Savings and Loan Crisis

The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995: the Federal Savings and Loan Insurance Corporation (FSLIC) closed or otherwise resolved 296 institutions from 1986 to 1989 and the Resolution Trust Corporation (RTC) closed or otherwise resolved 747 institutions from 1989 to 1995.

A savings and loan or "thrift" is a financial institution that accepts savings deposits and makes mortgage, car and other personal loans to individual members (a cooperative venture known in the United Kingdom as a building society). By 1995, the RTC had closed 747 failed institutions nationwide, worth a total possible book value of between $402 and $407 billion. In 1996, the General Accounting Office estimated the total cost to be $160 billion, including $132.1 billion taken from taxpayers. The RTC was created to resolve the S&L crisis.

In 1979, the Federal Reserve System of the United States doubled interest rates that it charged its member banks in an effort to reduce inflation. The building or savings and loans associations (S&Ls) had issued long-term loans at fixed interest rates that were lower than the interest rate at which they could borrow. In addition, the S&Ls had the liability of the deposits which paid higher interest rates than the rate at which they could borrow. When interest rates at which they could borrow increased, the S&Ls could not attract adequate capital, from deposits to savings accounts of members for instance, they became insolvent. Rather than admit to insolvency, lax regulatory oversight allowed some S&Ls to invest in highly speculative investment strategies. This had the effect of extending the period where S&Ls were likely technically insolvent. These adverse actions also substantially increased the economic losses for the S&Ls than would otherwise have been realized had their insolvency been discovered earlier. One extreme example was that of financier Charles Keating, who paid $51 million financed through Michael Milken's "junk bond" operation, for his Lincoln Savings and Loan Association which at the time had a negative net worth exceeding $100 million.

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