PSU Magazine Summer 1990

Should federal regulators Bail Out or Butt Out? The savings and loan crisis has prompted some illogical and unnecessary takeovers, say a PSU professor and a PSU alumna from the S&L industry. By John R. Kirkland M any gallons of ink have been devoted to the crisis in the sav– ings & loan industry, giving the impression that most S&Ls are corrupt and failing, and that commercial banks are cruising along trouble-free . Both impressions are wrong, according to Leslie "Les" Anderson, chairman of the Finance and Law Department in PSU 's School of Business Administration. First of all, some S&Ls may have gotten a bad rap. Yes, corruption and fai lure in the S&L industry is so extensive that it will cost, at last count, $ 1,000 to $2,000 for every man, woman and child in the United States to repair. But the regulations that the federal government enacted to control the damage are sometimes illogically imposed on S&Ls that don't need them, hampering their managers from helping their institu– tions out of short-term problems. Second, Anderson said there have been more failures of banks in the United States si nce 1980 than at any other time since the Great Depression. Although healthier and more diversified than the S&Ls, banks are still plagued by the fact that much of their loans are for real property, and the value of those properties have fallen - as seen in the farm belt, parts of Texas affected by the oil bust of the late '80s and other regions of the country. At the same time, banks have made loans worth millions of dollars to developing countries - many of whom are unable to pay them back. If commercial banks begin failing at the rate of S&Ls, the American public could see a much bigger bill than they 're seeing with the S&Ls . The FSLIC , which insures sav– ings & loan deposits, ran out of funds to cover losses, and has been dissolved into the FDIC, which insures banks and which currently has $ 14 billion in assets. Anderson said close to 1,000 of the nation's roughly 12,500 banks have some degree of serious problem. "So if we had a recession of any severity, that $14 billion could be wiped out in the twinkle of an eye ." Can the banks avoid what happened to the S&Ls? History and the way banks do busi– ness would indicate they can. But the bigger question, according to Anderson, is how much of a role should the government play in keeping the sick ones alive? A look back shows how the government 's role as financial babysitter may have created much of the mess in the first place. Savings & loans came under federal regulation in 1932 during the Hoover admin– istration and the first years of the Great Depression . The regulation dictated that S&Ls provide basically two services: mak– ing home loans and taking savings deposits. The interest they paid on savings deposits was limited by law, and the rest of the business was so simple that , Anderson said, the typical S&L had about half the staff of a (John R. Kirkland, a Portlandfree-lance writer and photographer, is a frequent conn·ibutor to PSU Magazine .) bank of simil ar size . Kathleen Day, a Washington Post reporter who is writing a book on the S&L crisis, wrote that execu– tives lived by the "3-6-3 rule: Pay depositors 3 percent interest. Lend the money out at 6 percent. Play golf at three o'clock." Since almost all the loans they made had large downpayments or were VA and FHA in– sured, "this was the place to be ," said Anderson. The kinks in this otherwise smooth-run– ning system began happening in the mid- 1960s and conti nued through the '70s when short term interest rates rose above the level of interest rates financial institutions were chargi ng for loans . Depositors who had a ceiling on the rates they were getting from the local S&L began pulling out their money, finding they cou ld get a better deal buying money markets, mutual funds and treasury bills. The S&Ls began running out of money. In 1980 and 1982 , Congress passed laws to deregulate the S&Ls, in effect allowing them to be more like commercial banks. They eliminated the ceiling on deposit rates , and allowed the S&Ls to expand their business beyond just simple home loans. Kathleen Day writes "The government continued to give federal aid to S&Ls while it allowed the industry to venture headlong into commercial real estate, futures markets, gambling casinos, shopping centers , you name it. " Not only did the S&Ls make loans for these ventures, they invested in them themselves . And in the many cases where the investments were unprofitable, the S&Ls took a bath. Anderson says the fact that FSLIC was PSU 7