Banking

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

Read more at www.postindependent.com

We’ve briefly watched the savings and loan (thrift) segment of the U.S. banking business implode. It didn’t take long: The dominoes began teetering in 1987, and it was all over by 1990. A major segment of the U.S. banking business had effectively ceased to exist after 175 years of financing housing for Americans.

Some 550 thrifts failed, and 403 S&L execs were convicted of fraud. The remaining institutions scrambled to distance themselves from the carnage and stigma of having been in the thrift business. Institution names were changed to “savings bank,” or simply “bank.” But the thrift charter, effectively the license to do business issued by the federal deposit insurers, stayed the same. And that charter had, and still does have, one feature that played a part in the coming of the Great Meltdown in 2008: It allows a thrift to load up on home mortgages. The biggest bank failure in U.S. history, Washington Mutual (WAMU), a thrift, occurred in 2008, a result of home loans gone bad.

The closure of the failed thrifts was by no means the end of the saga, at least for the hapless U.S. taxpayer. To dispose of billions of dollars worth of property and real estate loans, the government formed the Resolution Trust Corp., an entity charged with marketing everything from failed banks to typewriters. This federal entity was staffed by a combination of banking regulators and employees of failed institutions. The inefficiency of its operation was notorious, and the source of some great stories, if you find big governmental boondoggling risible. There have some very good books written about the RTC, but these two examples will probably give an idea of the sausage being made by the outfit:



In one instance, a builder tendered a bid to the RTC on some land for development, which was rejected. He reworked the presentation, and offered less. It was accepted; who knows why. Maybe the first RTC analyst had moved on to a new job in banking.

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



The office building of a failed thrift in a resort community, even back then a very valuable piece of real estate, was put on the market. In a matter of days, the winning bidder had flipped the property for an embarrassingly healthy profit, which went into the pocket of the seller, not the U.S. taxpayers.

Laws were passed. Among them, the Bank Bribery Act and the big dog legislation, the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). It was a wide-ranging piece of legislation that, among other things, set down civil money penalties for bankers, and laid out strict guidelines for real estate appraisals. It was the Dodd-Frank Act of the 20th century, designed to make certain nothing like the collapse of the S&L industry ever, ever should happen again. As we now know, it was no more effective in that role than the Treaty of Versailles was in preventing World War II, and probably as successful as Dodd-Frank will be in obviating the next banking crisis.

Because you can’t legislate away human nature; you can’t regulate greed and hubris.

But it didn’t matter, because the seeds of the Financial Crisis of 2008 were planted and thriving. The secondary mortgage market had been around for a long time. The Government National Mortgage Association (Ginnie Mae), a U.S. government enterprise, had been packaging VA guaranteed loans into securities since 1946. Fannie Mae, which specialized in buying and securitizing FHA and VA loans, and, later, Freddie Mac, which was formed to make a market for conventional mortgages, those not guaranteed by the U.S., were well on their way to becoming massive conduits of paper backed by this nation’s home mortgages. Beginning in the late ‘80s, private banking operations such as Merrill Lynch and Bear Stearns began buying and securitizing single family residential mortgages. It was very profitable for the producers and exceptionally attractive to investors.

For the perception was that there simply was no investment that could compare to these securities in safety and yield. This view was underscored by the reputation of Fannie and Freddie, which was so solid that regulators actually permitted insured financial institutions — banks, thrifts and credit unions — to count the stock of the two enterprises as cash on an institution’s balance sheet.

The worldwide appetite for U.S. mortgage-backed securities was ravenous, and all hands turned out to satisfy the hunger, including Fannie and Freddie. It didn’t really take very long for the banking business to drive off the bridge; only about 21 years separated the S&L debacle from the 2008 crash. Exactly the same time between the two World Wars.

As in the case of the thrift implosion, the cause of the Great Meltdown was just too much money on the table, always the major underlying illness that puts banking on a ventilator and eventually into oblivion. But this time the money people and adjunct professionals, such as Realtors, appraisers and loan originators, had help: borrowers.

That’s right. There was so much loot available for the taking that homeowners got into the act and became unindicted co-conspirators.

Next: The Great Meltdown, proving that we Americans can achieve almost anything when we work together. Don’t miss the Grand Finale.

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

 

 

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