S & L Crisis Case Study

WHAT WAS S&L CRISIS?
Savings and loans crisis was the subsequent failure of many S & L institutions in 1980s. S&L Institutions lost money because of upwardly spiraling interest rates and asset-liability mismatch. Net S&L income which totaled $781 million in 1980 fell to negative $4.6billion and $ 4.1 billion in 1981 and 1982. During the first three years of the decade, 118 S&Ls with $43 billion assets failed. Figures state that the Federal Government resolved the failure of 1043 S& L institutions with total assets of $ 874 billion. This crisis was estimated to cost the tax payers around $ 210 Billion. The thrift industry declined from 3234 to 1645 institutions; a decrease of almost 50 percent.
Also when these institutions failed, the FSLIC

Regulations limiting lending and depository interest rates were seen as the primary obstacle to an unfettered free market. According to the free market blueprint, higher interest rates on deposits would encourage increased private thrift and savings which would flow into investment of new capital, plant and equipment. But the Reagan era departed from the reality by ignoring the fact that increased interest rates meant more burdensome lending rates for public.
Even when institutions started failing the state didn’t prefer intervening much. Also it didn’t have enough funds at FSLIC which could be used to bailout institutions, this made intervention further difficult. In fact instead of using corrective regulations, the government still opted for deregulation and lenient measures. Examples of this are the Riegle-Neal Interstate banking and Branching Efficiency Act of 1994 and the reinterpretation of Glass Steagall Act in

These policies were nothing but just a measure to cover the loopholes of the previous policy and a step towards deregulation. Gramm-Leach-Bliley Act of 1999 and Commodity Futures Modernization Act of 2000 are examples. The latter exempted derivatives from regulation. Derivatives trade expanded quickly, from a total outstanding value of $106 trillion in 2001 to $531 trillion in 2008. The rapid growth overwhelmed the legal and technological infrastructure of the industry. Commercial banks could make trades so quickly and enter contracts so freely that often times no firm was certain who owed exactly how much to whom.
In 2004 the SEC proposed a system of voluntary regulation under the Consolidated Supervised Entities program, allowing investment banks to hold less capital in reserve and increase leverage.
Previously banks had been portfolio lenders, holding assets on their books until they reached maturity. Now by securitization, assets could be pooled together and repackaged into securities. Often, consumers did not understand the complex financial arrangement they entered into.
The mortgage market was also expanding rapidly. Mortgage lenders targeted lower-income, higher-risk borrowers with lower credit ratings through the use of alt-A and subprime loans. As these markets became profitable, the mortgage industry pushed more and more loans onto