Insolvency at Inception:

How Regulatory Mismanagement Forced

George H. W. Bush to Bailout the Savings and Loan Industry

Andrew S. Terrell

A Paper for the 2010 Southwestern Social Science Association Conference

Saturday; 3 April 2010 11:30
HI 61: NEW BIOGRAPHICAL PERSPECTIVES IN AMERICAN HISTORY
Phi Alpha Theta Session
Chair & Discussant: A.W.R. “Rusty” Hawkins, Ph.D. West Texas A&M University
In the past two years, the housing market collapse and bailout under the W. Bush and Obama
administrations received considerable attention and criticism. Lenders exploited the 2005 and
2006 housing booms in the country and offered thousands of variable interest rate loans without
much credit scrutinizing and future market speculation. As we know now, the results of the
housing collapse have revolutionized mortgage lending forever. What will become more
apparent to future scholars, is the realization that this more recent bailout is a continuation of
comprehensive mortgage lending legislation that went into effect during the H.W. Bush
administration.

Merely eighteen days into his presidency, Bush decided to meet with his cabinet and key
policymakers to determine their course of action for a comprehensive solution to the Savings and
Loan thrift, mortgage industry. Here is an excerpt from an 8:04am speech to his advisers.

We've got a big problem in this savings and loan industry. There are no easy answers and no
worrying about the blame -- plenty to go around. I want to see the problem solved. We need
ideas, and if we're overlooking something, we want to know what it is.

Whatever we come up with will not be popular but we've got to get on and get the problem
solved. I appreciate your coming down here early to discuss this today. I'll go out with it publicly
probably early next week and see where we go from there.

Before we break up here to start on our consultations, let me say -- and I think I speak for
everybody here -- that the safety of those deposits is guaranteed, will continue to be guaranteed,
and that there should be no feeling around the country that some solution will do anything to
diminish the credit of the United States being behind the deposits in the FSLIC, and the FDIC.
Thank you all very much, and now let's all go to work.

The Savings and Loan Crisis of 1989 was a direct result of corporate and state myopia in

addition to failures to adapt regulations to the changing economy throughout much of the 20th

century. Shortsighted regulations that ruined the thrift industry included slow, reactive policies

during the aftermath of the 1929 market crash, a failure to implement policy that made S&Ls less

susceptible to the expanding economy of the mid-20th century, and deregulation policies amid a

period of inflation and rising interest rates in the 1970s and 1980s. 1 President Bush inherited a

fifty-year-old economic crisis and became the first executive to propose and follow through on a

comprehensive solution.

2
 Bush’s proposal was too little, too late, however. By 1989, an inclusive bailout of the

S&L depositors seemed to be the only resolution to the S&L crisis.2 Federal insurance caps on

S&Ls had increased incrementally since the establishment of the Federal Savings and Loan

Insurance Corporation (FSLIC) in 1934 from five thousand to one hundred thousand in 1982.

Because of the increases in the amount insured in S&L deposits, Bush faced the largest federal

insurance gap in U.S. history. To make things worse, the country elected Bush on a platform of

“no new taxes” while decreasing the federal deficit. The deficit issue was significant because it

doubled in the eight years of Ronald Reagan’s administration from 1981 to 1989. In order to

secure the desired comprehensive solution, the Bush administration enacted the Financial

Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The plan was

expensive, nonetheless, necessary by 1989. The bailout and FIRREA were the inevitable

culminations of an industry mismanaged for five decades.3

Administrations before the Great Depression failed to grant early S&Ls the same security

given banks with the creation of the Federal Reserve System in 1913-insurance on deposits for

consumer confidence. As a result, over 1,700 thrifts failed when the market crashed in 1929. Up

to $200,000,000 in savings dissolved. Though there were 12,000 individual S&Ls in operation

during the 1920s, they were not integrated into a sole industry; they were largely regulated by

individual states if regulated at all. This calamity prompted President Herbert Hoover to sign the

Federal Home Loan Bank Act of 1932 that created a federal S&L pyramid and developed the

Federal Savings and Loan Associations. Under the bank act, Hoover appointed five citizens to

the Federal Home Loan Bank Board (FHLBB) which supervised twelve district Federal Home

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Loan Banks (FHLB). To help launch newer S&Ls, the Treasury Department agreed to contribute

up to $125,000,000 dollars.4

The Great Depression caused many savings to be lost, and moreover, it devastated the

housing market. As FDR entered office in 1933, part of his first New Deal legislation was the

National Housing Act of 1934. For the S&L industry, FDR’s act created the Federal Savings and

Loan Insurance Corporation (FSLIC) that insured thrift deposits much like the FDIC did for bank

accounts. Because S&Ls were federally insured then, tight regulations controlled the industry.

S&Ls were mostly limited to making home loans, and individual branches were confined to

issuing these mortgages only to properties within a fifty-mile radius of the S&L office. In

addition to the obvious limitations to future expansionist investments was the acceptance of

short-term deposits while offering fixed-rate, long-term loans. As the real estate market

recovered and grew after WWII, S&Ls began paying more in interest to their depositors than

they received in interest payments from their loans. 5 The shortsighted regulations were

quintessential of most New Deal legislation; the early enactments were intended to be temporary.

The 1950s housing boom, caused by increasing family incomes and stable employment,

allowed real estate prices to soar. By the mid-1950s long-term savings of individuals within the

S&L associations increased exponentially. S&Ls marked the second largest dollar increase from

1945-1953 among savings, bonds, and life insurance reserves ($15.5 billion). Additionally,

FSLIC liability increased from five to ten thousand dollars per account in 1951. Confidence in

S&L deposits grew along with the increases in federal insurance. Home mortgages reached a

new high of $19.7 billion during 1953, and S&Ls provided 37% of this figure.6 The industry

was still vulnerable to any increase in interest rates, but the economic boom after WWII

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concealed the threat for another decade. Proactive adaptation to the changing real estate market

and rising interest rates did not occur during this period, however. In essence, because of the

expanding economy, regulations remained untouched. This may be attributed to the rationale

that warns to avoid fixing things that are not deemed broken.

The next phase of S&L mismanagement culminated in the 1980s deregulation policies of

Carter and Reagan. The eventual S&L Crisis that faced President Bush in 1989 has largely been

misconstrued as a result of this deregulation era solely. These misconceptions came to fruition

because of limited historical perspective during the crisis itself. For example, federal

enforcement of regulations were lax because S&Ls had histories of safe investments. The few

demand deposits that had variable interest rates were limited by federal regulations; only a small

amount of variable interest accounts could be offered at each individual S&L. Once President

Carter deregulated the industry in 1980, thrift executives looted their institutions and exploited

the new regulations by indulging in risky ventures formerly forbidden. 7

The federal S&L industry was insolvent at inception and the ultimate bailout was a victim

to unchanging regulations. Ultimately, the government’s largest bailout of the 20th century was

that of the S&L industry. Bush was forced to act in 1989 with FIRREA because the severity of

the S&L industry-wide insolvency was publicly exposed.

The early acts that brought S&Ls under the federal umbrella also perpetuated a

catastrophic flaw within the industry. An overwhelming majority of policies and programs

enacted during the Great Depression were geared toward massive spending in hopes of restarting

the economy. In the housing market, S&Ls realized steady rises in investment returns through

the war years as their capital revenue returned from the earlier withdrawal phase. However, as

5
WWII drew to a close, the payments on mortgages from the Great Depression era did not

increase. Nevertheless, interest rates for the S&Ls to borrow money from their pyramid structure

did increase as did dividend payments to depositors. 8

As the country shifted into the 1960s, the future of S&Ls was questionable at best.

Because presidential administrations from Hoover to Eisenhower failed to grasp the vulnerability

of the S&L industry, the threat increased as time passed on. The main problem with the S&L

industry was not a lack of well-intended prospects, but a dereliction of the FHLBB and

presidential administrations to adapt S&L structures to the changing economy from the Great

Depression to postwar America. The amount of mortgage loans from S&Ls made many

individual depositors and investors wealthy as the 1950s continued. Nevertheless, the majority

of the revenue for S&Ls were interest payments on 15-30 year loans at fixed interest rates. A

point of diminishing returns for such a market became more apparent as the country coasted into

the 1960s.

Although 1959 and 1960 showed considerable growth in public savings accounts and

mortgages, contemporary economists such as Charles M. Torrance, who also worked for FSLIC

at the time, expected to the see the rising value of S&Ls and other financial institutions level off

in latter 1960. The number of S&Ls did level off in 1960, but total assets doubled from 1959 to

1965. The FHLBB expanded to include forty-six hundred institutions, of which four thousand

were members of the FSLIC. 9 This meant that an overwhelming number of S&Ls were federally

insured and entering a period of inflation and rising interest rates.

After three decades of fostering the American dream of home ownership, S&Ls were still

vulnerable to vagaries of the market. Being federally insured and regulated had its perks, but it

6
also limited portfolio expansion. Until the 1960s, interest rates and inflation were generally

stable which allowed mortgage lenders to benefit from steady payments. Mortgage rates were

slightly higher than deposit rates in order to keep an S&L solvent. The system in place from the

Great Depression era worked well enough until the recessions of the 1960s and 1970s. In an

attempt to avoid the recessions, the Federal Reserve instituted contractionary fiscal policies or

“tight money policies.” In such situations, the Federal Reserve raises its funds rate to decrease

the supply of money. Doing so causes higher mortgage rates and diverts inflation, theoretically.

In the case of the 1960s, it did not work. Vietnam exacerbated the tough times and inflated the

dollar further leading to a floating exchange rate and the end of the Bretton Woods system by

1973. This mattered to the S&L industry because the dollar was no longer fixed in value with

gold at $35 an ounce. Stagflation also contributed to the declining stability of the S&L industry;

interest rates soared as inflation devalued what funds were available.10 The S&Ls that held long-

term assets became the most susceptible to sudden insolvency.11 No presidential administration

wanted to amend regulations of the S&L industry, perhaps because they focused on commercial

banks believing S&Ls to be safer because of their limited portfolios.

The JFK, LBJ, and Nixon administrations received reports of the effects the changing

economy had on the thrift industry. In each successive report, committees recommended

permitting federal savings institutions to engage in broader investments. The aim was to allow

for a more flexible portfolio of individual S&Ls. President Nixon’s Commission (known as the

Hunt Commission) stated, “Without additional investment powers, thrift institutions would not

be able to survive.”12 So the administrations knew of the problems facing the S&L industry as

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early as 1962. However, little more than recommendations came of the committees who

investigated the deteriorating situation.

By the late 1970s, inflation rates skyrocketed to 13%. S&Ls were more susceptible to the

these hikes in interest rates because depositors were receiving higher dividends than S&Ls were

collecting from interest payments. What made matters worse, was already insolvent S&Ls were

able to mask their problems by way of poor accounting methods. These questionable banking

records were possible because of the lax enforcement protocols within the FHLBB.13

Another remnant of the 1933 banking act was Regulation Q which limited the interest

rates that S&Ls were allowed to offer on savings accounts at 5.5%. However, treasury bills were

yielding over 8% in 1970 and 15% by 1980. It was only natural for depositors to move their

money to the higher yield accounts.14 Then, in the late 1970s, prime interest rates hit 21%.

President Carter and his cabinet then agreed deregulation of the thrift industry would best

remedy the situation. This was one of the greatest blunders of S&L history.

Carter’s legislation, Depository Institutions Deregulation and Monetary Control Act

(DIDMCA), provided for a phased elimination of Regulation Q in hopes of attracting depositors

back into S&Ls who could then offer higher yield returns. Additionally, Carter’s act allowed

federally-chartered thrifts to engage in commercial lending, which was the largest growing

market in 1980. Of most significance, was how DIDMCA increased FSLIC insurance on

deposits from $40,000 to $100,000. These drastic changes in regulations forced the FHLBB to

permit expansion of S&Ls beyond their regular comfort level. 15 In Carter’s defense,

deregulation did seem to be the only option aside from additional government monies that would

cause tax increases.

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 The 1980 deregulation of the S&L industry allowed corporate leaders to have free reign

on short-term, high-return, but high-risk endeavors. Deregulation was a last effort to help the

S&L industry fix itself. After all, the majority of the debate at the time focused on S&Ls’

inability to compete. However, the ability to compete ended up as a double-edged sword.

Despite the efforts by Carter and DIDMCA, interest rates continued to climb, and savings

institutions continued to lose money. Some estimated that up to two-thirds of the S&L industry

was insolvent by 1982. President Reagan responded with the signing of the Garn-St. Germain

Act which gave regulators “new emergency powers to deal with insolvent institutions.” For

instance, allowing S&L regulators to arrange for interstate acquisitions of weaker S&Ls, new

powers to provide financial assistance to failing thrifts, and the authorization of federally-

chartered institutions “to engage in several additional bank-like powers, such as the authority to

make a limited amount of commercial loans.” It is important to recognize that Garn-St. Germain

only targeted federally-chartered thrifts, not state-Chartered institutions. However, a number of

State laws gave even broader powers to their S&Ls, “Including the authority to make direct

equity investments in speculative ventures, from wind mill farms, to hamburger franchises.”

California, Texas, and Florida deregulated their thrifts before Congress passed Garn-St. Germain

even. The mistakes were apparent by 1988 and 1989: over three-fourths of FSLIC losses were

the result of mismanaged State-chartered thrifts.16

Merely two years after Garn-St. Germain, the FHLBB attempted to address ongoing

abuses by individual S&Ls. However, many in Congress felt the FHLBB was acting

prematurely, over half of the members of the House of Representatives co-sponsored a bill to

delay the FHLBB in 1984. A year later, in 1985, the FHLBB requested $15-20 billion to aid the

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FSLIC fund. Congress underestimated the amount of insolvent institutions, and deregulation as

a cure was not working. In 1987 the Senate and House Banking Committees recommended

funding plans totaling only a third of the requested amount. Congress wanted to prevent the

FHLBB from closing insolvent thrifts, even as late as 1987. Essentially, the end $10.8 billion

funding amount was merely a form of forbearance. The final legislation authorized S&Ls to use

“phony” accounting techniques to “artificially bolster their capital, and specifically authorized

the use of ‘goodwill’ in meeting capital requirements.” Furthermore, the forbearance funding

required the FHLBB to allow tangibly insolvent institutions to remain open if “their financial

condition resulted from loans in economically depressed regions.” This was another example of

how slow the government was with reacting to changing climates. Money was released to the

FHLBB and FSLIC eighteen months after initial requests on 29 July 1987. The late funding bill

was the target of criticism in 1989 when committee members tried to blame the S&L crisis on

members of opposite parties. 17

Vice President George H.W. Bush led a commission on Regulations of Financial Services

in 1984. The commission produced its report, entitled Blueprint for Reform. Bush’s task group

made recommendations for the Reagan administration along the same lines as former reports had

since Kennedy’s commission in 1962. Bush called for more effective regulation through the

elimination of overlapping regulatory structures, uniform capital and accounting standards aimed

at ending low capital levels and “dubious accounting standards in the thrift industry.”

Furthermore, Bush recommended that the FDIC and FSLIC institute systems of risk-based

insurance premiums. Finally, the report requested that a portfolio test be taken in order to

determine “whether a thrift industry is in fact engaged in traditional specialized thrift activities.

10
Those not meeting the test would be required to be regulated as a bank and obtain deposit

insurance from the FDIC.” 18 The mass insolvency issue was not cured in the 1980s. Not on

Reagan’s watch, especially as the deficit had doubled since deregulation in 1980. The

responsibility to resolve the S&L crisis fell to the former vice president task group chair, George

Bush.

President Bush asserted his intention to permanently fix the S&L crisis in February 1989,

only days after his inauguration. FIRREA was the comprehensive solution and was introduced

more as a cleanup rather than a bailout. However, it was a legitimate bailout because tax payers

did front much of the burden throughout the early 1990s. The near $200 billion bailout price tag

was not only forced onto Bush by decades of neglect, myopia, and mismanagement, but it also

forced Bush to retract on his 1988 campaign slogan, “Read my lips, no new taxes.” In a period

of large deficits, Bush aimed to balance the budget and the S&L bailout did not allow him to

keep his promise.

The primary focus of FIRREA was to protect depositor savings. Thousands of S&Ls

were insolvent by 1989, but FSLIC insured up to $100,000 on each deposit thanks to President

Carter ten years previously. The figures in November 1990 stated “approximately 10 million

deposit accounts and $100 billion in deposits were protected” by FIRREA. FIRREA instituted

tougher capital standards that required thrift owners to increase capital at risk. However, by

November 1990, seventy-five percent of all thrifts with $750 billion in deposits were operating

on an insolvent basis. Bush also had the Department of Justice pursue major thrift crimes along

with the Federal Bureau of Investigation.19

11
 Misinformation about the total cost worried many citizens in 1989 and 1990. Published

estimates placed the cost between $100-$500 billion. The Resolution Trust Corporation (RTC),

an agency created by Bush in 1989 to aid in closing insolvent thrifts, finished its work in 1995.

By then, 747 thrifts in addition to the 296 formerly closed by the FSLIC were gone. From 1

January 1986 through 1995, federally-insured S&Ls declined in number by 50 percent. How

much did this cost the taxpayers? The Department of the Treasury initially reported a $50 billion

expected cost to solidify the S&L industry. This rose to a range of $100 billion to $160 billion in

June 1991. Analysts independent of the Treasury Department based their estimates on Thrift

Financial Report data that was inaccurate, and even outdated. The Bush administration expected

thrifts with assets of over $400 billion to be turned over to the RTC. Misinformation abounded

because such a large bailout had never been executed in American history. Furthermore, some

estimates included expected interest payments over a few years which compounded the number

significantly. Ultimately, the final number indicated that all direct and indirect losses totaled

$152.9 billion. The thrift industry itself covered 19% of that figure, leaving the burden of $123.8

billion to the taxpayers.20 The S&L bailout of 1989-1995 was the largest fund of its kind to

bailout an entire industry and its federal insurance corporation until 2008.

Why did the problem fall to Bush’s administration? Because successive administrations

did not want to have their tenure tarnished with the inevitable cost and publicity of a failed

institution. Nevertheless, since no overhaul of the system took place, the federal S&L industry

was inherently insolvent at its inception in 1932.

Though the S&L crisis was not an issue in the 1988 presidential campaign, Bush must

have considered the problem significant enough to deal with early in his administration as shown

12
by his announcement eighteen days after his inauguration. Had Bush maintained the status quo

of neglect and ignorance as shown by earlier administrations, who knows what may have come

to pass. Nonetheless, for acting on a national crisis thus forcing Bush to recall his no new taxes

pledge, he was denigrated. One can make the case that the S&L bailout was a major factor in his

failure to be reelected in 1992. From any vantage, the S&L crisis was a national tragedy on

many fronts. First, we see the inability of a federally-regulated institution to last. Secondly, utter

disbelief in the U.S. government that began with Vietnam fomented a revived sense of

incredulity towards Washington, State boards, and the S&L industry as a whole. Finally, one

sees how an industry-wide bailout became commonplace. Thank you.

1 ThriftIndustry is often used synonymously with savings institutions. For our purposes, the U.S. thrift
industry in the 20th century is the Savings and Loan institution.
2 Insome conservative accounts, the bailout is construed as a cleanup. See Timothy Curry and Lynn
Shibut, “The Cost of the Savings and Loan Crisis: Truth and Consequences,” FDIC Bankings Review 13, no. 2
(2000).
3 Dwight M. Jaffee, “Symposium on Federal Deposit Insurance for S&L Institutions,” The Journal of
Economic Perspectives 3, no. 4 (Autumn, 1989): 3-7; U.S. Senate Republican Policy Committee, Dealing with the
S&L Bailout, William L. Armstrong, Chairman, 101st Congress. 16 July 1990 and Briefing Material: The Savings
and Loan Crisis, George H.W. Bush Presidential Library: White House Chief of Staff Collection, John Sununu Files,
Box 86, Folder: Savings and Loan Industry(1990).
4 J.E.
McDonough, “The Federal Home Loan Bank System,” The American Economic Review 24, no. 4
(December, 1934): 668-671; Stephen Pizzo, Mary Fricker and Paul Muolo, Inside Job: The Looting of America's
Savings and Loans (New York: McGraw-Hill Publishing Company, 1989), 9-12.
5 Henry N. Pontell and Kitty Calavita, “The Savings and Loan Industry,” Crime and Justice 18 (1993):
203-6; Briefing Material: The Savings and Loan Crisis, George H.W. Bush Presidential Library: White House Chief
of Staff Collection, John Sununu Files, Box 86, Folder: Savings and Loan Industry(1990).
6 Harold W. Torgerson, “Developments in Savings and Loan Associations, 1945-1953,” The Journal of

Finance 9, no. 3 (September, 1954): 283-93; James R. Barth, The Great Savings and Loan Debacle, American
Enterprise Institute for Public Policy Research Special Analysis, (Washington, D.C.: AEI Press, 1991), 17.
7 Federal Deposit Insurance Corporation, The Savings and Loan Crisis and Its Relationship to Banking,

History of the 80s, Volume 1, Chapter 4 (1997): 170-171, Available On-line, http://www.fdic.gov/bank/historical/
history/vol1.html.
8 Harold W. Torgerson, “Developments in Savings and Loan Associations, 1945-1953,” The Journal of
Finance 9, no. 3 (September, 1954): 283-93.
9 CharlesM. Torrance, “Gross Flows of Funds Through Savings and Loan Associations,” The Journal of
Finance 15, no.2 (May, 1960): 157-160.

13
 10 U.S. Department of the Treasury, Sources of Secular Increases in the Unemployment Rate, 1969-82,
Bureau of Labor Statistics, Available On-line, http://www.bls.gov/opub/mlr/1984/07/art4full.pdf; F. Steb Hipple,
“Fiscal Policy vs. Monetary Policy,” College of Business and Technology East Tennessee State University, Available
On-line, http://faculty.etsu.edu/hipples/fpvsmp.htm; David H. Papell, “Monetary Policy in the United States Under
Flexible Exchange Rates,” The American Economic Review 79, no. 5 (December, 1989), 1106-1109; Michael D.
Bordo and Barry Eichengreen, eds., A Retrospective on the Bretton Woods System: Lessons for International
Monetary Reform, (Chicago: University of Chicago Press, 1993), v-xiii.
11 Michael J. Boskin, Chairman, President’s Council of Economic Advisers, The S&L Mess: What Caused it

and How it’s being fixed, Presented before Citizens for a Sound Economy Washington, D.C., 9 August 1990, George
H.W. Bush Presidential Library: White House Office of Cabinet Affairs, Case Studies File, Folder: S&L Strategy
Group August 1990.
12 U.S.Senate Republican Policy Committee, Dealing with the S&L Bailout, William L. Armstrong,
Chairman, 101st Congress. 16 July 1990.
13 Michael J. Boskin, Chairman, President’s Council of Economic Advisers, The S&L Mess: What Caused it
and How it’s being fixed, Presented before Citizens for a Sound Economy Washington, D.C., 9 August 1990, George
H.W. Bush Presidential Library: White House Office of Cabinet Affairs, Case Studies File, Folder: S&L Strategy
Group August 1990.
14 Kirby R. Cundiff, “Monetary Policy Disasters of the 20th Century,” The Freeman Online 57, no.1

(January, 2007). 6-8; U.S. Government Printing Office, Part 217: Prohibition against the Payment of Interest on
Demand Deposits (Regulation Q), Electronic Code of Federal Regulations, Available On-Line, http://
ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&tpl=/ecfrbrowse/Title12/12cfr217_main_02.tpl; David H. Pyle, “The
Losses on Savings Deposits from Interest Rate Regulation,” School of Business Administration University of
California, Berkeley, Available On-line, http://www.haas.berkeley.edu/groups/finance/WP/rpf018.pdf.
15 Briefing Material: The Savings and Loan Crisis, George H.W. Bush Presidential Library: White House

Chief of Staff Collection, John Sununu Files, Box 86, Folder: Savings and Loan Industry (1990), 1-3.
16 U.S. Senate Republican Policy Committee, Dealing with the S&L Bailout, William L. Armstrong,

Chairman, 101st Congress. 16 July 1990, 1-2.

17 Ibid, 3-4.
18Briefing Material: The Savings and Loan Crisis, George H.W. Bush Presidential Library: White House
Chief of Staff Collection, John Sununu Files, Box 86, Folder: Savings and Loan Industry (1990), 4.
19 OversightBoard, Resolution Trust Corporation, Bush Administration’s S&L Cleanup Goals and Results,
Current as of 13 November 1990. George H.W. Bush Presidential Library: White House Office of Records
Management, Folder: S&L Strategy Group, August 1990, OA/ID 03565 [1 of 4].
20 Curry and Shibut, “The Cost of the Savings and Loan Crisis: Truth and Consequences,” 26-33.

14
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16