Savings And Loan Crisis (S&L)

What is the '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 removed their money from the S&L institutions and deposited it in money market funds. This allowed for higher interest rates, because the funds were not governed by Regulation Q. Next Up Resolution Funding Corporation ... Asset Management and Disposition ... Federal Savings And Loan Insurance ... Federal Savings and Loan

Explaining 'Savings And Loan Crisis - S&L'

Once regulations were loosened, S&Ls began engaging in high-risk activities, such as commercial real estate lending and investments in junk bonds, to cover losses. 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).

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 steep recession. Bad land investments were auctioned off, causing real estate prices to plummet. Office vacancies rose significantly, and the price of crude oil dropped off by half. Texas banks, such as Empire Savings and Loan, took part in criminal activities that further drove the Texas economy into the ground.

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 holding a $20 billion check that inevitably left the corporation bankrupt. The defunct company can be likened to the Federal Deposit Insurance Corporation (FDIC) that oversees and insures deposits today.

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.

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