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Essay Subject: Examines savings & loan crisis of 1980s & failure of Baltimore institution. Causes, effects, role of Federal Reserve.... More...

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Paper Abstract: Examines savings & loan crisis of 1980s & failure of Baltimore institution. Causes, effects, role of Federal Reserve. Paper Introduction: OLD COURT SAVINGS AND LOAN: AN EXAMINATION OF AN S&L FAILURE Introduction This research examines the failure of the Old Court Savings and Loan Association of Baltimore, Maryland. The broader focus of this research is one failures of savings and loan (S&L) institutions in the United States in the 1980s. This analysis includes a description and an analysis of the prevailing economic and financial environment within which the failure of the institution occurred, an assessment of asset and debt management at the institution, as well as a review of the problems leading to the institution’s failure and the role of the Federal Reserve in the closing of the S&L. A Description and An Analysis of the Economic and Financial Environment Within Which the 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. It was also at this point that the people of Maryland learnedthat the private insurer was unable to cover the deposits. The events did have aneffect on thrift industry officials in Maryland, however, as they rushed toprotect the industry at the expense of the Maryland public (Singer, 1987). In Maryland, state banking regulators and thegovernor reacted to the run on savings and loan institutions in that stateby placing six institutions in receivership, freezing depositor funds inthose six institutions, placing a withdrawal limit of $1, on alldepositor funds in all of the remaining state-chartered thrifts inMaryland, creating a Maryland Deposit Insurance Corporation to replace theprivately run thrift insurance organization that had been created by thestate legislature, eventually requiring that all state-chartered savingsand loan institutions in Maryland become members of the FDIC, and mostimportantly by causing years of misery and hardship for savings and loandepositors in the State of Maryland (Pyatt, 1989). There was, however, another factor involved in the problems of thethrift industry that both the Bush Administration and most members ofCongress were reluctant to mention because to do so would cast doubt on oneof the most sacrosanct of current government policies-deregulation ("StudyFinds Regulators-Not Auditors-to Blame for S&L Debacle," 1991). By that time, hundreds of savingsand loan associations were either insolvent, or were in danger of becominginsolvent in the relatively near future. It wasquite possible-even probable, however, that deregulation was either or both(1) an underlying cause, to some extent, of each of factors more generallycited as causes of the thrift industry problem, or (2) a primary cause ofthe problems being experienced by the industry (Benston, 1986). From 1976 through 1978,President Carter and the Congress implemented fiscal policies once againdesigned to stimulate a depressed economy. A Description and An Analysis of the Economic and Financial Environment Within Which the Failure of the Old Court Savings and Loan Association Occurred The savings and loan crisis was brought into sharp focus for theAmerican people in the summer of 1989, when it had developed to a pointwhere the Bush Administration and the Congress could no longer afford tobehave as if the problem did not exist. Daniel Singer summed up the regulatory actions of the State ofMaryland in the savings and loan crisis as follows: "The situation is aclassic example of what happens when disinterested politicians and timidbureaucrats delegate responsibility to protect the public interest toindustry representatives, whose concern is for the industry first and forthe public interest second. In late-1979, work was initiated in the Congress to overhaul thecountry's banking and financial regulatory structure. The effects of deregulation in the banking and financial sectorin the 198 s encompassed far more significant activities than a mereshifting of business between the players. Knowledgeable sources contendedthat the thrift industry as a whole was losing between $3 million and$4 million each month. Gilbert, R. "For a Former Thrift Executive, the Verdict IsIn-But His Industry Is Still On Trial," Washington Post, 8 June 1989, C3. (1994, April). As a result, many state-chartered commercial banks and most thriftinstitutions were required to maintain reserve accounts with the System,and, as well, these institutions gained access to the System services(Timberlake, 1985). One outcome ofthe disclosure of this knowledge was a depositor run on all state-chartered, privately-insured savings and loan institutions in the state,including the Old Court Savings and Loan Association (Brenner, 199 ). New York: New York University, 1986. 1 4-113). Four days lateron 17 May 1985, Governor Hughes signed into law hastily enacted legislation(a package of seven separate bills) to address the crisis. Maryland's regulatory mechanism was too laxdue to reliance on S&L industry self-regulation and self-insurance. Through the setting of the discount rate and the interbankborrowing rate, the Federal Reserve can exert a more immediate impact oninterest rates. In the summer of 1989 (when the S&L crisis came to the attention ofthe general public), the banking and finance industry was well into theeighth year of deregulation. Once again, thefunctioning of the IS-LM model in response to the monetary policy actionsof the federal reserve, together with the fiscal actions of the Presidentand the Congress, alternately encouraged and discouraged the placement offunds in thrift institutions. 633-651). On 13 May1985, Old Court Savings and Loan was placed in conservatorship, and theState of Maryland contributed $25 million to subsidize the purchase ofanother Maryland thrift institution, Merritt Commercial, by Chase Bank.Two other troubled thrift institutions, Chesapeake Savings and Loan andFriendship Savings and Loan, were merged with Chase Bank in the sametransaction (Brenner, 199 ). When a large savings and loan institution such as Old Court Savingsand Loan Association in Maryland failed, the private deposit insurancecompany was unable to cover the losses (Valentine, 1992). (White, 1991). E. "Ohio Banking Crisis Shakes the Balance of SystemStability and Market Discipline." Trusts & Estates, 124 (1985): 8, 1 . Pyatt, Rudolph A., Jr. The Ohio experienceshould have alerted the thrift industry in Maryland, the state governmentin Maryland, and the federal banking regulators that something was wrong.If any of these parties had acted wisely and quickly, the savings and loandebacle in Maryland might have been avoided. (1992). Unfortunately, the outcomes of governmental actions are not always asanticipated. S&L Debacle: PublicPolicy Lessons For Bank and Thrift Regulation. 162-181). In the Maryland case, such aconclusion would be only partly true, because the managements were removedfrom several of the institutions. The failure of Homes Savings and Loan sparked a run on savings andloan institutions in Ohio (Thompson 1985). Federal ReserveBulletin, 78(9), 633-651. Thestate itself meant no harm to consumers, but it made the mistake of havingfaith in the good intentions of the S&L industry" (Singer, 1987, p. The Maryland savings and loan crisis did not occur in a vacuum. Monetary policy report to Congress. Walsh, Sharon W. Kidd, P. To quell the panic, statebanking regulators and the Governor of Ohio closed down all state-charteredsavings and loan institutions in the state (Leverson, 1985). The failing economy-particularlyin energy, agriculture, and real estate-has been cited the cause of many ofthe banking failures subsequent to 1981 (Stephens, 1986). A Keynesian perspective on money.Lloyds Bank Annual Review, 5, 162-181. When the Republicanslost the congressional elections in 1982, and with President Reagan'spopularity slipping to the point where the Administration began to worryabout the prospects for the 1984 presidential election, a major fiscalpolicy shift was made by the Reagan Administration. As aconsequence, the depositors in the failed institutions lost their funds,and when the word spread depositor runs began on all savings and loaninstitutions in those states whose deposits were privately insured (Horn1985). Brenner, Joel G. This number was the largest in any single year in the United Statessince the Great Depression of the 193 s. Even more worrying was the fact that theFederal Deposit Insurance Corporation (FDIC) continued to rate more than1,1 American banks as problem institutions, with respect to assessmentsof capital, assets, management, earnings, and liquidity; all factors whichcould lead to the failure of a bank. An Assessment of Asset and Debt Management At Old Court Savings and Loan Association For many thrift institutions in Maryland and especially for the OldCourt Savings and Loan Association, the matching of a changing financialenvironment with an existing mortgage loan portfolio resulted in asituation where a negative interest spread existed between an institution'searning assets and its deposit liabilities.(Walsh, 1989). In the development and implementation of fiscal policy,both the President and the Congress also can affect interest rate levels.Heavy deficit spending, which occurred at historically high levels duringthe Reagan and Bush Administrations, places pressures on the capitalmarkets, which, in turn, often lead to interest rate increases. "Don't Worry It Can't Happen Again." US Banker, 96(1985): 55-56. Klaman, S. The problems being experienced by thethrift industry were attributed to a number of factors. "Lessons From Maryland's Savings and Loan Disaster."Business and Society Review, No. "Statement to Congress." Federal Reserve Bulletin, 71(1985): 415-418. 1). The statechartered savings and loan institutions in Ohio were not allowed to reopenuntil they had secured federal deposit insurance (Singer, 1987). In1985, 12 banking institutions in the United States failed (Gilbert & Wood,1986). Problems of Thrift Institutions in theDeregulated Environment, rev. ed. While theAdministration publicly proclaimed that it was staying the course, itsfiscal policies dramatically changed from that of a tight-fisted monetaristorientation to a Keynesian orientation which might have made Keynes' mostardent supporters blush (Kaldor & Trevithick, 1992, pp. "Study Finds Regulators-Not Auditors-to Blame for S&L Debacle." PublicAccounting Report, 15 May 1991, 2. (1992, September). Oneresult of the policy shift was a dramatic boost for a depressed economy.Another effect was the reelection of the President. Old Court Savings and Loan: An Examination of an S&L Failure Introduction This research examines the failure of the Old Court Savings and LoanAssociation of Baltimore, Maryland. Thompson, T. Spotting shifts in markets. In Ohio, the failure of the Homes Savings and Loan Association and thesubsequent depositor runs on other privately insured savings and loaninstitutions in the state prompted state banking regulators and theGovernor of Ohio to close all state chartered, privately insured savingsand loan institutions in the state. "Health of Washington Region's S&Ls Is RapidlyDeteriorating." Washington Post, 1 September 199 , WB1. "Judge Acquits Md. Between 1945 and1981, however, failures in the economy were not exactly rare, and the bankfailure rate did not rise with each significant downturn in the economy. This analysis includes a description and an analysis of theprevailing economic and financial environment within which the failure ofthe institution occurred, an assessment of asset and debt management at theinstitution, as well as a review of the problems leading to theinstitution's failure and the role of the Federal Reserve in the closing ofthe S&L. On top of these unexpected outcomes,the crisis in the savings and loan industry threatened to dwarf thatproblem of commercial bank failures (Council of Economic Advisers, 1995). The DepositoryInstitutions Deregulation and Monetary Control Act of 198 was enacted, andthis legislation was followed two years later by the complementaryDepository Institutions Act of 1982. Mandate for Change:Restructuring the Banking Industry. The banking decontrol acts also expanded the types of financialinstitutions (1) for which mandatory membership in the Federal ReserveSystem was required, or (2) to which regulation by the System was extended. Concluding Assessment One might conclude that, if government bailed out every faileddepository institution, there would be little incentive for bankingmanagers to act in a prudent manner. Among other things,the acts removed most interest rate ceilings (the exception beingcommercial demand deposits), and the prohibition against the paying ofinterest on checkable accounts was lifted. An Analysis of the Causes of Savings and LoanAssociation Failures. The Role of the Federal Reserve in the Closing of the Old Court Savings and Loan Association The savings and loan crisis in the 198 s was precipitated by thecombined effects of a multitude of factors (Kidd, 1994, pp. Maryland's savings and loans didnot even begin to emerge from the crisis until 1989. Louis), 68 (December 1986): 5-14. "State S&L's: The End of An Era." Baltimore BusinessJournal, 15 May 1992, 1-2. Both the regulatory structure, andthe structure of the country's financial system were transformed throughthe implementation of the two banking decontrol acts. The distinction between commercial banks andthrift institutions had also been blurred. Wood. E. Washington: United States GovernmentPrinting Office, 1987. Through manipulation of the money supply,the Federal Reserve can cause interest rate changes on a somewhat delayedbasis. The functioningof the IS-LM model in response to the monetary policy actions of thefederal reserve, together with the fiscal actions of the President and theCongress, alternately encouraged and discouraged the placement of funds inthrift institutions. Economic indicators. Net losses fromthis mismatch began to appear early as 1979. Thestate's action requiring state chartered thrift institutions to acquirefederal deposit insurance before being allowed to operate in the future wasa good decision (Walsh, 1989) Private deposit insurance in the UnitedStates has never been a success when the insurer has been asked to cover alarge loss. The broader focus of this research isone failures of savings and loan (S&L) institutions in the United States inthe 198 s. Council of Economic Advisers. The policiesalso, however, stopped the economy in its tracks. Failures and bank runs alsosurfaced subsequent to 1981, although regulatory revision could not be saidto be the primary causal factor for all of these events (Federal DepositInsurance Corporation, 1987). A Review of the Problems Leading to the Failure of the Old Court Savings and Loan Association On 9 May 1985, Old Court Savings and Loan in the State of Maryland wasdepleted of $15 million in funds in a run on the institution that wasprecipitated by rumors of trouble at the thrift (Walsh, 1989). In March 1985, the Home Savings and Loan Association in Ohio failed(Stephens, 1986). In the mid-197 s, the Arab Oil Embargo sent prices up and theeconomy down. Maio, Patrick J. All of these parties,however, sat on their hands and waited for the sky to fall, and fall itdid. Some ofthese savings and loans were unable to meet these qualifications, includingthe Old Court Savings and Loan Association, and were required to merge withother institutions before their deposit accounts were insured by the FDIC.Some of these thrift institutions, such as the Old Court Savings and LoanAssociation, were unable to find acceptable merger partners (Walsh, 1989). Timberlake, R. Although the crisis became apparent to the American public in thesummer of 1989, it was full-blown by that time, having developed into aserious problem by the mid-198 s. The Ohio thrift failure occurred two months earlier thanthe first run on a savings and loan in Maryland. Commercial bank failures in the mid-to-late198 s were the highest (well over 1 per year) for any period since theeconomic depression of the 193 s. 6 (Winter 1987): 38-4 . In 1979, however, the nationexperienced a second energy crisis, inflation zoomed, and new residentialhousing starts crashed. "Maryland near End of Chapter in S&L Crisis."Washington Post, 26 June 1989, F1.White, Lawrence J. "Coping with Bank Failures: SomeLessons from the United States and the United Kingdom." Economic Review(Federal Reserve Bank of St. One of theseseven bills created the Maryland Deposit Insurance Fund to take over fromthe private insurance fund that had been guaranteeing the deposits at thestate-chartered thrift institutions in Maryland. New York: McGraw-Hill Book Company, 199 . Washington:U.S. Chief among thosefactors cited by the Bush Administration, the Congress, and industryregulators were (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. A., and G. Had the courts convicted most of thethrift managers brought to trial by the state, the message for thriftinstitution managers would have been stronger (Valentine, 1992). It was at this point that affected state-charteredthrifts in Maryland, including the Old Court Savings and Loan Association,notified the state's private deposit insurer of the need to cover thedeposits. In New York, the failure of the BoweryMutual Savings Bank prompted the FDIC (the deposit insurer for Bowery) toplace massive amounts of funds on deposit in the institution, in an effortto stabilize the operation. By that time, many ofthem were engulfed by the national savings and loan crisis (Maio, 1992). Government Printing Office, July 1986. The Federal Reserve acted to control inflation, and thoseactions raised interest rates and unemployment. In the early-198 s, loosely coordinated monetary policy implementationby the Federal Reserve and fiscal policy implementation by the ReaganAdministration was designed to stop price inflation in its tracks, and thepolicies worked (Council of Economic Advisers, 1995, p. As an example, the activities of commercial banks andinvestment-type institutions overlapped to a greater extent than was trueprior to regulatory revision. 4 ). W. Later, when the state-chartered savings and loan institutions inMaryland sought federal deposit insurance from the FDIC, they were requiredto demonstrate that they met the standards for financial reserves,operational ratios, and managerial policies required by the FDIC. Throughout this period, the thrift industry was ona roller-coaster over which the industry had no control. MortgageBanking, 54(7), 1 4-113. Leverson, I. Between the time of the beginning of the savings and loan crisis inMaryland in 1985 and 1987, the State of Maryland took over six thriftinstitutions in the state (Walsh, 1989). Valentine, Paul W. S&L Officers of Fraud,Conspiracy." Washington Post, 22 April 1992, D1. H., Jr., "Legislative Construction of the MonetaryControl Act of 198 ." American Economic Review 2 (May 1985): 88-1 2. New York: Oxford UniversityPress, 1991. References Benston, George J. Horn, K. Certainly some of the outcomes of governmental deregulationin the airline and communications industries differed from predictions,and, in the summer of 1989, it was becoming apparent that some of theoutcomes of deregulation in banking and finance were not what had beenpredicted. Singer, Daniel. On 13 May 1985 also, Maryland Governor Harry Hughes ordered a $1, per month withdrawal limit for all depositors at the state-charteredsavings and loan associations in the state (Walsh, 1989). 1 4-113).Among the more significant of these factors was monetary policy. In the early-197 s, the Federal Reserve loosened the money supply, andPresident Nixon and the Congress increased federal spending, in policyactions designed to stimulate a depressed economy (Kidd, 1994, pp. Two days later, 19 May1985, the governor's general distribution fund paid $111 million to OldCourt Savings and Loan depositors. (1995). At that time, there existed some blurring ofthe functions of the major players in the industry, as well as the presenceof many new players. Kaldor, N., & Trevithick, J. By 1985, the cumulativelosses were so large and the net worth deficiency was so high that it wasno longer possible for some savings and loan institutions, the Old CourtSavings and Loan Association most particularly, to meet withdrawal demandsfrom depositors. None ofthese events appeared to have any impact on regulatory or politicalofficials in either Maryland or Washington, D.C. TheFederal Reserve can exert a significant influence on the level of interestrates through the development and implementation of monetary policy(Monetary, 1992, pp. By this time, thriftinstitutions were permitted to engage in all retail banking activities,although not all thrifts availed themselves fully of such opportunities.Further, the narrowing (or, in some cases, the elimination) of interestrate ceilings between commercial banks and thrifts resulted in arestructuring of the activities of the two types of institutions (Klaman &Rubison, 199 ). N. Federal Deposit Insurance Corporation. B., and Rubison, J. 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.