in the amount of money available for mortgage lending. But the real threat emerged in the 1970s as inflation joined forces with the deregulation of US interest rate markets to produce an increasingly volatile interest rate market.
Sharp price movements demand new risk management structures, skills and tools. But as interest rates became more volatile, particularly in the late 1970s, the S&L industry failed to tackle the risk inherent in the funding of long-term, fixed-interest mortgages by means of short-term deposits.

One problem was that regulation intended to help the S&L sector in the 1960s had put a ceiling on the interest rate that S&Ls could offer to depositors. This measure succeeded for a while in dampening competition for depositor funds between banks and S&Ls. But as new money market funds began to compete fiercely during the 1970s for depositors' money by offering interest rates set by the market, S&Ls suffered significant withdrawal of deposits during periods of high interest rates - a process known as disintermediation.

The biggest problem, though, was more fundamental. When S&Ls tried to compete for funds by offering relatively high rates or - after deposit interest rate ceilings were eliminated between 1980 and 1982 - by offering interest rates in line with or above market rates, an unsustainable gap opened up between the cost of their funding liabilities (short-term interest rates) and the income generated by their assets (long-term, fixed-rate mortgage repayments).

Worse, as interest rates moved higher, the economic value of existing S&L portfolios of long-term, low interest rate residential mortgages moved sharply lower, threatening institutions with insolvency.

The trigger for the closing shut of this asset/liability trap was the shock rise in oil prices in 1979, pushing up inflation and headline interest rates around the world. By 1980, with interest rates on US government debt hitting 16%, many S&Ls had already been fatally wounded.

Luckily for the owners of thrifts, regulators in the early 1980s lacked the political, financial or human resources to close large numbers of institutions. Rigorous enforcement would have meant paying out much more money to insured depositors than was held in the industry-funded FSLIC insurance fund. It would also have meant working with literally hundreds of insolvent institutions, and overcoming numerous political obstacles at a federal and state level to radical S&L industry reform.

Instead, between 1980 and 1982, regulators, industry lobbyists and legislators put together various legislative and regulatory mechanisms to postpone the threatened insolvency of the sector in the hope that interest rates would quieten down and S&Ls would be able to engineer themselves back into profitability.

In particular, from the early 1980s, S&Ls began to both lend to real estate developers and to invest in real estate, construction and service companies. In key regions, such as Texas and Florida, S&L lenders competed with other lenders such as commercial bankers to fuel a real-estate boom, as US investors queued to take advantage of a 1981 change in federal tax laws that rewarded investments in construction.

1960s: Congress applies Regulation Q to the S&L industry to put a ceiling on the interest rate that S&Ls can pay to depositors.

1970s: Congress deregulates interest rates opening up potential asset/liability and interest rate risks for S&Ls, but politicians fail to act on various studies and commissions recommending a mix of consolidated supervision and liberalised regulation of the sector.

1979-1982: Sharply raised interest rates lead to an asset/liability crisis at many S&Ls that is at its worst in 1980 to 1982.

November 1980: Following the March enactment of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), which allowed the Bank Board to ease the previous statutory 5% of net worth requirement to anywhere between 3% and 6%, FHLBB eases 'net worth' rules to only 4% of insured accounts. DIDMCA also raises the bar on federally insured deposits from $40,000 to $100,000 and allows some S&Ls to put money into property development and other risky activities.

1981: Changes in federal tax regulations under the Economic Recovery Tax Act of 1981 help spark the beginnings of the real-estate boom of the early to mid 1980s.

Take Gander

1978--Financial Institutions Regulatory and Interest Rate Control Act of 1978 enacted. Weak version of previous recommendations. Allows S&Ls to invest up 5% of assets in each of land development, construction, and education loans.

1979--Doubling of oil prices. Inflation moves into double digits for second time in five years.

1980-1982 Statutory and regulatory changes give the S&L industry new powers in the hopes of their entering new areas of business and subsequently returning to profitability. For the first time, the government approves measures intended to increase S&L profits as opposed to promoting housing and homeownership.


March, 1980--Depository Institutions Deregulation and Monetary Control Act (DIDMCA) enacted. The law is a Carter Administration initiative aimed at eliminating many of the distinctions among different types of depository institutions and ultimately removing interest rate ceiling on deposit accounts. Authority for federal S&Ls to make ADC (acquisition, development, construction) loans is expanded. Deposit insurance limit raised to $100,000 from $40,000. This last provision is added without debate.
November, 1980--Federal Home Loan Bank Board reduces net worth requirement for insured S&Ls from 5 to 4 percent of total deposits. Bank Board also removes limits on the amounts of brokered deposits an S&L can hold.

FDIC still disagrees with you.


Hmm, seems that Wiki is missing the bigger picture. The Regulations that were taken away in the 70s. Who was President then? Jimmy Carter.

__________________
Pioneers are walking all around singing songs about Lenin and they should be shot for it.

Handlebars

"If you are looking for the guilty, you need only look into a mirror"- V

It is inaccurate to say that I hate everything. I am strongly in favor of common sense, common honesty, and common decency. This makes me forever ineligible for public office.
H. L. Mencken

come on you know you wanna play football..

Beagán agus a rá go maith.

Economic Left/Right: 3.75
Social Libertarian/Authoritarian: -2.87

Not at all:

As anyone can see, most of the damage was done in 1982.

You see where it says "in the early eighties?" Do you know what that means? Do you need a remedial reading lesson?

Once again I have to repeat the obvious...

__________________
I'm Proud I never Voted For Bush!



PAT PAULSEN FOR PRESIDENT

As anyone can see, if was a failure to regulate the industry, led by the Reagan administration, that caused the massive losses in the S&L industry...in other words, Reagan did the wrong thing...

See, Reagan caused the mess. Need more proof?


What's that sound? Why it's your facts being flushed down the old toilet...

__________________
I'm Proud I never Voted For Bush!



PAT PAULSEN FOR PRESIDENT

You love cherry picking evidence. I am just going to call you Bush the 3rd.

Actions in the 70s lead to higer interest rates in the 80s. Putting S&L in a bind as they wanted to compete with others so they always gave 5 to 10% above the Interest rate to get buyers.

If there was no collaspe in the Economy in the 70s, none of this would have happened.


As you said early in this topic.

You now understand why nobody wants to raise interest rates. As Interest Rates screwed the S&L in the late 70s and early 80s. FDIC pointed this out in 1980 when it was pushing Carter to regulated it and he said no. Reagan agreed to regulate it because people were going to lose a Billions over it.

But you still don't get it because you want to raise Interest Rates now. You want another "Savings and Loans". Raising Interest rates would kill the backs of Americans overnight. It won't be 4 to 8 Million Americans losing their homes.. but 10 to 20 Million and alot of Banks will default, so will those who back the loans such as AMBAC.

A few years of inflation is not as bad as what will happen if you raise Interest rates.

I was slowly walking you through this. So you would understand cause and effect, but you did not get this. So now that I have explained it to you.. don't rush to assumptions about whats going on.

__________________
Pioneers are walking all around singing songs about Lenin and they should be shot for it.

Handlebars

"If you are looking for the guilty, you need only look into a mirror"- V

It is inaccurate to say that I hate everything. I am strongly in favor of common sense, common honesty, and common decency. This makes me forever ineligible for public office.
H. L. Mencken

come on you know you wanna play football..

Beagán agus a rá go maith.

Economic Left/Right: 3.75
Social Libertarian/Authoritarian: -2.87

On a more intellectual note, those that blame Carter for the S&L Debacle because of deposit insurance, please explain why the regular banks, which also had the very same deposit insurance, didn't destroy themselves?


Get it? If the deposit insurance caused the S&L's to fold, why didn't it cause the regular banks to fold as well??? In other words, such arguments that try to pin Reagan's mess on Carter aren't worth spit...

__________________
I'm Proud I never Voted For Bush!



PAT PAULSEN FOR PRESIDENT

Just answer the question:

If the deposit insurance caused the S&L's to fold, AS YOU CLAIM, why didn't it cause the regular banks to fold as well???

Well, we're all waiting....

__________________
I'm Proud I never Voted For Bush!



PAT PAULSEN FOR PRESIDENT

I'm waiting Finny...we're all waiting...everyone is watching...

You claimed that Carter was responsible for the S&L Debacle because of the change in deposit insurance for S&L's in 1980. Okay, explain why deposit insurance didn't cause the regular banks to fail?

Waiting...waiting...waiting...

__________________
I'm Proud I never Voted For Bush!



PAT PAULSEN FOR PRESIDENT

I can tell you why.

The Fed allowed the S&L in the 70s to pay above Interest Rates in hopes off setting how much they were loaning by producing more reasons to save with S&Ls over Banks (banks had to keep with the Fed Rates). This failed due to not having the ability to offer checking accounts, you had to go to the S&Ls and withdraw the money. Interest rates kept going up and S&L had to beat the Banks at the Rates so they added outrageous interest for saving.. sometimes 15% to 25% over Fed Rates. (All this was done was during Carter).

So what happen was people were collecting Interest, but nobody was putting more into S&L (new customers or customers). So It left them with a loss of income. At the same time they were loaning. This got worse because there was very few oversight. It just kept building and building, some cooking the books and it looks all good.

It looked good during the 80s because there was a good economy and they "covered" because people weren't defaulting on loans. When things started slow down it started to show.

Samething is happening now with the Banks..

Oh btw.. Banks were effected during the S&L as well.. just not as much.

Great Article about it from Nov 1993

__________________
Pioneers are walking all around singing songs about Lenin and they should be shot for it.

Handlebars

"If you are looking for the guilty, you need only look into a mirror"- V

It is inaccurate to say that I hate everything. I am strongly in favor of common sense, common honesty, and common decency. This makes me forever ineligible for public office.
H. L. Mencken

come on you know you wanna play football..

Beagán agus a rá go maith.

Economic Left/Right: 3.75
Social Libertarian/Authoritarian: -2.87

Here is a website with the history of the S&Ls

FDIC: The S&L Crisis: A Chrono-Bibliography

The problem with S&L's is they are a bad business model. Of course they werent started as a large profit business. They were created to help people buy homes. It wasnt until republicans decided that they should be more about profit then homes that they started on the downward slide that caused the major problems.

Also here is a website that explains the Bush families involvement with the S&L scandels.

The Bush family and the SL (Savings and Loan) Scandal

Waiting waiting waiting...

Its a forum, people are allowed to step away from their computer.
If he does you can just wait, it does not portray a bad picture of anyone if the response is not immediate.