The Savings and Loan Crisis (often called the S&L Crisis) was a slow-motion financial disaster that unfolded across the United States in the 1980s and early 1990s. It involved the widespread failure of over a third of the nation's 3,200 Savings and Loan associations (S&Ls). Traditionally, these were sleepy, community-focused financial institutions, taking in local savings and lending that money out as long-term, fixed-rate mortgages for homebuyers. Think of George Bailey's building and loan in It's a Wonderful Life. However, a perfect storm of soaring inflation and interest rates, misguided deregulation, and outright fraud turned this stable model on its head. The crisis ultimately exposed deep flaws in the financial system, led to one of the largest government bailouts in U.S. history, and cost taxpayers billions. For investors, it serves as a powerful case study in the dangers of interest rate risk, the unintended consequences of policy changes, and the critical importance of scrutinizing a company's business model and management.
The S&L Crisis wasn't a single event but a toxic cocktail of economic pressure, bad policy, and human greed.
The classic S&L business model was simple: borrow short, lend long. They paid low, regulated interest rates on short-term savings deposits and used that capital to issue 30-year fixed-rate mortgages. This worked fine in a stable economy. But in the late 1970s, the economic climate turned hostile. The Federal Reserve, led by chairman Paul Volcker, jacked up interest rates to combat runaway inflation. Suddenly, S&Ls had to pay high short-term interest rates to attract deposits, while their income was locked into old, low-rate mortgages. They were losing money on their core business, a classic and fatal case of asset-liability mismatch.
To “help” the struggling S&Ls, Congress passed new laws, primarily the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St. Germain Depository Institutions Act of 1982. This deregulation allowed S&Ls to diversify away from home mortgages and into riskier, higher-yield investments like commercial real estate projects, corporate acquisitions, and even junk bonds. Crucially, the government also increased federal deposit insurance from $40,000 to $100,000 per account. This created a massive moral hazard:
This new, high-stakes environment attracted crooks and speculators like sharks to blood. Freed from old restrictions and with lax supervision, many S&L managers engaged in reckless lending and outright fraud. High-flyers like Charles Keating of the Lincoln Savings and Loan Association became infamous. They funneled depositors' money into speculative real estate deals, junk bonds, and lavish personal expenses. They paid themselves exorbitant salaries and used political connections to keep regulators at bay. This behavior was not an exception; it was a widespread symptom of a system with broken incentives.
By the late 1980s, the industry was collapsing. The federal agency that insured S&L deposits was bankrupt. In 1989, the U.S. government stepped in with a massive bailout. It created a new agency, the Resolution Trust Corporation (RTC), to handle the mess. The RTC's job was monumental:
The final cost to American taxpayers was estimated at around $124 billion, a staggering sum at the time. Thousands of S&L executives faced criminal charges, and the crisis left a deep scar on the American financial landscape.
The S&L crisis is more than a history lesson; it's a goldmine of timeless wisdom for the prudent investor.