September 28, 2021

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Bankers’ Hours column: 21 years separated the S&L debacle from the 2008 crash

We briefly watched the savings and credit segment of US banking implode. It didn’t take long: in 1987 the dominoes began to shake, by 1990 it was all over. An important part of the US banking business had ceased to exist for Americans after 175 years of home finance.

Around 550 bargain hunters failed, and 403 S&L managers were convicted of fraud. The remaining institutions struggled to distance themselves from the carnage and stigma of the thrift business. The names of the institutes were changed to “Sparkassen” or simply “Bank”. But the savings charter, the business license issued by federal deposit insurers, remained the same. And this charter had and has one feature that played a role in the 2008 big meltdown: it enables a frugality to top up on home mortgages. The largest bank failure in US history, Washington Mutual (WAMU), a thrift, occurred in 2008 as a result of bad home loans.

Closing the failed thrifts was far from the end of the saga, at least for the hapless US taxpayer. To sell billions of dollars worth of real estate and real estate loans, the government created Resolution Trust Corp., an organization tasked with commercializing everything from bankrupt banks to typewriters. This federal body was occupied by a combination of banking regulators and staff from failed institutions. The inefficiency of his operation was notorious and the source of some great stories when you find big government deals ridiculous. There are some very good books that have been written about the RTC, but these two examples likely give an idea of ​​the sausage that the facility makes:



In one case, a contractor made the RTC an offer for a plot of land for development, which was rejected. He revised the presentation and offered less. It was accepted; who knows why. Perhaps the first RTC analyst had moved to a new job in banking.

And the following incident was typical of the RTC marketing sense:



The office building of a failed thrift in a holiday complex, already a very valuable property back then, was brought onto the market. Within days, the winner had flipped the property for an embarrassingly healthy profit that went into the seller’s pocket, not the U.S. taxpayer.

Laws were passed. Including the Bank Bribery Act and the Big Dogs Act, the Financial Institutions Reform, Restoration and Enforcement Act (FIRREA). It was a far-reaching law that set civil fines for bankers and strict guidelines for property valuations, among other things. It was the 20th century Dodd-Frank Act that was supposed to ensure that nothing like the collapse of the S&L industry would ever happen again. As we know today, he was no more effective in that role than the Treaty of Versailles in preventing World War II, and probably as successful as Dodd-Frank in avoiding the next banking crisis.

Because you can’t put away human nature; Greed and hubris cannot be regulated.

But that didn’t matter because the seeds of the 2008 financial crisis were sown and thriving. The secondary mortgage market had been around for a long time. The Government National Mortgage Association (Ginnie Mae), a US government company, has been packing VA-guaranteed loans into securities since 1946. Fannie Mae, who specialize in buying and securitizing FHA and VA loans, and later Freddie Mac, who was founded to create a market for conventional, non-US guaranteed mortgage loans, were well on their way to become massive paper channels backed by this country’s home mortgages. In the late 1980s, private banking firms like Merrill Lynch and Bear Stearns began buying and securitizing single-family home mortgages. It was very profitable for the producers and extremely attractive for investors.

Because the perception was that there was simply no investment that could be compared to these securities in terms of security and returns. That view was underscored by the reputation of Fannie and Freddie, which was so solid that regulators even allowed insured financial institutions – banks, credit unions, and credit unions – to account for the two companies’ stocks as cash on an institution’s balance sheet.

The global appetite for US mortgage-backed securities was huge, and all hands came to satiate hunger, including Fannie and Freddie. It wasn’t long before the banking business drove off the bridge; Only about 21 years separated the S&L debacle from the crash of 2008. Exactly at the same time between the two world wars.

As with the thrift implosion, the cause of the Great Meltdown was simply too much money on the table, always the major underlying disease that relies on a ventilator and is ultimately forgotten. But this time the money people and auxiliaries like brokers, appraisers and lenders had help: borrowers.

It’s correct. There was so much takeaway loot that homeowners stepped in and became unindicted co-conspirators.

Next up: The Great Meltdown, which proves that we Americans can achieve almost anything if we work together. Don’t miss the grand finale.

Pat Dalrymple is from western Colorado and has spent more than 50 years in the mortgage and banking business in the Roaring Fork Valley. He will be happy to answer your questions or hear your comments. His email is [email protected].