Page 594 - WhyAsInY

Why (as in yaverbaum)
and 1985, S&Ls increased in number, and S&L assets increased by more than 50 percent.
The second significant event was the enactment of the Tax Reform Act of 1986. That legislation was aimed at, among other things, the tax treatment of improved real estate. One important change was that the use of depreciation to reduce taxable income of such high-earning non– real estate professionals as doctors, lawyers, and businessmen—which had been the cornerstone of Integrated Resource’s “tax shelter” busi- ness—was eliminated.17 The ability of such people to depreciate property and thereby reduce current taxes had incentivized investment and had therefore been a vital component in analyses relating to the purchase and valuation of real estate. Because the use of depreciation to reduce income tax was now severely curtailed, the market value of real estate plunged—and with that plunge came a virtual freezing in the market upon which the S&Ls relied for their business. In addition, the value of mortgages and real estate held by the S&Ls necessarily suffered a major decrease, the effect of which was to severely reduce or wipe out their net worth (the amount, if any, by which their assets exceeded their liabilities). And no net worth means insolvency.
The speculative loans and fraud that came about from, or were fos- tered by, deregulation and the evaporating value of real estate that occurred largely because of the Tax Reform Act of 1986 combined with increasing short-term interest rates to result in the insolvency of a huge number of S&Ls. Starting in 1986, more than one thousand of the approximately thirty-two hundred thrifts in the United States became insolvent, and the government’s insurance fund that had been estab- lished to protect their depositors was woefully inadequate to achieve its
17. As you might recall, class, depreciation created a loss that was used to offset current taxable income and thereby reduce current income tax, but that loss did not involve the expenditure of actual cash for many years, if at all. You might also recall that the publication of regulations that formed the precursor to the Tax Reform Act of 1986 stopped dead in its tracks a huge transac- tion that was intended to create an Integrated Resources tax shelter vehicle with respect to a vast amount of property on Muhammad Ali Boulevard in Louisville, Kentucky. (Integrated filed for bankruptcy in 1990.)
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