Word: thrifts
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Dates: during 1980-1989
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When the huge cost of the cleanup hit home last week, so did a strong sentiment in favor of pursuing the fraudulent thrift owners who made off with the loot. Regulators have estimated that at least one in every four S & L failures has been the result of fraud. In fact, the Bush rescue plan proposes to give the Justice Department an additional $50 million a year for probing S & L fraud, a sum that would pay for 200 new investigators and 100 more prosecutors...
...arrive at such a sorry state? Traditionally, running a thrift was a relatively tranquil business. S & L managers used to follow what was known as the 3-6-3 rule: pay depositors 3%, lend money at 6% and tee up at the golf course by 3 p.m. When interest rates remained stable, the strategy worked well. But by the late 1970s, thrifts began steadily losing depositors to the new money-market funds, which were not covered by deposit insurance and paid higher interest rates...
...Thrift executives pressured Congress to let them fight back. In 1980 Congress lifted restrictions on interest rates that S & Ls could pay. But regulators waited a year before freeing the other side of the balance sheet by allowing S & Ls to grant adjustable-rate mortgages. The delay left the thrifts in a bind, because interest rates had rocketed from 13% at the end of 1979 to more than 20% a year later. Thrifts were collecting interest rates of around 8% or less on their 30-year mortgages, while paying double-digit interest to new depositors. During 1981 some...
Troubled S & Ls are heavily concentrated in Texas and California, where state thrift regulations were loose and local economies had booms and busts. Many Texas thrift owners who pumped money into energy ventures when oil sold for $29 per bbl. in 1983 saw their collateral collapse in value when prices plummeted below $10 in 1986. In California some thrifts invested in real estate markets that became glutted, including Los Angeles office towers and Beverly Hills condominiums...
...overall losses would have been vastly smaller if Government regulators had seized control of insolvent S & Ls years ago. In 1983 the cost of the bailouts was estimated at only $10 billion. But the FSLIC never had enough cash simply to close down the thrifts and pay off the depositors. The Bank Board lobbied Congress for more money, but the politically powerful thrift industry consistently opposed such requests, along with almost any proposal to rein...