Savings and Loan Associations (also known as S&Ls or Thrifts) are financial institutions that specialize in accepting savings deposits and providing residential mortgage loans. Think of them as the original community-focused banks, born from the idea that a local pool of savings should be used to help local people buy homes. Unlike larger commercial banks that serve a wide range of corporate and consumer needs, S&Ls historically had a much narrower mandate. They were often structured as mutual ownership companies, meaning they were owned by their depositors and borrowers rather than outside stockholders. This structure was designed to align the institution's interests with those of its community. While their role has evolved significantly over time, their story—especially the infamous S&L crisis of the 1980s—offers timeless lessons for every investor about risk, regulation, and the dangers of straying from a simple, proven business model.
For much of the 20th century, running an S&L was considered one of the most stable and straightforward jobs in finance. The business model was so simple it was famously dubbed the “3-6-3 rule”: pay depositors 3% interest, lend that money out for mortgages at 6%, and be on the golf course by 3 PM.
The classic S&L business model thrived in a stable economic environment. They performed a simple but vital function: they borrowed money short-term (through customer deposits that could be withdrawn at any time) and lent it out long-term (through 30-year fixed-rate mortgages). This practice, known as maturity transformation, was the engine of post-World War II suburban expansion in the United States, making the dream of homeownership a reality for millions. For decades, it was a low-risk, predictable business that served its community well.
The sleepy world of S&Ls was turned upside down in the late 1970s and 1980s. A perfect storm of economic shifts and misguided policies led to one of the most significant financial collapses in U.S. history. The key ingredients were:
The result was the failure of over 1,000 S&Ls, costing taxpayers an estimated $124 billion. The government created the Resolution Trust Corporation (RTC) to manage and sell the assets of the failed thrifts, a monumental cleanup operation.
The S&L industry that survived the crisis is a shadow of its former self. Most have either been acquired by banks or have converted to behave more like traditional community banks. The regulatory environment is also vastly different. The Office of Thrift Supervision (OTS) was created to oversee the industry and was later merged into the Office of the Comptroller of the Currency (OCC), placing thrifts under a much tighter watch. Today, the lines between an S&L and a community bank are often blurred, though their primary focus often remains on real estate lending.
For a value investor, the story of the S&Ls is not just a history lesson; it's a goldmine of wisdom. It powerfully illustrates several core principles of sound investing.