Savings And Loan Crisis - S&L

What is 'Savings And Loan Crisis - S&L'

The savings and loan (S&L) crisis began under the volatile interest rate climate of the 1970s when vast numbers of depositors withdrew their money from S&L institutions and deposited them in money market funds. This increased interest rates because the funds were not governed by Regulation Q.

BREAKING DOWN 'Savings And Loan Crisis - S&L'

Once the regulations were loosened, S&Ls began engaging in high-risk activities to cover losses, such as commercial real estate lending and investments in junk bonds. Depositors in S&Ls continued to funnel money into these risky endeavors because their deposits were insured by the Federal Savings and Loan Insurance Corporation (FSLIC).

Widespread corruption and other factors led to the insolvency of the FSLIC, the $124 billion bailout of junk bond investments and the liquidation of more than 700 S&Ls by the Resolution Trust Corporation.

The S&L Crisis is arguably the most catastrophic collapse of the banking industry since the Great Depression. Across the United States, more than 1,000 S&Ls had failed by 1989 essentially ending one of the most secure sources of home mortgages.

The Texas Situation

The crisis was felt twice over in Texas where at least half of the failed S&Ls were based. The collapse of the S&L industry pushed the state into a severe recession. Bad land investments were auctioned off, causing real estate prices to plummet. Office vacancies rose significantly, and the price of crude oil dropped by half. Texas banks, such as Empire Savings and Loan, took part in criminal activities that further caused the Texas economy to plummet.

The Federal Savings and Loan Insurance Corporation and State-run Funds

The FSLIC was established to provide insurance for individuals depositing their hard-earned funds into S&Ls. When S&L banks failed, the FSLIC was left with a $20 billion debt that inevitably left the corporation bankrupt. The defunct company is similar to the Federal Deposit Insurance Corporation (FDIC) that oversees and insures deposits today.

During the S&L crisis, which did not effectively end until the early 1990s, the deposits of some 500 banks and financial institutions were backed by state-run funds. The collapse of these banks cost at least $185 million and demolished the concept of state-run bank insurance funds.

The Keating Five Scandal

During this crisis, five U.S. senators – the Keating Five – were investigated by the Senate Ethics Committee due to the $1.5 million in campaign contributions they accepted from Charles Keating, the head of the Lincoln Savings and Loan Association. These senators also pressured the Federal Home Loan Banking Board to overlook suspicious activities in which Keating had participated.