The Savings and Loan (S&L) scandal of the 1980s and early 1990s was one of the largest financial scandals in United States history. It was the failure of hundreds of S&L institutions in the late 1980s and early 1990s, resulting in a taxpayer-funded bailout costing nearly $124 billion.
The roots of the scandal can be traced back to the early 1930s when the Federal Home Loan Bank Act was passed. The act established a new type of financial institution, the savings and loan association, to provide affordable home mortgages to middle-class Americans. These institutions were allowed to offer high-interest savings accounts to their customers, and they invested these funds in long-term, fixed-rate home mortgages.
For decades, S&Ls operated safely and soundly. However, in the 1970s and 1980s, deregulation allowed S&Ls to make riskier investments, such as commercial real estate and speculative loans. This led to a boom in the S&L industry, as entrepreneurs and investors saw the potential for high profits.
Unfortunately, many of these investments turned out to be disastrous. By the mid-1980s, a large number of S&Ls were insolvent, with assets worth less than their liabilities. Some S&L executives, in a desperate attempt to save their institutions, engaged in illegal and unethical practices such as fraud, embezzlement, and insider trading.
One of the most notorious figures in the S&L scandal was Charles Keating, the chairman of the Lincoln Savings and Loan Association in California. Keating, a prominent businessman and political donor, used Lincoln S&L as his personal piggy bank, siphoning off millions of dollars for his own use. He also engaged in fraudulent practices such as selling risky junk bonds to unsuspecting investors.
Keating’s fraudulent activities were eventually uncovered, and he was convicted on multiple counts of fraud and racketeering. He was sentenced to ten years in prison, but his sentence was later reduced to time served due to a technicality.
The S&L crisis also had a significant impact on the US economy. As the number of failed S&Ls increased, the federal government was forced to step in and bail out the failing institutions with taxpayer money. The bailout cost nearly $124 billion, making it one of the largest financial disasters in US history.
The S&L scandal led to the passage of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989, which created the Resolution Trust Corporation (RTC) to oversee the liquidation of failed S&Ls. FIRREA also established new regulations for the banking industry, including stricter accounting standards, increased capital requirements, and improved regulatory oversight.
In conclusion, the S&L scandal was a major financial crisis that had a significant impact on the US economy. It was caused by a combination of deregulation, risky investments, and illegal practices by S&L executives. While the scandal led to important regulatory reforms, it also serves as a cautionary tale about the dangers of financial deregulation and the importance of ethical business practices.