Once upon a time in America, bank executives went to prison for white-collar crimes. During the Savings and Loan (S&L) debacle, between 1985 and 1995, there were over 1,000 felony convictions in cases designated as major by the U.S. Department of Justice.
In contrast, no senior bank executives faced prosecution for the widespread mortgage fraud that contributed to the 2008 financial apocalypse that precipitated the Great Recession. Not a single senior banker who had a hand in causing the financial crisis went to prison. Rather than reining in Wall Street, President Obama and Congress restored the status quo ante, even when it meant ignoring a staggering white-collar crime spree.
Indeed, the Department of Justice did not prosecute a single major bank executive in the largest man-made economic catastrophe since the Great Depression. They went after the small fish, not the mortgage executives who created the toxic products or the senior bank executives who peddled them.
The S&L crisis was arguably the most catastrophic collapse of the banking industry since the Great Depression. S&Ls were banks that for well over a century had specialized in making home mortgage loans. Across the United States, more than 1,000 S&Ls had failed, nearly a third of the 3,234 savings and loan associations that existed in 1989. It is estimated that by 2019, there were only 659 S&L institutions in the United States.
In 1979, the S&L industry was facing many problems. Oil prices doubled, inflation was in double digits for the second time in five years, and the Federal Reserve decided to target the money supply to control inflation. This not only let interest rates rise, it also made them more volatile.
As inflation continued to soar, S&Ls, with their concentration in home loans, found themselves squeezed by an interest rate mismatch. The 30-year mortgages on their books earned single-digit interest rates, but they either had to pay depositors double-digit rates or lose them to competitors. Overnight, long-term depositors turned short term. Funding long-term assets like mortgages with short-term liabilities like deposits is a risky formula, and in a high-inflation environment, it quickly makes insolvency inevitable.
For sure there are several parallels between then and the failures of Silicon Valley Bank and other banks over the last several months. Just as many S&Ls went bust because surging interest rates increased their costs as mortgages brought low fixed rates of interest, many of today’s banks face similar balance sheet problems.
The changing economic and financial environment ruined the “3-6-3” business model that had served thrift executives well for decades: pay 3 percent on savings deposits, charge 6 percent on mortgages, pocket the difference, and play golf at 3:00.
In 1982, lobbying from the S&L industry led Congress to permit them to make highly leveraged investments far removed from their original franchise to provide mortgage funding. In response, the federal government also enacted statutory and regulatory changes that lowered the capital standards that apply to S&Ls.
For the first time, the government approved measures intended to increase S&L profits, as opposed to promoting home ownership. The premise underlying the changes was that deregulation of markets could let the S&Ls grow out of their insolvency. Instead, the crisis culminated in the collapse of hundreds of S&Ls, which cost taxpayers many billions of dollars and contributed to the recession of 1990-1991.
And some S&Ls contributed to the development of a Wild West attitude that led to outright fraud among insiders. Many S&Ls ended up defrauding their depositors and speculating on high-risk ventures, engaging in illegal land flips, engaging in accounting fictions, and other criminal activities.
The S&L crisis teaches at least one important lesson: There is no ending financial chicanery without holding senior bankers accountable for their wrongdoing.