Big Money Crime Fraud And Politics In The Savings And Loan Crisis

How The S&L Mess Actually Worked

The savings and loan crisis of the 1980s and early 90s wasn't some grand conspiracy that some shadowy cabal planned out in advance. It was a slow-motion collision between deregulation, weak oversight, and guys who thought they could cheat the system because they had friends in Washington. The basic mechanism is straightforward if you've ever worked in lending: you relax the rules on what institutions can lend money for, you underfund the insurance that's supposed to backstop deposits, and then you wait for everyone to start making bad bets. I was down in Dallas around 1987, working on some commercial loan restructuring for a mid-size S&L that was already showing cracks. The thing nobody tells you about these situations is how mundane the fraud looked at the time. It wasn't elaborate. It was people just... not reporting losses. Assets were carried at appraised value instead of market value. Loans that were clearly underwater were rolled over and restructured rather than marked to death. The accounting rules back then, specifically the FASB Statement 91 and the accounting treatment for thrifts, allowed you to keep going even when the numbers told a different story.

Big Money Crime Fraud And Politics In The Savings And Loan Crisis

The political side is where this gets ugly. Congress had been pushing deregulation since the early 80s. The Depository Institutions Deregulation and Monetary Control Act of 1980 started it, but the real accelerator was the Garn-St Germain Depository Institutions Act of 1982. That law let thrifts get into commercial real estate lending, expanded adjustable-rate mortgages, and generally opened the door for S&Ls to chase yields they weren't qualified to handle. The legislation was pushed by thrift lobby groups with deep pockets and close relationships with key committee members. You can read the congressional records and see exactly who testified, who called in favors, and where the money flowed. The fraud side operated on two tracks. There was the ordinary kind: inflating property appraisals, pretending a subdivision had absorption rates it never achieved, labeling speculative land deals as residential development loans. Then there was the criminal enterprise side, which is what most people think of when they talk about the S&L scandal. Charles Keating and the "Keating Five" is the textbook case. He ran a scheme through Lincoln Savings and Loan that basically amounted to running a Ponzi structure with depositors' money while wiring campaign contributions to five sitting senators who then looked the other way when regulators came knocking. Here's something most summaries leave out: the regulatory capture wasn't accidental, it was structural. The Federal Home Loan Bank Board, which oversaw thrifts, was understaffed and underfunded relative to the industry it was supposed to regulate. You had maybe a few hundred examiners trying to review the books of thousands of thrifts. The ones who did find problems got transferred or pushed out. I knew an examiner in Chicago who flagged a thrift for inflated commercial paper holdings and suspicious related-party lending. Six months later he was reassigned to documentation review in a different state. The thrift failed eighteen months later for twice the amount he'd identified.

The workaround I ended up using when I was dealing with this stuff was to look at the cash flow coverage ratios on the underlying collateral, not the appraised values. Appraisals were basically fiction at that point, often done by appraisers who knew their reports would determine whether their client bank stayed in business. But if you took the actual debt service on a property and compared it to the principal and interest payments due, you could see pretty quickly which loans were paying from income and which were paying from hope. It cut my due diligence time down from a week to about two days per file, though it didn't do much for the guys who'd already signed off on the deals. A counter-intuitive thing about the crisis: the biggest losses didn't come from the wild west criminals like Keating. They came from the boring, seemingly legitimate expansion into commercial real estate by established thrifts that had been doing residential lending for decades. These were operations that had compliant examiners and clean reports right up until the moment they didn't. The 1986 Tax Reform Act is largely responsible here. It eliminated many tax shelters around commercial real estate, which crashed property values overnight. Thrifts that had loaded up on leveraged RE loans based on tax-advantaged valuations suddenly found themselves holding assets worth half what they'd paid. This wasn't fraud. It was a policy decision that created the conditions for widespread insolvency among otherwise respectable institutions. The cleanup cost is still a point of debate. The actual resolution through the FIRREA act of 1989 and the creation of the RTC wound up costing taxpayers roughly $124 billion in nominal dollars, though some economists put the total economic cost including lost output and distorted credit markets closer to $500 billion. The deposit insurance fund was completely drained, which is why FIRREA had to restructure the entire regulatory framework and move thrift supervision to the OTS.

If you're looking at this for practical reasons, say you're dealing with legacy S&L assets or trying to understand the regulatory precedent, the key document is FIRREA itself. It's available on government sites. The RTC published extensive reports on how they resolved institutions. The GAO also has a series of studies from the early 90s that are still useful. What I'd recommend is ignoring the political narratives and looking at the actual asset quality data from the period. The quarterly call reports for individual thrifts tell you more than any book written about the crisis. One final thing nobody emphasizes enough: the people who profited the most weren't always the ones who got convicted. There's a difference between criminal fraud and aggressive valuation techniques that happened to produce bad outcomes when the market turned. Prosecutors focused on the dramatic cases because they were easier to sell to a jury. The guys who structured the deals using every loophole in the relevant regulations mostly walked away with their bonuses intact. That distinction matters if you're trying to draw any practical lessons about what actually gets you in trouble versus what just gets you a settlement.