The Savings and Loan Crisis The savings and loans crisis in the United States during the 1980s and 1990s saw the failure of nearly a quarter of the country's savings and loan associations. Born from the ‘building society movement’ that sprung up in Britain at the end of the 18th century, the American building and loans later became savings and loans associations and was designed primarily to help working class families save and buy a home. This principle was later extended so that modern savings and loans associations are cooperative ventures, in which individual members have savings accounts used towards a mortgage, auto loan, and other types of personal loans.

Background of the Crisis

The savings and loans associations had experienced somewhat of a bumpy ride over the years, but had managed to survive everything from the first great depression of 1893 to World War II. Then in the years following the war, the savings and loans prospered. This continued through into the 1960s. However, during the 1960s and 1970s interest rate wars and rising inflation saw the associations coming under increasing pressure. This was brought to a head in 1979, when oil prices doubled almost overnight and interest rates and inflation rose dramatically.

The savings and loans suddenly found that they simply could not continue in the present climate and Congress passed legislation in 1980 and 1982 to deregulate the industry. This allowed the associations the freedom to offer their customers a much wider range of saving and loan products. The scene was now set for the crisis that was about to unfold.

Causes of the Crisis

There was no one single event that triggered the crisis, and because of the complex financial climate that existed at the time, opinions differ as to just what led to such a widespread collapse. One significant factor was the deregulation of the industry. This allowed the associations to enter into a whole range of speculative ventures, many of which carried risks the associations were not used to taking. Nonetheless, managers without either the

experience or ability happily took their associations into new territory, without any idea of, or regard for, the possible consequences. Another key factor in the collapse was the elimination of a range of regulations that had originally been drawn up to limit lending and minimize the risk of failure. In particular, this allowed lending into markets with which the associations were unfamiliar. It also allowed the associations to become heavily involved in speculative development projects, in which the developers and builders themselves often had little or no financial stake. A third major factor in the equation was that deregulation brought the opportunity for fraud. For those who recognized the openings available, there was an enormous scope for abusing transactions and making large amounts of money through simple fraud.

Examples of Failures In March 1985, investors lined up outside branches of the Home State Savings Bank in Cincinnati to withdraw their deposits in a classic 'run' on the bank. Word was out that the bank was about to collapse and the governor was forced to order the closure of all the savings and loans associations in the State of Ohio.

This was just one of many closures across the country. In 1988, the Silverado Savings and Loan collapsed, leaving taxpayers with a bill of $1.3 billion. This particular failure attracted considerable attention, not least because of alleged wrongdoing by one of its directors, Neil Bush. At the time Neil Bush's father, George H. W. Bush, was the Vice President of the United States.

The Aftermath

It’s impossible to say just how much this crisis cost the United States, however, it was estimated the final bill was somewhere around $160 billion, of which $124 billion was paid by the taxpayer. In the years following the crisis, the number of savings and loans associations in the United States declined to approximately half of what was seen in the late 1970s. Lending through the

associations also fell as a consequence, from some 53% of all market mortgage lending in 1975, to less than 30% by 1990.

Source: SavingsAndLoanCrisis.com By: Robby Morton