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“resolvinG tHe Crisis; restorinG tHe ConfiDenCe”
And what happens when inflationary pressures and increases in short- term interest rates charged to the thrift by the Federal Reserve come into play? That’s right. There’s a “squeeze.” And paying out more than you’re taking in is not a good long-term business strategy.
Of course, certain changes in the economic climate might be short- lived and the squeeze on S&Ls might have been just an aberration, but in the eighties, there were two significant events:
The first significant event was “deregulation.” After the Great Depression, in order to make depositors in banks and S&Ls feel secure, the federal government started insuring deposits of up to a fixed amount (say, $100,000) and placed tight regulations on banks and thrifts. That basically worked well, but, in 1979, interest rates charged by the Fed to the thrifts doubled, and, as interest rates continued to spiral upward thereafter, in 1982, when the now-revered (by some) Ronald Reagan was the president, he and Congress, intending to help the thrifts to grow and overcome the squeeze created by increasing interest rates, “deregu- lated” the S&L industry. Federally chartered thrifts could now lend in the way that federally chartered (FDIC-insured) banks could but would be free of the regulatory controls that were imposed on those banks.
Deregulation was seductive to the S&Ls. Its effect was to permit the theretofore conservative home-loan-oriented industry, which was suffering from competition and hungry for more profitable business, to venture into more commercially oriented, higher-risk, and, in many cases, very speculative lending transactions. But, while the S&Ls were conducting riskier business, there were no effective controls on their lending practices—and no rules to force them to maintain high “net worth” to form a cushion to protect against possible losses. (Deregula- tion was also to lead to S&L frauds on an epic scale, many of which were investigated by the RTC and resulted in criminal prosecutions or civil liability.) Where thrifts were state-chartered, and therefore subject to state regulation, they rushed to become rechartered as federal insti- tutions to free themselves from state controls. (Some states, most notably Texas and California, actually matched the federal rules changes by deregulating their state-chartered thrifts.) Between 1982
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