SAVINGS & LOAN CRISIS.   Term Paper ID:18348 Click to get this paper

Essay Subject: Closing of institutions, costs, causes (fraud, bad loans, interest rates), deregulation, possible solutions.... More...

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Paper Abstract: Closing of institutions, costs, causes (fraud, bad loans, interest rates), deregulation, possible solutions. Paper Introduction: Introduction The purpose of this research is to examine the country's savings and loan crisis, as of mid-summer 1990. Considered in this examination are (1) the magnitude of the problem, (2) the causes of the problem, (3) solution of the problem, and (4) an evaluation of the government's handling of the problem. Magnitude of the Problem In mid-summer 1989, the Bush Administration reported to the Congress that as many as 500 savings and loan institutions would likely have to be closed by the government (Nash, 1990). In mid-summer 1990, the Chairman of the Resolution Trust Corporation, the government agency established to deal with the crisis, reported to the Congress that the true number of institutions which the government will likely be required to seize will be Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. The Bush appointee was forcedto resign, and estimates of the cost of the bail-out soared (Quint, 199 ). Both the bail-out plan and the Resolution Trust Corporation soonbecame croppers. Between 1945 and 1981, however, failures offinancial institutions were not exactly rare, and the bank failure rate didnot rise with each significant downturn in the economy. Thus, it is more appropriate to say thatthe objective of deregulation is to permit, to the extent possible, freemarket conditions to prevail. As usual, where either the ReaganAdministration was, or the Bush Administration is required to deal with anon national defense issue, rose-colored predictions and under funding wasthe order of the day. Causes of the Problem National politicians, from the president on down, tend to treat thesavings and loan crisis, as they do the drug crisis, and all other crises:as if it is some alien in our midst, which has no relation to our society,and which certainly is not the fault of whatever politician or politicalparty spokesperson is doing the talking at the time. Chief among thesefactors cited by federal politicians, industry regulators, and mediacolumnists are (1) fraud, (2) imprudent loans to the small players in theoil industry, and to real estate developers in states heavily dependentupon the oil industry, which, in each instance, were severely and adverselyaffected by the collapse of world oil prices in the mid-198 s, and (3) awidening gap in the interest rate margin between earning assets and fundingliabilities, which resulted, in great part, from home owners defaulting onlong-term, high-interest mortgages issued in the late-197 s. At the same time, however, itmust be recognized that the banking and finance industry in the UnitedStates at the time of deregulation was confronted with a dynamic economicenvironment, including the most severe recession since that of the 193 s.Thus, many of the outcomes which accompanied deregulation were likely alsoinfluenced by other factors. Theargument also fails to recognize what kind of banking and financialenvironment the country might have had since the mid-193 s, if consumerconfidence in the system had not been restored largely through the creationof federal deposit insurance. The fundamental objective of deregulation in the United States is thesame, regardless of the particular industry which was being deregulated,and regardless of the extent to which a particular industry was beingderegulated. Until the Bush Administrationdecides to deal openly and honestly with the problem, the will continue toget deeper and deeper. The real culprit isderegulation which changed the thrift segment of the financial industry,and which put pressures on savings and loan institutions to compete inactivities for which they were unprepared. Klaman, S.B., & Rubison, J. Such projections, however, convenientlyoverlook both the national debt/federal budget deficits, and the country'scumulative international trade deficit. The evidence, however, indicates that, for whateverspecific reasons, the banking and financial environment in the UnitedStates is less stable in the deregulated era than it was in the regulatedera. As we are often reminded, however, the American economyhas been in a sustained period of growth since mid-1984. Recent bank failures. In mid-summer 199 , the Chairman ofthe Resolution Trust Corporation, the government agency established to dealwith the crisis, reported to the Congress that the true number ofinstitutions which the government will likely be required to seize will becloser to 1, (Nash, 199 ). Evaluation of the Governments Handling of the Problem It is clearly evident that the primary motive of the BushAdministration in dealing with the savings and loan crisis has been tounderestimate the magnitude of the problem, so that the president maycontinue to resist tax increases (Nash, 199 ). Realistic estimates of the totalprogram cost now range between $4 billion and $1 trillion (Nash, 199 ). On the one hand, deregulation permitted many thrift institutionsand commercial banks to enter into activities wherein they had littleexpertise. In mid-summer 199 , whilethe Bush Administration does not dispute the statements of the Chairman ofthe Resolution Trust Corporation with respect to the cost of the bailout,it is highly upset that he made the projection public before the fallcongressional elections (Nash, 199 ). (1987). Government PrintingOffice. Further, the narrowing (or, in some cases,theelimination) of interest rate ceilings between commercial banks and thriftsresulted in a restructuring of the activities of the two institution types(Klaman, & Rubison, 1987). Mandate for change:restructuring the banking industry. Deregulation in banking and finance was accompanied by bank failures(of both thrift institutions and commercial banks), and bank runs (on boththrift institutions and commercial banks). The Chairman also requested $1 billion to deal with the problem infiscal year 1991 (Nash, 199 ). The Bush Administration's appointee to head theCorporation quickly came under fire on charges of both incompetency andfavoritism, and the woeful inadequacy of the estimates of the fundingrequired for the plan soon became apparent. Boston: Auburn House. (1986, April 11). (199 , April 7). New York Times, pp. (199 , July 31). Morespecifically, it is contended that the unstated policies that (1) thegovernment will not permit large thrift institutions and commercial banksto fail (there will be a bailout of some sort, according to thiscontention), and (2) the tendency to reimburse all depositors--even thosewhose deposits are above the levels of the federal deposit insurance.These unwritten policies, according to some economists, destroy marketdiscipline in banking. New York: McGraw-Hill. Problems of thrift institutionsin the deregulated environment. (1981). Solution to the Problem In the summer of 1989, both the Congress and the Bush Administrationwere struggling with the problem of developing an effective and anacceptable solution to the problem which has come to be known as thesavings and loan crisis. Certainly, some ofbanking's failures which occurred prior to mid-1983 were the result of afailing economy. Considered in this examination are (1)the magnitude of the problem, (2) the causes of the problem, (3) solutionof the problem, and (4) an evaluation of the government's handling of theproblem. New estimate on savings bailout sayscost could be $5 billion. Introduction The purpose of this research is to examine the country's savings andloan crisis, as of mid-summer 199 . FRBSF WeeklyLetter, 1-3. The crisis in the savings and loan industry threatens todwarf the commercial bank failures; yet, the two phenomena are related asto both cause and effect. As is true withrespect to the drug crisis, and other crises, this approach to the savingsand loan crisis overlooks the facts that (1) the savings and loan crisis isthe result of actions and policies integral to American society and federalgovernmental policy, and (2) the savings and loan crisis is not an isolatedphenomenon within the American financial environment. Airlinederegulation: The early experience. The effects of deregulation in the banking and financial sector inthe 198 s encompassed far more significant activities than a mere shiftingof business between the players. This fundamental objective is to permit industries to operatein a free market (Meyer, & Oster, 1981). The magnitude of the problem was purposefully down-played, so that the funding package for the plan could fit reasonablycomfortably within a Congress/Administration compromise federal budget. Federal Deposit Insurance Corporation. The eighth full year of regulatory revision (deregulation) in bankingand finance in the United States was completed at the end of 1989. Savings regulator seeks $1 billion forbailout in '91. 1, 19.----------------------- 3 Responsibleestimates, however, limit fraudulent activities to approximately five-percent of the total problem. The case appears strong for some degree ofreregulation. Failures, and bank runs also surfacedsubsequent to 1981, although regulatory revision could not be said to bethe primary causal factor for all of these events (Federal DepositInsurance Corporation, 1987). Although this fundamental appliesregardless of the industry involved, it is tempered to a degree by thecharacteristics of each industry. As an example,the activities of commercial banks and investment-type institutions overlapto a greater extent than was true prior to regulatory revision. Washington: U.S. In199 , there exists some blurring of the functions of the major players inthe industry, as well as the presence of many new players. It is now projected that the savings and loancrisis will turn out to be the most expensive financial disaster in thecountry's history (Nash, 199 ). The counter-arguments appear to blame both banking regulation andbanking deregulation for contemporary commercial bank and thriftinstitution failures. Meyer J.R., & Oster, C.V., Jr. New York Times, pp. Commercial bank failures in the mid-to-late 198 s were the highest(well over 1 per year) for any period since the economic depression ofthe 193 s (Federal Deposit Insurance Corporation, 1987). If such an undesirable outcome as bankfailure were going to derive from deposit insurance, one would haveanticipated such an occurrence long before the decade of the 198 s. The counter-arguments appear to blame both banking regulation andbanking deregulation for contemporary thrift institution commercial bankfailures. Thedistinction between commercial banks and thrift institutions had also beenblurred. It is quite possible, however, thatderegulation is either or both (1) an underlying cause, to some extent, ofeach of factors more generally cited as causes of the savings and loanproblem, or (2) a primary cause of the savings and loan problem. Eventually, the Congress and the Administrationcompromised on a bailout plan for the industry, and created the ResolutionTrust Corporation to administer it. While there is a theoretical attraction to this argument, it fails torecognize that deposit insurance had been a part of the banking environmentfor 5 years before the sudden rash of thrift institution and commercialbank failures began to occur. The failing economy--particularly in energy, agriculture, and realestate--was the cause of many of the thrift institution and commercial bankfailures subsequent to 1981. In may be argued with merit that deregulation encouraged many banksand thrifts to enter into activities wherein they had little expertise. The outcomes of governmental actions are not always as anticipated.Certainly some of the outcomes of governmental deregulation in banking andfinance were not anticipated. The problems which are being experienced by the savings and loanindustry have been attributed to a number of factors. Coping with bankfailures: Some lessons from the United States and the United Kingdom.Economic Review (Federal Reserve Bank of St. Some economists contend that the banking problems of the 198 s may belaid at the foot of the recession of the early 198 S. Itmay also be argued with merit that banks and thrifts which might haveotherwise survived significant economic downturns were unable to do so inthe deregulated environment, because of the increased levels of competitionbrought about by deregulation. (1986, December). References Cyrnak, A.W. Nash, N.C. Fraud is thefactor most often seized upon by the Bush Administration, because theythink they can then pin the problem on some bad guy. Magnitude of the Problem In mid-summer 1989, the Bush Administration reported to the Congressthat as many as 5 savings and loan institutions would likely have to beclosed by the government (Nash, 199 ). Even moreworrying was the fact that the Federal Deposit Insurance Corporation (FDIC)continued to rate more than 1,1 American banks as problem institutions,with respect to assessments of capital, assets, management, earnings, andliquidity; all factors which could lead to the failure of a bank (Gilbert,& Wood, 1986). Quint, M. A factor mentioned only incidentally as a cause of the savings andloan problem is the role of the deregulation of the banking and financeindustry in the United States. This amount, together with the $5 billionappropriated for the Resolution Trust Corporation in the current fiscalyear exceeds the estimate of the total five-year cost of the bailout ($137billion) provided by the Bush Administration last summer (Nash, 199 ).Additionally, no responsible individuals think that the total cost of thebailout will be limited to $15 billion. (Eds.). Gilbert, R.A., & Wood, G.E. on the other hand, thrift institutions and commercial bankswhich might have otherwise survived significant economic downturns wereunable to do so in the 198 s, because of the increased levels ofcompetition brought about by banking and financial deregulation. Louis), 5-14. It is, however,in the mid-to-late 198 s, when the effects of the recession of 1981-1983should have little impact, that the surge in thrift institution andcommercial bank failures occurred. The falling real estate prices, the failure of the oil industry, andall of the other factors most often blamed for the current savings and loancrisis are actually ancillary contributors. (1987). Thrift institutions are now permitted to engage in all retailbanking activities, although not all thrifts availed themselves fully ofsuch opportunities. The current savingsand loan crisis resulted in part from governmental actions, and is relatedto other quite recent financial sector debacles. Some economists argue that the availability of federal depositinsurance also contributed to the increase in the failure rate for boththrift institutions and commercial banks (Cyrnak, 1986). Al, C2. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.