Did deregulation cause the Savings & Loans debacle of the 1980s?

Government deregulation occurred throughout the 1980s, as part of President Reagan’s overall attempt to reduce the hand of government in business activities. He deregulated wage and price controls, the oil industry, the banking industry, and other government-controlled pricing mechanisms. President Reagan also reduced taxes, cut government domestic spending, and maintained strict control on monetary policy. This was called Reaganomics. “Inflation dropped significantly in the 1980s, from over 13% when he took office to around 5% at the end of his term.”[1] I have already discussed the effects of monetary policy in the section on inflation. The point here is that all these effects are interrelated.

Because of deregulation in the banking industry, many S&Ls throughout the country were either taken over by disreputable people or by honest people turned dishonest by the lure of easy money and the low probability of prosecution. One regulation change of particular note was the thrift ownership requirement: In April 1982, this requirement was changed from mandating a minimum of 400 shareholders, with no shareholder owning more than 25%, to allowing a single shareholder to own 100% of the S&L. As one could expect, this type of change brought out the worst in people and attracted the nastiest types to the S&L industry. As Pizzo, Fricker, and Muolo state in Inside Job: The Looting of America’s Savings and Loans, “…many of the ‘entrepreneurs’ attracted by these changes were actually con men intent upon draining as much money from the system as they could and then moving on.”[2]

Deregulation went further for the state chartered thrifts, and the two worst states for potential fraudulent activity were California and Texas. In California, “…virtually anyone could own an S&L, attract as many deposits as he could pay for, and invest all those deposits in anything.”[3] This was a result of the Nolan bill, which came about because all the California S&Ls were becoming federally chartered, and it was an attempt at regulation “parity” to compete for S&L business in the state. In Texas, the state thrifts were known for risk taking, deal making, and political schmoozing. In addition, Texas real estate was a hot market, because the oil industry was booming and oil prices had jumped 500% from the late ‘70s to the early ‘80s.[4]

One of the prime examples of excess and mismanagement of an S&L was Centennial Savings and Loan in Northern California. Centennial was run by Erwin Hansen, a former CEO of Far West Financial and a senior executive of Imperial Savings and Loan. In 1983, Hansen lent large sums of money to the executives of Centennial and booked those loans as profit, even though they were extremely inflated assets that would become underperforming and eventually end up in default. He also overpaid himself and the other Centennial executives, and provided them with additional perks like cars and parties paid for by Centennial.[5] In August 1985, Centennial was taken over by the government due to insolvency. It was one of the more expensive S&L failures, costing taxpayers $160 million.

mortgage paperwork

[1] The American President, A Complete History, by Kathryn Moore, 2007, Fall River Press, New York, New York, page 55

[2] Inside Job: The Looting of America’s Savings and Loans, by Stephen Pizzo, Mary Fricker, and Paul Muolo, 1989, McGraw-Hill Publishing Company, New York, New York, page 13

[3] Ibid, page 21

[4] Ibid, page 20

[5] Ibid, pages 30-37