Savings And Loan Crisis Research Paper

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Definition: The Savings and Loans Crisis was the greatest bankcollapse since the Great Depression of 1929. By 1989, more than 1,000 of the nation's Savings and Loans (S&Ls) had failed. This effectively ended what had once been a secure source of home mortgages. Half of the nation's failed S&Ls were from Texas, pushing that state into recession. As bad land investments were auctioned off, real estate prices collapsed, office vacancies rose to 30%, and crude oil prices fell 50%. The Federal Savings and Loan Insurance Corporation (FSLIC) had been created to insure their deposits, much like the FDIC does today. However, S&L bank failures cost the FSLIC $20 billion, which bankrupted it. In addition, more than 500 banks were insured by state-run…show more content…
Senators, known as the Keating Five, were investigated by the Senate Ethics Committee for improper conduct. They had accepted $1.5 million in campaign contributions from Charles Keating, head of the Lincoln Savings and Loan Association. They also put pressure on the Federal Home Loan Banking Board, the agency responsible for investigating possible criminal activities at Lincoln, to overlook possibly suspicious activities. What Caused the Savings and Loans Crisis? Savings and Loans were specialized banks that used low-interest, but federally-insured, deposits in savings accounts to fund mortgages. However, in the 1980s, money market accounts became more popular by offering higher interest rates on savings. Consequently, investors became pulling money out of savings accounts, depleting the banks' source of funds. S&L banks asked Congress to remove the low-interest rate restrictions. In 1982, the Garn-St. Germain Depository Institutions Act was passed, which allowed S&Ls to raiseinterest rates on savings deposits. In addition, the banks were no longer restricted to mortgages, but were allowed to make commercial and consumer loans. Most importantly, the law removed restrictions on loan-to-value ratios. At the same time, the Federal Home Loan Bank Board regulatory staff was reduced thanks to budget cuts during the Reagan Administration. This further impaired their ability to investigate possible risky
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