Savings and Loans

  • The Crisis arose because the Government extended a 100% Guarantee on most Thrift Deposits without taking commensurate measures to prevent unsound banking practices likely to lead to losses.

1990 - AP - The Savings-and-Loan Crisis Causes and Remedies, by 
Dalton Leonard Anderson - 203p

  • During the past decade, the savings and loan crisis and the problems of the banking industry have focused the public's attention on the financial problems in the insurance industry and their implications for the overall economy.
  • The life insurance industry suffered from some of the same competitive forces that hurt the savings and loan and banking industries.

1994 04 - CBO - The Economic Impact of a Solvency Crisis in the Insurance Industry - 80p

  • Savings & Loan Insurance Crisis [Video-CSPAN]
    • ~~ 2:35: Herbert Sandler, World Savings and Loan Association, Chairman
      • <Bonk: The Harry Markopolos of the S&L Situation???>
  • 1989 0417 - Press Club - Where Was the White House during S&L Crisis? - This program is part of a series of three panel discussions entitled “Where Were the Watchdogs when the Savings & Loans were Robbed?” [Video-CSPAN]
  • 1989 0424 - Press Club - Where Was Congress When S&L's Were Robbed? [Video-CSPAN]
  • Where Was the Press During the S&L Crisis? - This program is part of a series of three panel discussions entitled “Where Were the Watchdogs when the Savings & Loans were Robbed? [Video-CSPAN]
  • 1990 - AP - The Savings-and-Loan Crisis Causes and Remedies, by 
    Dalton Leonard Anderson - 203p

    • The Crisis arose because the Government extended a 100% Guarantee on most Thrift Deposits without taking commensurate measures to prevent unsound banking practices likely to lead to losses.
  • I think these fears are vastly exaggerated.
  • True, the savings and loan (S&L) industry is in deep trouble, but we are biting the bullet on that one.
  • We are spending something like $150 billion to bail out the S&Ls - now, in reading newspapers the number is $500 billion - but here's a friendly audience who knows about present value and discounting, and the $500 billion includes the interest on bonds issued out 30 years.
  • The present value of the bailout package is about $150 billion.
  • That will not sink our economy.

-- Dr. William Freund

1991 - SOA -  Major Issues Facing the Economy,  The Insurance Industry and Actuaries in the Years Ahead, Society of Actuaries - 12p  

1981 - GOV (JEC) - The 1981 Economic Report of the President, part 1 - [PDF-215p]

-- (p11) - Statement of Alan Greenspan, Townsend-Greenspan & Co., Inc., New York, N.Y.

  • Because a goodly chunk of mortgage loans were made many years ago at much lower rates, the average portfolio yield of mortgages in  savings and loans associations today approximates 9  percent, approximately half current short-term market yields.
  • At this rate of return, S. & L.'s are extraordinarily exposed.
  • While most of their liabilities consist of relatively short-term high interest cost instruments, there is still well over $100 billion, or approximately 21 percent of liabilities, in conventional passbook accounts at a legal ceiling of 51/4 percent.
  • Needless to say, the S. & L.'s are under strong pressure, and were it not for very heavy purchases of mortgages by federally sponsored mortgage pools in the secondary market and heavy direct lending by the Federal Home Loan banks to the S. & L.'s, it would be difficult to imagine these institutions continuing to function.
  • Obviously, in the short run, they can sell off some of their nonmortgage assets to meet the interest payment costs of their liabilities.
    • But obviously, this cannot go on for very long under the existing interest rate structure.
    • At some point, when interest income will no longer consistently meet interest cost requirements, the whole thrift institution system will undergo a massive crisis. 
  • The concern, perhaps, is not that thrift institutions will at that point cave in, but that the Federal Home Loan banks in conjunction with the Federal Reserve would feel obligated to bail out this major segment of our financial system.
  • Such a bailout implies large borrowings by the Federal Home Loan banks, which if accommodated by the Federal Reserve would surely mean major new acceleration of inflation.

We could move from the mere 10-percent base rate of inflation; which most-of us estimate for today, to twice that.

Life insurance companies are also in danger of a major acceleration of loans on outstanding policies at well below market cost of funds if short-term interest rates, especially for money market funds, continue at approximately twice the rate at which most individual policy loan contracts are written.

  • Obviously, were there a magic wand which could be waved to convert all long-term mortgage portfolios of thrift institutions into variable rate mortgages tied to, say, 1-year Treasury bill rates, then the prospective huge negative cash flow of the thrift institutions could be readily eliminated.
  • But legislation which would abrogate millions of outstanding mortgage contracts to refinance them at higher interest rates seems unlikely in the extreme, is probably unconstitutional, and surely inappropriate.  (p17)

<def. Abrogate: repeal or do away with (a law, right, or formal agreement>