# Understanding the Savings and Loan Crisis: Key Events and Its Impact

![Savings and Loan Crisis (S&L)](https://www.investopedia.com/thmb/NSgOWHSFu2Cc0zg1pCRg5RwkDFM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/sl-crisis.asp-Final-f916747a014841a0a28e67be567ff5e6.jpg)

*— Investopedia / Yurle Villegas*

## What Was the Savings and Loan (S&L) Crisis?

The Savings and Loan Crisis in the late 20th century marked a period of speculative lending and financial collapse affecting over 1,000 institutions across the U.S. Arising from regulatory mismatches, moral hazards due to deregulation, fraud, and risky lending practices, the crisis demanded a massive taxpayer-funded bailout and led to significant financial reforms. This article explores the causes, the government’s response, and the lasting implications on the banking industry.

### Key Takeaways

*   The Savings and Loan Crisis led to the failure of over 1,000 S&Ls in the 1980s and 1990s, costing taxpayers $132 billion.
*   Deregulation and speculative lending fueled the crisis, creating a moral hazard with taxpayer-backed guarantees.
*   The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 was implemented to address the crisis and reform the S&L industry.
*   The crisis significantly impacted the Texas economy, contributing to a recession due to rampant real estate speculation and fraud.
*   Similarities exist between the S&L Crisis and the 2007-2008 financial crisis, both involving speculation, poor risk management, and taxpayer-funded bailouts.  
    

## Key Events and Factors Behind the S&L Crisis

Restrictions placed on S&Ls at their creation via the [Federal Home Loan Bank Act of 1932](https://www.investopedia.com/terms/f/federal-home-loan-bank-act.asp)—such as caps on interest rates on deposits and loans—greatly limited the ability of S&Ls to compete with other lenders as the economy slowed and inflation took hold. For instance, as savers piled money into newly created [money market](https://www.investopedia.com/terms/m/moneymarket.asp) funds in the early 1980s, S&Ls could not compete with traditional banks due to their lending restrictions.

Add in a recession—sparked by high-interest rates set by the Fed in an effort to end double-digit inflation—the S&Ls were left with little more than an ever-dwindling portfolio of low-interest mortgage loans. Their revenue stream had become severely tightened.

By 1982, the fortunes of S&Ls had turned. They were losing as much as $4.1 billion per year after having turned a healthy profit in 1980.

## Unfolding of the S&L Crisis: A Timeline

In 1982, in response to the poor prospects for S&Ls under current economic conditions, President Ronald Reagan signed [Garn-St. Germain Depository Institutions Act](https://www.investopedia.com/terms/g/garn-st-germain-depository-institutions-act.asp), which eliminated loan-to-value ratios and interest rate caps for S&Ls, and also allowed them to hold 30% of their assets in consumer loans and 40% in commercial loans. No longer were S&Ls governed by [Regulation Q](https://www.investopedia.com/terms/r/regulationq.asp), which led to a tightening of the spread between the cost of money and the rate of return on assets.

With reward uncoupled from risk, [zombie thrifts](https://www.investopedia.com/terms/z/zombie-bank.asp) began paying higher and higher rates to attract funds. S&Ls also began investing in riskier commercial real estate and even riskier [junk bonds](https://www.investopedia.com/terms/j/junkbond.asp). This strategy of investing in riskier and riskier projects and instruments assumed that they would pay off in higher returns. Of course, if those returns didn’t materialize, it would be taxpayers \[through the [Federal Savings and Loan Insurance Corporation](https://www.investopedia.com/terms/f/federal-savings-and-loan-insurance-corporation-fslic.asp) (FSLIC)\]—not the banks or S&Ls officials—who would be left holding the bag. That's exactly what eventually happened.

This combination of deregulated lending and capital requirements along with a taxpayer-funded guarantee backstop created an enormous [moral hazard](https://www.investopedia.com/terms/m/moralhazard.asp) in the S&L industry. S&Ls were allowed to take greater risks and incentivized to do so excessively. The result was rapid growth in the industry along with ballooning speculative risk.

At first, the measures seemed to have done the trick, at least for some S&Ls. By 1985, S&L assets had shot up by nearly 50%; far faster growth than banks. S&L growth was especially robust in Texas. Some state legislators allowed S&Ls to double down by allowing them to invest in speculative real estate. Still, over one in five S&Ls were not profitable, as of 1985.

Meantime, although pressure was mounting on the FSLIC's coffers, even failing S&Ls were allowed to keep lending. By 1987, the FSLIC had become insolvent. Rather than allowing it and S&Ls to fail as they were destined to do, the federal government recapitalized the FSLIC, exposing taxpayers to even greater risk. For a while longer, the S&Ls were allowed to continue to pile on risk.

## Fraud and Misconduct in the S&L Sector

The "Wild West" attitude among some S&Ls led to outright fraud among insiders. One common fraud saw two partners conspire with an appraiser to buy land using S&L loans and flip it to extract huge profits. Partner 1 bought land at market value, then, with a rigged appraisal, it was sold at a higher price to Partner 2 using an S&L loan, which was defaulted on. Both partners and the appraiser would share the profits. Some S&Ls knew of—and allowed—such fraudulent transactions to happen.

Due to staffing and workload issues, as well as the complexity of such cases, law enforcement was slow to pursue instances of fraud even when they were aware of them.

## Resolving the S&L Crisis: Legislative and Regulatory Actions

As a result of the S&L crisis, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which amounted to a vast revamp of S&L industry regulations. One of the most significant actions of the FIRREA was the creation of the [Resolution Trust Corporation](https://www.investopedia.com/terms/r/resolution-trust-corporation.asp), which had the goal of winding down the failed S&Ls that regulators had taken control of.

> **Important**
>
> FIRREA was passed by George H.W. Bush and provided $50 billion to cover costs and losses associated with the crisis.

The act also put forth minimum capital requirements, raised insurance premiums, limited S&L non-mortgage and mortgage-related holdings to 30%, and required the divestment of junk bonds. When all was said and done, the Resolution Trust Corp. had liquidated more than 700 S&Ls.

## Aftermath of the S&L Crisis: Economic and Industry Impact

The S&L crisis was likely the worst banking collapse since the [Great Depression](https://www.investopedia.com/terms/g/great_depression.asp). Across the United States, more than 1,000 S&Ls had failed by 1989, essentially ending what had been one of the most secure sources of home mortgages.

> **Fast Fact**
>
> The S&L market share for residential mortgages before the crisis was 45% (1980); after, it was 27% (1990).

The crisis hit the finance and real estate sectors hard, likely triggering the 1990-1991 recession, as new home building plummeted to World War II levels. Some economists speculate that the regulatory and financial incentives that created a [moral hazard](https://www.investopedia.com/terms/m/moralhazard.asp) that led to the 2007 subprime mortgage crisis are very similar to the conditions that led to the S&L crisis.

## Texas: The Epicenter of the S&L Crisis Impact

The crisis was felt doubly hard in Texas where at least half of the failed S&Ls were based. The collapse of the S&L industry pushed the state into a severe recession. Faulty land investments were auctioned off, causing real estate prices to plummet. Office vacancies rose significantly, and the price of crude oil dropped by half. Texas banks, such as Empire Savings and Loan, took part in criminal activities that further caused the Texas economy to plummet. The bill for Empire's eventual default cost taxpayers about $300 million.﻿﻿

## State Insurance Challenges Amid the S&L Crisis

The FSLIC was established to provide insurance for individuals depositing their hard-earned funds into S&Ls. When S&L banks failed, the FSLIC was left with a $20 billion debt that inevitably left the corporation bankrupt, as premiums paid into the insurer fell far short of liabilities. After the FSLIC's dissolution in 1989, the responsibilities of the defunct institutions were transferred to the [Federal Deposit Insurance Corporation](https://www.investopedia.com/terms/f/fdic.asp) (FDIC) that oversees and insures deposits today.

During the S&L crisis, which did not effectively end until the early 1990s, the deposits of some 500 banks and financial institutions were backed by state-run funds. The collapse of these banks cost at least $185 million and virtually ended the concept of state-run bank insurance funds.

## The Keating Five: A Political Scandal in the S&L Crisis

During this crisis, five U.S. senators known as the Keating Five were investigated by the Senate Ethics Committee due to the $1.5 million in campaign contributions they accepted from Charles Keating, head of the Lincoln Savings and Loan Association. These senators were accused of pressuring the [Federal Home Loan Banking Board](https://www.investopedia.com/terms/f/fhlb.asp) (FHLBB) to overlook suspicious activities in which Keating had participated. The Keating Five included:

1.  John McCain (R–Ariz.)
2.  Alan Cranston (D–Calif.)
3.  Dennis DeConcini (D–Ariz.)
4.  John Glenn (D–Ohio)
5.  Donald W. Riegle, Jr. (D–Mich.)

In 1992, the Senate committee determined that Cranston, Riegle, and DeConcini had improperly interfered with the FHLBB's investigation of Lincoln Savings. Cranston received a formal reprimand.

When Lincoln failed in 1989, its bailout cost the government $3 billion and left some 23,000 depositors with worthless junk bonds. Keating was convicted of conspiracy, racketeering, and fraud, and served time in prison before his conviction was overturned in 1996. In 1999 he pleaded guilty to lesser charges and was sentenced to time served.

## Do Savings and Loans Still Exist?

Yes, they do. As of 2023, it is estimated there were 563 savings and loan institutions in the U.S. This is down from 3,371 in 1989.  

## How Many People Were Prosecuted for the Savings and Loan Crisis?

More than 1,000 bankers were convicted by the Justice Department after the Savings and Loan Crisis.  

## How Was the S&L Crisis Different or Similar to the Credit Crisis of 2007–2008?

Both crises were a result of boom and bust cycles. Both banks and thrifts were involved in financing the booms and then were negatively hit when the situation took a downturn. Speculation was present in both crises, with real estate being a big part as well as poor risk management in the institutions.

Commercial real estate was a critical area causing issues as commercial real estate lending standards were loosened in the 1980s. Most of the banks that failed were small but both crises saw large banks having trouble and needing assistance from the government. In both crises, taxpayer money was used to save these institutions.

The Savings and Loan Crisis, however, involved three recessions, and was longer in length, while the 2007-2008 crisis was just one recession and shorter in length. In the Savings and Loan crisis, bank failures were gradual and spread over time, whereas in the 2007-2008 crisis, bank failures were rapid.

## What Could Regulators Have Done Better to Solve the Savings and Loan Crisis?

Regulators failed to stop savings and loans from using federally insured deposits to make risky loans. Reagan also cut the budget of the regulatory staff at the FHLBB, removing its ability to investigate high-risk loans. Certain states also passed laws that allowed savings and loans to invest in speculative real estate.

At the time, banks were also not using [mark-to-market](https://www.investopedia.com/terms/m/marktomarket.asp) accounting, which required the value of assets to be continuously adjusted to reflect their true value. So banks were not devaluing their assets on their books if they lost value, making them look more profitable than they actually were.

## How Were Commercial Banks Affected by the Savings and Loan Crisis?

Both savings and loans and commercial banks have been taxed heavily to pay for the Savings and Loan Crisis. At the end of the 1980s, Congress removed the walls that separated commercial banks and S&Ls, whereby much of the S&L industry today has been folded into the regular banking industry.

## The Bottom Line

The Savings and Loan Crisis of the 1980s and 1990s marked a devastating financial collapse, impacting over 1,000 U.S. savings and loans. This crisis was fueled by excessive speculation, deregulation, and moral hazards, culminating in significant taxpayer bailouts and the insolvency of the Federal Savings and Loan Insurance Corporation (FSLIC).

The upheaval led to regulatory reforms under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), yet it underscored vulnerabilities that persisted, eventually contributing to the 2007-2008 financial crisis. As we reflect on these events, understanding the risks associated with speculative lending and the importance of prudent financial regulation remains crucial for preventing future economic turmoil.

> **Article Sources**
>
> 1.  Federal Deposit Insurance Corporation. "[The Savings and Loan Crisis and Its Relationship to Banking](https://www.fdic.gov/bank/historical/history/167_188.pdf)."
>     
> 2.  U.S. Government Accountability Office. "[Resolving the Savings and Loan Crisis: Billions More and Additional Reforms Needed](https://www.gao.gov/products/t-afmd-90-15)."
>     
> 3.  Federal Reserve Bank of Chicago. "[The Incredible Shrinking S&L Industry](https://core.ac.uk/download/pdf/6986269.pdf),"
>     
> 4.  International Banker. "[The Savings and Loan Crisis (1989).](https://internationalbanker.com/history-of-financial-crises/the-savings-and-loan-crisis-1989/)"
>     
> 5.  New York Times. "[Charles Keating, 90, Key Figure in ’80s Savings and Loan Crisis, Dies](https://www.nytimes.com/2014/04/02/business/charles-keating-key-figure-in-the-1980s-savings-and-loan-crisis-dies-at-90.html)."
>     
> 6.  Federal Deposit Insurance Corporation. "[BankFind Suite: Find Annual Historical Bank Data](https://banks.data.fdic.gov/explore/historical/?displayFields=STNAME%2CSAVINGS%2Cnewcount%2Cchartoth%2Ctochrt%2CTOT_FDIC&selectedEndDate=2020&selectedReport=SIS&selectedStartDate=1989&selectedStates=0&sortField=YEAR&sortOrder=desc)." Enter "2023" in "End Date.'
>     
> 7.  Frontline. "[Were Bankers Jailed in Past Financial Crises](https://www.pbs.org/wgbh/frontline/article/were-bankers-jailed-in-past-financial-crises/)?"