Tanya Carone April 16, 2013

 Interest rates  Risk ◦ Federal insurance for deposits  1970s ◦ Interest rates at banks were capped ◦ Money Market accounts available  Higher interest rates than S&L

 When you have made all of the payments  When you sell you house  When you refinance ◦ Dropping interest rates  More refinancing  More home sales ◦ Increasing interest rates  Little refinancing  Fewer home sales

 Scenario 1 ◦ Saving Accounts Interest Rates 4% ◦ Mortgage Interest Rates 7%  Scenario 2 ◦ Saving Account Interest Rates10% ◦ Mortgage Interest Rates7%

 Liabilities have higher rate than assets  Minimal refinancing due to increase interest rates  Fewer individual putting in deposits

 Removed cap on interest rates ◦ S&L could offer higher interest rates to encourage more deposits  Allowed S&Ls to engage in “new” activities ◦ Commercial real estate ◦ Bonds

 Government insurance of deposits ◦ S&L keep rewards from investments ◦ Government covers losses  Junk Bonds  Speculative Real Estate

Lincoln Savings and Loan American Continental Corporation Charles Keating Chairman & Controlling Stockholder FHLBB Increased high risk assets Land Equity positions in real estate Junk Bonds 1984

 Audited in 1986 ◦ Unreported losses ◦ Surpassed regulated direct investments limit  Tried hiring away regulators and/or their wives  Used political influence (Keating Five) ◦ Alan Cranston (D – CA) ◦ Dennis DeConcini (D-AZ) ◦ John Glenn (D-OH) ◦ John McCain (R-AZ) ◦ Donald Riegle (D-MI)  Filed lawsuit again FHLBB