Al Renner Stephanie Hilgeford Charlotte Ford-Cunningham Failed Incentives in the Savings and Loan Industry

Magnitude of The S&L Crisis  ’86-’89: FSLIC closed 296 S&L, assets of $125 billion  ’89-’95: RTC closed 747 S&L, assets of $394 billion  Total: 1,043 S&L, $519 billion  ’86-’89: S&L reduced from 3,234 S&L to 1,645 (50%) (FDIC Banking Review)

Cost of The S&L Crisis  Direct costs of closing S&L $146 billion  Indirect costs of closing S&L $7.4 billion  Total costs: 1$153 billion  Total cost: taxpayers $124 billion (81%), S&L industry $29 billion (18%)  Pre 1986 costs paid by solvent FSLIC (FDIC Banking Review)

Historical Timeline  Federal Home Loan Bank Board  Federal Savings and Loan Insurance Corporation (FSLIC)  Regulation Q applied to S&L  1970s - Double digit inflation, high interest rates  Depository Institutions Deregulation & Monetary Control Act

Historical Timeline  FHLBB allows GAAP or RAP  Garn–St. Germain Depository Institutions Act  % S&L losing money, 9% insolvent by GAAP standards  Gov declares Ohio bank holiday  FSLIC down to $4 billion; had lost $20 billion

Historical Timeline  TX has 14 of 20 largest losses; 50% of all nationwide  JAN GAO declares FSLIC insolvent by $3.8 billion  Competitive Equity Banking Act  President Bush announces taxpayer funded rescue plan

Real and Conceptual Issues  High Inflation Rates Causes the COG to increase 1971 the gold standard was eliminated Highest level 1980 – 14% Excess supply of currency, high oil prices, delayed response to increasing rates  Principle-Agent Problem

Real and Conceptual Issues  Maturity Mismatch Long-term, fixed rate loans funded by short- term deposits  Regulation Q – 1933 Interest rate ceilings

Real and Conceptual Issues  Deregulation – 1982 Garn – St. Germain Depository Institutions Act Removal of interest rate ceilings  Delayed Closure of Insolvent S&Ls FSLIC - 3 rescue programs Incentives to continue to operate

 Enhance both the short-term and long-term economic survival of the thrift industry.  "Bide" time for legislative and regulatory efforts to affect an economic recovery.  Encourage "leveraged" asset growth through debt financing  Halt and prevent the massive withdraws of funds by depositors (disintermediation) (Tucker & Salam, 1994) Legislative and Regulatory

 Regulatory accounting principles and interpretations authorized by the FHLBB. Regulatory Accounting Principles (RAP)  GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information. Generally Accepted Accounting Procedures (GAAP)

 Federal Home Loan Bank Board (FHLBB) regulatory agency  Federal Savings and Loan Insurance Corporation (FSLIC) to insure deposits at S&L institutions  Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)  Federal Deposit Insurance Company (FDIC) Improvement Act of 1991 Federal Insuring Agencies