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The Savings and Loans Bailout

The S&L Crisis: A Chrono-Bibliography
The Federal Deposit Insurance Corporation (FDIC)
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Despite the enormity of Spain’s problem, this crisis is a refreshing change
It doesn’t involve wholesale deposits, collateralised debt obligations, or structured investment vehicles – or even an investment bank
It is the kind of fiasco that always brings down banks
Over-leverage, a commercial property bubble, poor supervision and hubris

John Gapper, Financial Times 30 May 2012

The next administration — whether it's McCain or Obama — will be forced to restore the Resolution Trust Corp., which was created in 1989 to dispose of assets of insolvent savings and loan banks.
The effects on the dollar, however, will be catastrophic.
Mike Whitney 6 June 2008

In America bank deposits and company pensions are protected through sector-wide schemes, funded by a levy on those that participate.
The problem, as the Federal Deposit Insurance Corporation (FDIC) and the Pension Benefit Guarantee Corporation (PBGC) have found, is that banks and pension funds engage in herd-like behaviour.
Buttonwood, The Economist print, September 4th 2008

Here are some facts on the infamous S&L scandal of the eighties which we are still paying for
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The rapid unravelling of the US subprime mortgage market reminds us of... the costly savings and loan crisis of the early 1980s
Desmond Lachman, Financial Times August 3 2007

At the heart of today’s subprime crisis is the unfortunate interaction of financial innovation gone awry, inept market regulation and a failure of the rating agencies to exercise their fiduciary responsibility to protect the average investor.

It began with the increased securitisation of mortgage market loans in the late 1990s. This increasingly separated the originator of mortgage loans from their final outcome. It also gave the originator every incentive to push out mortgage loans at an increasing pace without regard for how they would perform over the longer term.

Financial market innovation alone could not have spawned the phenomenal growth in the subprime market. Rather, what was needed was for both federal and state regulators, including the Federal Reserve, to be asleep at the wheel as loans totalling $1,300bn were issued – the equivalent of 10 per cent of US gross domestic product.

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Macho men crying 'Mommy'
The financial world: It's populated with rich, hypocritical whiners. Wall Street, the hedge-fund community and their lap dogs in the news media continually brag about how much they love capitalism and free markets.
Yet when the creative-destruction component of capitalism rears its ugly head, they want the central planners to bail them
Bill Fleckenstein, CNBC 27/8 2007

I have written plenty over the years about how financial firms have been allowed to essentially make up their numbers. But on Wednesday, a Bloomberg story by Jonathan Weil ("Wells Fargo Gorges on Mark-to-Make-Believe Gains") makes it appear I have not been skeptical enough about the ability of these firms to create illusions.

The Financial Accounting Standards Board last September approved a new, three-level hierarchy for measuring ``fair values'' of assets and liabilities, under a pronouncement called FASB Statement No. 157, which Wells Fargo adopted in January.
Level 1 means the values come from quoted prices in active markets. The balance-sheet changes then pass through the income statement each quarter as gains or losses. Call this mark-to- market.
Level 2 values are measured using ``observable inputs,'' such as recent transaction prices for similar items, where market quotes aren't available. Call this mark-to-model.
Then there's Level 3. Under Statement 157, this means fair value is measured using ``unobservable inputs.'' While companies can't actually see the changes in the fair values of their assets and liabilities, they're allowed to book them through earnings anyway, based on their own subjective assumptions. Call this mark-to-make-believe.

So in addition to what we already know -- that the murky world of structured credit had thrived on a mark-to-model fantasy -- we now learn that financial institutions leveraged to the eyeballs enjoy the ability to mark themselves to whatever they theoretically think they ought to be allowed to declare.

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Over the past 20 years major financial disruptions have taken place roughly every three years
Financial crises differ in detail but, just as there are plot cycles common to literary tragedies, they follow a common arc.
Lawrence Summers, Financial Times August 27 2007

Hedge Funds


The Savings and Loans Associations Bailout
Asset bubbles - in the stock exchange, in the real estate or the commodity markets -
invariably burst and often lead to banking crises.
One such calamity struck the USA in 1986-1989.
Sam Vaknin, Ph.D. Global Politician 4/24/2005

The savings and loans association, or the thrift, was a strange banking hybrid, very much akin to the building society in Britain. It was allowed to take in deposits but was really merely a mortgage bank. The Depository Institutions Deregulation and Monetary Control Act of 1980 forced S&L's to achieve interest parity with commercial banks, thus eliminating the interest ceiling on deposits which they enjoyed hitherto.

Interest rate volatility created a mismatch between the assets of these associations and their liabilities. The negative spread between their cost of funds and the yield of their assets - eroded their operating margins. The 1982 Garn-St. Germain Depository Institutions Act encouraged thrifts to convert from mutual - i.e., depositor-owned - associations to stock companies, allowing them to tap the capital markets in order to enhance their faltering net worth.

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The Big Fix:
How an Unholy Alliance of Politics and Money Destroyed America's Banking System,
by James Ring Adams, New York: John Wiley and Sons, 308 pages.

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