Introduction The Savings and Loans (S&L) crisis of the 1980’s in the United States was one of the most devastating events for the US economy since the 1930s. It witnessed a virtual collapse of the S&L Industry as around 1043 such institutions with a total of $500 billion in assets failed in the period between 1986-1995. A Savings and Loan Association, oft called a ‘thrift’, is an institution that specializes in taking deposits and making home mortgage loans. They had been under strict regulation, with the US Government taking a cautious stand due to its experience with previous panics of 1873, 1907 and 1930. However, a series of steps by the Government to de-regulate and curb inflation levels, and a mix of other terrible policy decisions, …show more content…
Inflation was as high as 10-11 percent. Efforts to curb inflation lead to a rise in short term interest rates, above the limits placed by Regulation Q. Since S&Ls specialized in taking short term deposits and making long term (fixed rate) mortgage loans, this asset-liability mismatch made them particularly vulnerable to increases in interest rates. There was a flight of capital away from banks and S&Ls as investors were seeking alternatives with better returns. People preferred money market mutual funds as they offered higher rates of return, while operating outside of reserve requirements and interest rate restrictions. All these factors lead to large number of actual and threatened insolvencies in the S&L industry by the late 70s and early …show more content…
This act also increased the federal deposit insurance levels. All this was done to decrease the flow of deposits into alternative investments like the money market mutual funds. The Garn-St Germain Act of 1982, allowed thrifts to engage in commercial lending upto 10 percent of assets. It also removed statutory limits on loan to value ratios. Thus, these two laws gave the S&L industry expanded investment powers and allowed them to enter new financial territory with new risks as they could now make acquisition, development and construction (ADC) loans. This deregulation at the federal level lead to a ‘competition in laxity’ at the state level as well, with state legislatures actively reducing regulatory measures in order to retain state-chartered institutions. Adoption of liberal laws lead to a significant increase in the size of the industry, specially in states of Texas, California and Florida. Adoption of Lax Accounting