The Unlearned Lesson of the Savings and Loan Debacle

Ron Berger —

bank-3In Michael Moore’s new film Where To Invade Next, he visits other countries to bring back good ideas to the United States. In one scene, he interviews a government official in Iceland about his country’s criminal prosecution of bankers after the global financial crash of 2008. No such prosecutions, Moore reminds us, took place in the United States (see my March 9, 2016, Wise Guys article). The irony of this contrast, the Iceland official notes, is that the precedent for such prosecutions was the U.S. prosecutions of bankers in the aftermath of the savings and loan (S&L) scandal of the 1980s, when about 1,100 individuals were charged and about 840 were convicted of crimes, with more than three-quarters of those convicted sentenced to prison.

While viewing Moore’s film, however, it occurred to me that most Americans may not understand the nature of the S&L debacle and how we failed to learn from past mistakes, mainly, the danger of deregulating financial markets.

The money that depositors lost due to the S&L scandal was insured by the federal government, and the bailout cost taxpayers about $480 billion. If interest on the borrowed money is taken into account, the cost was even higher. Moreover, it is no small matter that criminal activity was a significant factor in 70 to 80 percent of the failed S&Ls and that as much as 25 percent of the losses were due to crime.

So, what was this scandal all about?

The federally insured S&L system was established in the early 1930s as a depression-era measure designed to ensure the availability of home loans, promote the construction of new homes, and protect depositors from the types of financial devastation that followed the 1929 stock market crash. According to criminologists Kitty Calavita and Henry Pontell, federal regulations prohibited S&Ls from making risky investments, essentially confining them “to the issuance of home loans within 50 miles of their home office.” By the 1970s, however, S&Ls could no longer compete with other financial institutions such as mortgage companies (for home loans) and mutual funds and money markets (for savings investments). They were locked into long-term, low-interest loans they had previously made and were prohibited by law from offering adjustable-rate mortgages or from offering more than 5.5 percent interest on deposits (even during a period of double-digit inflation).

During the 1970s, the S&L industry’s net worth declined dramatically, and by 1980, 85 percent of S&Ls were losing money. At that time a complete bailout of the industry utilizing taxpayer dollars might have cost about $15 billion. But instead of cutting losses at this level, President Ronald Reagan and the Democratic-controlled U.S. Congress opted for a strategy of deregulation. Federal legislation passed in the early 1980s phased out restrictions on interest rates and opened up new areas of investment for S&Ls, which were now authorized to “make consumer loans up to 30 percent of their total assets; make commercial, corporate or business loans; and invest in nonresidential real estate worth up to 40 percent of their assets.”

The new (de)regulations also gave the S&Ls unprecedented access to funds by removing the 5 percent limit on brokered deposits, that is, aggregated deposits placed by middlemen that yielded high interest rates for investors and exorbitant commissions for brokers. These funds were used to finance risky speculative investments that had the potential for either high payoffs or financial calamity. In addition, S&Ls were allowed to provide 100 percent financing to borrowers, essentially giving them risk-free loans. And the government dropped the requirement that S&Ls “have at least 400 stockholders with no one owning more than 25 percent of stock,” thereby allowing a single entrepreneur to own and operate a federally insured S&L. At the same time, the amount of federal depository insurance was raised from $40,000 to $100,000 per account.

Deregulation, in Calavita and Pontell’s words, was “the cure that killed.” S&Ls lost billions of dollars through legal investments that were previously illegal, and the deregulated climate opened the industry to insider abuse and crime. These crimes included what Calavita and Pontell call unlawful risk-taking, whereby S&Ls extended their investment activities beyond the levels allowed by law—for example, by exceeding the 40 percent limit on commercial real estate loans. S&Ls also compounded the risk they undertook by failing to conduct adequate marketability studies to insure the feasibility of their investments, as they were required by law to do.

The crimes of the S&L industry also included what Calavita and Pontell call collective embezzlement. Unlike ordinary cases of embezzlement, which typically entail lone, relatively subordinate employees stealing from the company in which they work, collective embezzlement involved the misuse and theft of funds by the S&L’s ownership and top management. During the 1980s, some S&L officials treated their institutions as personal slush funds, throwing elaborate parties and purchasing expensive luxury goods like artwork, antiques, yachts, airplanes, and vacation homes. They also gave themselves and their associates excessive “salaries as well as bonuses, dividend payments, and perquisites” beyond what was “reasonable and commensurate with their duties and responsibilities.” And some of them engaged in fraudulent loan schemes such as “straw borrowing,” whereby people outside of an S&L obtained loans on behalf of people within the S&L, thus circumventing the legal limit on the proportion of an institution’s loans that could be made to insiders. Another scheme entailed insiders from one S&L authorizing loans to insiders of another S&L in return for a similar loan.

Lastly, the S&L scandal included illegal cover-ups, that is, the manipulation and misrepresentation of financial books and records to conceal fraudulent practices from government regulators, hence preventing regulators from learning about an S&L’s impending financial insolvency and delaying the closure of the institution. Regulators were not always adversaries of S&Ls, however, as some who anticipated lucrative “job offers at salaries several times … their modest government wages” even collaborated with S&L operators to protect them from scrutiny and criminal prosecution.

George Santayana famously said, “Those who cannot remember the past are condemned to repeat it.” As noted, the S&L debacle should have been a warning about the dangers of deregulating financial markets, but the American people and their political representatives failed to learn from this experience. I fear that even after the financial crash of 2008, we still have not heeded this lesson.


Ronald J. Berger. 2011. White-Collar Crime: The Abuse of Corporate and Government Power. Lynne Rienner Publishers.

Kitty Calavita & Henry N. Pontell. 1990. “Heads I Win, Tails You Lose: Deregulation, Crime, and Crisis in the Savings and Loan Industry.” Crime & Delinquency 36, pp. 309-341.

Jeffrey Reiman. 2007. The Rich Get Richer and the Poor Get Prison: Ideology, Class, and Criminal Justice. Allyn & Bacon.

Joseph E. Stiglitz. 2012. The Price of Inequality: How Today’s Divided Society Endangers Our Future. W.W. Norton.



Comments are encouraged.

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s