Envy of the World (US)

RaceBannon said:

https://investopedia.com/terms/s/sl-crisis.asp

What Was the Savings and Loan – S&L – Crisis ?
The savings and loan (S&L) crisis was a slow-moving financial disaster that came to a head in the 1980s and 1990s and resulted in the failure of nearly a third of the 3,234 savings and loan associations in the United States between 1986 and 1995. It began during the volatile interest rate climate, stagflation, and slow growth of the 1970s and ended with a total cost of $160 billion—$132 billion of which was borne by taxpayers. Key to the S&L crisis was a mismatch of regulations to market conditions, speculation, as well as outright corruption and fraud, and the implementation of greatly slackened and broadened lending standards that led desperate banks to take far too much risk balanced by far too little capital on hand.

In 1982, in response to the poor prospects for S&Ls under current economic conditions, President Ronald Reagan signed Garn-St. Germain Depository Institutions Act, which eliminated loan-to-value ratios and interest rate caps for S&Ls, and also allowed them to hold 30% of their assets in consumer loans and 40% in commercial loans. No longer were S&Ls governed by Regulation Q, which led to a tightening of the spread between the cost of money and the rate of return on assets.

With reward uncoupled from risk, zombie thrifts began paying higher and higher rates to attract funds. S&Ls also began investing in riskier commercial real estate and even riskier junk bonds. This strategy of investing in riskier and riskier projects and instruments assumed that they would pay off in higher returns. Of course, if those returns didn’t materialize, it would be taxpayers [through the Federal Savings and Loan Insurance Corporation (FSLIC)]—not the banks or S&Ls officials—who would be left holding the bag. That's exactly what eventually happened.

At first, the measures seemed to have done the trick, at least for some S&Ls; by 1985, S&L assets had shot up by over 50% (far faster growth than banks). S&L growth was especially robust in Texas. Some state legislators allowed S&Ls to double down by allowing them to invest in speculative real estate. Still, more than a third of S&Ls were not profitable, as of 1983. Meantime, although pressure was mounting on the FSLIC's coffers, even failing S&Ls were allowed to keep lending. By 1987 the FSLIC had become insolvent. Rather than allowing it and S&Ls to fail as they were destined to do, the federal government recapitalized the FSLIC. For a while longer, the S&Ls were allowed to continue to pile on risk.


During this crisis, five U.S. senators known as the Keating Five were investigated by the Senate Ethics Committee due to the $1.5 million in campaign contributions they accepted from Charles Keating, head of the Lincoln Savings and Loan Association. These senators were accused of pressuring the Federal Home Loan Banking Board to overlook suspicious activities in which Keating had participated. The Keating Five included John McCain (R–Ariz.), Alan Cranston (D–Calif.), Dennis DeConcini (D–Ariz.), John Glenn (D–Ohio), and Donald W. Riegle, Jr. (D–Mich.).

In 1992, the Senate committee determined that Cranston, Riegle, and DeConcini had improperly interfered with the FHLBB's investigation of Lincoln Savings. Cranston received a formal reprimand. When Lincoln failed in 1989, its bailout cost the government $3 billion and left more than 20,000 customers with junk bonds that were worthless. Keating was convicted of conspiracy, racketeering, and fraud, and served time in prison before his conviction was overturned in 1996. In 1999 he pleaded guilty to lesser charges and was sentenced to time served.