savings_and_loan_crisis [CapiPedia]

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======Savings and Loan Crisis======
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 association]]s (S&Ls). Traditionally, these were sleepy, community-focused financial institutions, taking in local savings and lending that money out as long-term, fixed-rate [[mortgage]]s 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 Perfect Storm - What Caused the Crisis? =====
The S&L Crisis wasn't a single event but a toxic cocktail of economic pressure, bad policy, and human greed.
==== The S&L Business Model: A Ticking Time Bomb ====
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.
==== Deregulation: Good Intentions, Disastrous Results ====
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]]:
  * **For depositors:** Why worry about your S&L's health? Your money was backed by the U.S. government.
  * **For S&L operators:** With an endless supply of insured deposits, why not gamble on risky ventures? If the bet paid off, you kept the profits. If it failed, the taxpayers would cover the losses. It was a "heads I win, tails you lose" proposition.
==== Fraud and Reckless Management ====
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.
===== The Aftermath and the Cleanup =====
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:
  - Take control of hundreds of failed S&Ls.
  - Pay back the insured depositors.
  - Liquidate the assets—a staggering portfolio of office buildings, undeveloped land, soured loans, and junk bonds—as quickly as possible.
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.
===== Lessons for the Value Investor =====
The S&L crisis is more than a history lesson; it's a goldmine of timeless wisdom for the prudent investor.
  * **Lesson 1: Understand the Business.** A savvy [[value investor]] would have seen the fundamental weakness in the S&L business model once interest rates started to climb. An industry that loses money on its core operations is not a sound investment, no matter how much lipstick deregulation tries to put on it.
  * **Lesson 2: Beware of Perverse Incentives.** Government guarantees combined with deregulation are a recipe for disaster. The S&L crisis teaches us to be deeply skeptical when we see a system that encourages reckless risk-taking with other people's money. Always ask: //Who bears the loss if this goes wrong?//
  * **Lesson 3: Judge Management by Their Actions.** The difference between a well-run S&L and a fraudulent one came down to the character and competence of its leadership. Look for managers who are conservative, transparent, and focused on long-term stability, not short-term speculative profits.
  * **Lesson 4: Find Opportunity in Forced Selling.** The RTC's fire sale of assets created a once-in-a-generation opportunity for disciplined investors. As the government desperately unloaded real estate and securities to recoup its losses, buyers with cash and courage—those following [[Warren Buffett]]'s advice to be "greedy when others are fearful"—were able to acquire valuable assets for pennies on the dollar. Crises create not just losers, but also incredible bargains for those prepared to act.