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.

When markets are in a “seek and destroy” mode, like the last dragon in Game of Thrones, it’s fruitless to guess where they might attack next in search of weaklings. But their next focus, alongside the impact of fast-rising interest rates on bond portfolios, may be commercial property and commercial real estate loans.

Concerns about a commercial office space crash have followed the collapse of Silicon Valley Bank, Signature Bank, and the regional banking crisis that began in early March. Federal Reserve officials have stressed that the collapse of these two banks had nothing to do with commercial real estate.

So often used for investment purposes, higher interest rates are making the commercial office property sector far less enticing.  Fast increases in the Federal Reserve Bank’s benchmark interest rate have led to significant shifts in customer behavior.  Institutional investors are shunning real estate for higher yields at lower risk on government bonds.

Fragility in parts of the banking system has not stopped the Federal Reserve from pushing up interest rates to subdue stubbornly high inflation.  The Fed recently voted to raise the benchmark borrowing rate by a quarter of a percentage point, the ninth increase over the past year.  That brought the fed funds rate to a target range of 4.75-5 percent, its highest level since late 2007. Another part of the motivation to raise rates might be to show—rather than simply tell—that the central bank has faith in the banking sector.

As property deals become more expensive to finance, the appetite for them wanes, which means fewer projects being built. Across, the sector, the Green Street Commercial Property Price Index is down 15 percent in a year, with the biggest drops in urban office real estate, where space stands empty as working from home takes permanent hold and people predict the death of the office.

U.S. office occupancy rates are between 40 and 60 percent of pre-COVID levels, according to the real estate firm JLL. Further, almost a quarter of the mortgages on office building must be refinanced in 2023, according to Mortgage Bankers’ Association data, which will bring higher interest rates.

COVID changed everything when employees were forced to work from home.  While some companies have pushed for a return to the office, others have adapted to the change and are allowing their workers to stay remote.  That is a bad sign for office owners.  As leases come up for renewal, many companies that have embraced work from home as the new normal will opt to terminate the leases.  That leaves some banks, especially regional ones, facing losses on real estate loans.

Consider that commercial real estate is a highly leveraged asset.  When mortgages on these properties mature and owners have to refinance, interest costs increase and adversely impact cash flow. Higher interest rates and more vacancies also decrease the value of some office buildings.  Indeed, some bank commercial office real estate loans may be threatened.

This is especially concerning for smaller banks, due to larger exposure as a percentage of their assets. For example, before its collapse, Signature Bank had the 10^th-largest commercial real estate book in the United States. Another bank in the news, First Republic, had the ninth-largest loan portfolio in the same market.

According to Fitch Ratings “the office sector faces asset quality deterioration, putting smaller banks at risk.” It may turn out that the pretense that Silicon Valley Bank was a one-off is finished.

In 1992, Warren Buffet coined the phrase: “It’s only when the tide goes out that you learn who’s been swimming naked.” Now that the flood of cheap money has drained away and interest rates are on the rise, there may be more unpleasant revelations.

It’s unclear what the market dragon’s breath may scorch next.  But the next banking calamity may be commercial office real estate

Before the 1980s, corporations rarely repurchased shares of their own stock.  But this year alone S&P 500 firms are buying back stock at double the pace of last year.  It is forecast that there will be at least $1 trillion in completed corporate stock buybacks by the end of the year.

All this despite a 1 percent tax included in the Inflation Reduction Act that went into effect on January 1 that is designed to slow stock buybacks.  Corporations that are awarded a piece of the $39 billion in grant money under the CHIPS and Science Act may also be barred from doing corporate stock buybacks.

Now the White House wants to further increase taxes on stock buybacks.  In his recent State of the Union address, President Biden said the tax should be much higher.  “Corporations ought to do the right thing.  That’s why I propose we quadruple the tax on corporate stock buybacks and encourage long-term investments.  They will still make considerable profit.”

That comment may have led the Oracle of Omaha, Warren Buffet, to weigh in on the hot button issue in the Berkshire Hathaway CEO’s annual letter to investors touting the benefits of repurchases: “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”

Still, Buffet included a caveat: he says buybacks make sense only if they are made at “value accretive prices,” i.e. when corporation don’t overpay.

Taking a step back, corporations have a number of ways to allocate capital:

1. Make capital investments designed to grow their businesses. For example, buying new machinery or pouring more resources into research and product development;
2. Acquire or merge with another company or business unit that the corporation believes could help grow its core business;
3. Pay regular cash dividends to shareholders that tend to be more reliable than stock buybacks, an actual real return of cash to investors; and
4. Use the money to repurchase their shares—a stock buyback automatically increases earning per share and has a stronger short-term impact with little, if any, tax consequences for shareholders.

As with many things in finance, the answer to whether stock buybacks are good for investors is “it depends.”

If a corporation sees its shares as undervalued and is flush with cash, a buyback could be a way to generate shareholder value.  A share buyback reduces the number of the corporation’s outstanding shares in the stock market and, theoretically, its share price should rise. Shareholders will own a bigger portion of the corporation and therefore a bigger portion of its earnings.

In theory, a corporation will pursue stock buybacks because they offer the best potential return for shareholders with relatively lower risk than other options for allocating capital.  When a corporation announces a stock buyback, it makes sense to ask if the firm believes its stock is cheap, or if there are other factors at play, such as senior management lining their own pockets in the case of a compensation incentive for executives based on stock price.

Also, investors are concerned if the stock buybacks are financed with debt, unlike dividends that are typically paid for out of cash flow, which makes the corporation’s balance sheet less resilient. Of course, it is a good sign if senior management is also buying company stock for themselves.

The tricky part in considering corporate stock buybacks is making sure senior executives are focused on sustainable long-term growth opportunities rather than increasing stock prices and engaging in share price manipulation while prioritizing the short-term.