S & L CRISIS & BAILOUT.   Term Paper ID:28614 Click to get this paper

Essay Subject: Analysis of 1980s-90s financial disaster of thrift industry. Background, deregulation effects, causes of crisis, bailout by Congress.... More...

6 Pages / 1350 Words 3 sources, 10 Citations, APA Format $24.00 Return to List of Papers

Paper Abstract: Analysis of 1980s-90s financial disaster of thrift industry. Background, deregulation effects, causes of crisis, bailout by Congress. Paper Introduction: THE SAVINGS AND LOAN CRISIS AND BAILOUT Introduction The savings and loan crisis in the 1980s and 1990s was one of the worst financial disasters that ever struck this country. The debacle was caused by many forces working over a long period of time. For most of its history the thrift industry was a remarkable success. The core operation of the individual S&L was the collection of deposits, upon which interest was paid, and the loan of this money in twenty to thirtyyear mortgages to finance home building. For the most part, depositors kept their money in the S&L for a long period of time. Since the rate of interest paid depositors was lower than the interest charged mortgage holders, the S&L made money (Warf, Cox, 1996, 135). Background Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. A total of 747 institutions were sold or paid off by the RTC as ofOctober 23, 1995. THE SAVINGS AND LOAN CRISIS AND BAILOUTIntroduction The savings and loan crisis in the 198 s and 199 s was one of theworst financial disasters that ever struck this country. It is a cushion to absorblosses. S&Ls could increase their commercialloans as a percentage of assets and provide 1 % financing of appraisedvalue. Many reasons were given for this so-calledregulatory forbearance, but of major importance was the prevailinginclination in the Reagan administration to soften the impact of federalregulations generally. Federal regulators havealso prosecuted accountants and lawyers for alleged malfeasance (Madura,Wiley, 2 , 165). The debacle wascaused by many forces working over a long period of time. FHLBB supervisorswere excessively hesitant to take quick and tough actions about importantirregularities in the S&Ls. Erosion of the Net Worth Requirement: Net worth is the equity whichowners of an S&L have in the enterprise. (Madura, Wiley, 2 , 145) The law sought to do four basic things: (1) ease the large financialdeficit of the FSLIC, (2) reconstruct the regulatory framework of thethrift industry, (3) make the thrift industry operate more like thecommercial banking industry, and (4) give the federal banking agenciesstrong powers over financial institutions. "The Savings and Loan Debacle;"in: "Business, Government and Society, 8th Edition;New York, Simon & Shuster. Germain Depository Institutions Act of 1982provided a statutory basis for the FHLBB to expand significantly theinvestment opportunities for S&Ls. 27, No. The Federal Home LoanBank Board (FHLBB) was created to supervise the new system. 35 No. (1997). "Spatial dimensions of the savingsand loan crisis;" Growth and Change; Spring, Vol. This system operated effectively until the196 s, when new problems appeared (Steiner, Steiner, 1997, 121). Keating, Jr.,owner of Lincoln Savings & Loan. States could charterS&Ls and the FHLBB was authorized to regulate them. Then interest rates began to rise and profitswere squeezed between the higher rates the S&Ls had to pay depositors andthe revenue from the lower rates paid by mortgage holders on loans mademany years before. Steiner, G.; Steiner, J. The Federal Savings andLoan Insurance Corporation (FSLIC) was established to insure depositorsagainst loss if an S&L failed. Theregulatory staff was reduced, salaries were lower than in competingfinancial institutions, and the best regulators left. S&L aggregate losses amounted to $4.6billion in 1981 and $4.1 billion in 1982. It was alsogiven the right to charter and regulate federal S&Ls. 3 Pg. Since the rate of interest paiddepositors was lower than the interest charged mortgage holders, the S&Lmade money (Warf, Cox, 1996, 135).Background In the Great Depression of the 193 s mortgage interest was inwidespread default and depositors withdrew their funds. Just the reverse happened: they loosened. (Madura, Wiley, 2 ,146-47) The Department of Justice has prosecuted hundreds of cases againstofficers and directors of failed S&Ls for fraud. From the end of World War II to the mid-196 's interest rates werestable and S&Ls prospered. ----------------------- 8 Accounting Flexibility: When losses mounted and eroded the net worthof many thrifts in 1981, the FHLBB introduced new accounting rules to helpS&Ls stay statistically within the rules. (1996). The core operation ofthe individual S&L was the collection of deposits, upon which interest waspaid, and the loan of this money in twenty- to thirty-year mortgages tofinance home building. It phased out interest rate ceilings; allowed thrifts to diversityinto areas heretofore forbidden, such as offering checking accounts; andraised the depositor guarantee to $1 , (Warf, Cox, 1996, 146). (Steiner, Steiner, 1997, 129-136)The Bailout On the day President Bush entered office he decided to dealforthrightly and quickly with a problem which had become a festering sorebecause of Reagan administration inaction. The net cost to thetaxpayer of the S&L debacle as of October 23, 1995, was $9 .1 billion(Steiner, Steiner, 1997, 137).Conclusion While it can be argued that criminals were let off easily and theirill-gotten riches insured by taxpayers, that the wrenching changes forcedby the bailout cost thousands of innocent people their jobs and careers,one need only look to the example of Japan to see the cost of doingnothing. Massive failuresresulted, and millions of depositors lost their savings in about 2, bankrupt S&Ls. The American Bankers Associationasserted that lowering the net worth requirement was the single mostimportant factor contributing to the wave of S&L failures after 1982.2. Failures of Government Supervision: One would expect that with thetypes of deregulation of the thrifts noted above, controls over theiroperations would tighten. C. The result was aserious decline in S&L profits. Originally S&Ls were required to have a net worth of 5 percent.The FHLBB asked the Congress to authorize a lower net worth to between 3and 6 percent for individual companies. To restrain this inflation, theFederal Reserve Board pursued a tight monetary policy, which lifted theprime interest rate in 198 to the unprecedented level of 15 percent. Congress passed the FinancialInstitutions Reform, Recovery and Enforcement Act (FIRREA) on August9,1989. Political influence was also a powerful restraint onregulators. The Bank HoldingCompany Act of 1956 was amended to permit bank holding companies to acquirehealthy savings associations. Thisleft $13.7 billion of assets (book value) to be sold. For the most part, depositors kept their money inthe S&L for a long period of time. For most of itshistory the thrift industry was a remarkable success. Thesewere unprecedented and dangerous expansions of lending capability. Thiscompared with a prime rate of 6.84 percent in 1976. Total asset sales and collections were $392 billion. References Madura, J.; Wiley, M. The widening ofpowers of thrifts attracted not onlyentrepreneurs who took risks, but financial pirates who used the permissivecontrol atmosphere to feed their greed by egregious, immoral, andfraudulent transactions. K.: (August 1, 2 "The Impact of the FinancialInstitutions Reform, Recovery and Enforcement Act On The Risk of SavingsInstitutions;" The Financial Review;Vol. The Garn-St. An example of this influence involved five senators whoaccepted substantial campaign contributions from Charles H. To save as many thrifts as possible the federal governmentestablished the Federal Home Loan Bank System to provide liquidity for themand guarantee the safety of deposits up to $5, . Mismanagement, Fraud, and Inadequate Internal Controls: It isdifficult to restrain outrage at the mismanagement, fraud, and lack ofinternal controls in S&Ls that cost taxpayers so much. Economic Recession: Consumer prices rose 11.2 percent in 1979, 13.5percent in 198 , and 1 .4 percent in 1981. It is noteworthy that as the thriftindustry's troubles mounted, political action committee (PAC) donations tokey members of Congress increased.5. Warf, Barney, Cox, J. Critics charged the RTC with selling assetsat bargain prices to individuals and companies who were knowledgeable aboutvalues and had the funds to purchase in huge amounts. As interest rates continued to rise the ceiling couldnot be sustained, and higher interest rates continued to reduce profits(Steiner, Steiner, 1997, 124).Expansion of Powers and Deregulation To help the S&Ls overcome the profit squeeze, the DepositoryInstitutions Deregulation and Monetary Control Act (DIDMC) was enacted in198 . Commercial loans up to 3 % of an S&Ls assets were permitted. It is calculated as the differencebetween asset value and liabilities of a company. The result is thatcapital is tied up supporting companies and projects that should not exist,while those companies that could lead the way to economic renewal andexpansion are denied the credit they need. 145-165. The Japanese banking system is even more rotten than anythingthat happened here with the savings and loan debacle, yet the Japanesegovernment refuses to admit the problem exists, and allows banks tocontinue to list property that is essentially valueless on their profit andloss statements to maintain "face," and so that the Liberal DemocraticParty can maintain control of the Japanese government. 2 Page: 135-156. For example, thrifts werepermitted to defer losses on loans to show better profits. Of importance, too, is the likelihood that the higher the equitythe more attention owners will pay to the successful operation of theenterprise. The Resolution Trust Corporation(RTC) was formed to sell the assets of failed S&Ls. The new ruleswere far more lenient than traditional accounting standards.3. Knowledgeable observers of thefinancial problems of many S&Ls strongly recommended that many of them beclosed, but Congress failed to authorize the necessary funds to bail themout, which at that time were estimated to be from $1 to $15 billion.4. The result is financialdeadlock and economic stagnation for the world's second-largest economy.It may have come at great cost, but the S&L bailout had more than a littleto do with the economic recovery the United States has experienced in thepast ten years. Coupledwith the Reagan administration's committment to further deregulation, itwas a recipe for disaster (Warf, Cox, 1996, 147).Causes of the Crisis1. An important question, to which we shallnever get a certain answer, is just how much pressure is exerted on theregulatory process by politicians. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

Many of our Papers can be Downloaded From This Site!

PLEASE READ THIS, IT IS IMPORTANT!

Office hours are Monday through Friday, from 9 am to 5 pm (PST). You may place orders for custom research over the phone during office hours. E-mail requests can be made to our graduate and undergraduate department any time, and will be reviewed during office hours. You may also contact customer service any time through e-mail, and we will review your message during business hours. A great many papers can be downloaded right from this site, but not all of them. If you would like to know if a particular paper is downloadable, just look in the description for: "Available for Internet Download: Y" or "Available for Internet Download: N" If you wish to purchase a paper which is NOT available for immediate download, you will need to make other shipping arrangements. Also, please be aware that these orders are processed Monday through Friday from 9 am to 5 pm (PST). If you place your order after 4:45pm on Friday, it will not be processed until the following Monday morning. We charge $8 per page for all of our pre-written reports, plus shipping (and tax for California residents). However, the highest cost of any ONE report is $136, or 17 pages. Please, take a moment. Make sure you have chosen the report you want or need BEFORE you complete your order. If you are not sure, allow us to help you. We do not offer refunds or exchanges, so it is important for you to let us answer your questions during office hours. Reports which are e-mailed or downloaded are in Microsoft Word format. We are making more reports available for e-mail delivery faster than we can update our listings. Please call to check on the status of particular reports. There are many other shipping options which are listed on the Checkout page.