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Global Financial and Economic Crises

1980s Savings and Loan Crisis

Project: Global Financial and Economic Crisis 2007-Present
Open-Content project managed by KJF, mtuck

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Efforts are made to improve the interest rate environment in which banks, and especially thrifts, have to operate, such as the Monetary Control Act of 1980 (see April 1, 1980), and numerous changes in the regulatory frameworks at the state and federal level. Despite all this activity, it remains the case that interest rates on sources of funds to the thrift industry lags behind those that could be paid by commercial banks and nonbanks in new vehicles such as money market accounts. Consequently, thrift bankers find it increasingly difficult to keep their businesses supplied with enough funds to sustain a profitable rate of new lending. The industry therefore cannot avoid a period of higher than historical failure levels and voluntary mergers and departures from the industry. [Brumbaugh et al., 1987]

Entity Tags: Monetary Control Act of 1980

Category Tags: 1980s Savings and Loan Crisis, Pre-2001 Policies and Actions

The 23rd largest commercial bank in the country gets a package of $1.5 billion in financial assistance, in exchange for close supervision of its operations by the Federal Deposit Insurance Corporation (FDIC). The aid consists of a $1 billion bank line of credit from the Federal Reserve, a $325 million loan from the FDIC written as a subordinated note to be paid off after five years and interest-free for the first year, and $175 million in other notes to a group of commercial banks. The following year, as regulators and the banking industries search for a response to a rising incidence of bank insolvency, the First Pennsylvania agreement will be seen by some as a model. [Wall Street Journal, 6/8/1981]

Entity Tags: Federal Deposit Insurance Corporation, First Pennsylvania Bank, Federal Reserve Board of Governors

Category Tags: 1980s Savings and Loan Crisis

In an unintroduced telephone call to R. W. Tanner, president of Vernon Savings and Loan of Vernon, Texas, Donald Ray ‘Don’ Dixon expresses interest in purchasing a small town S&L such as Vernon, which is located in a town where Dixon lived in his boyhood. Dixon does not reveal to Tanner, who does not recall having discussed the possibility of a sale of Vernon to anyone, that a mortgage insurer known to both men has given Dixon the referral. The phone call leads to a meeting between the two after a few days, during which Dixon says that if he bought the thrift he would continue the small-town, conservative style of savings and loan banking that Tanner had practiced for years. It appears to have been considered incidental by everyone at Vernon except possibly Tanner’s assistant, Woody Lemons, that Dixon’s other business affiliation was his real estate development enterprise, the Dondi Group. [O'Shea, 1991, pp. 2-5, 6] Dixon also does not tell Tanner at this time that Dixon’s source of cash is to be Herman K. Beebe, a Louisiana finance and real estate businessman of wide-ranging interests and a person of note in the 1976 rent-a-bank scandal that had come to light in the collapse of the Citizens State Bank (Carrizo Springs, TX) failure, and who, it will later be revealed, is involved in numerous acquisitions of smaller thrift institutions in the southwestern United States during the early 1980s. Beebe’s involvement with Vernon through Dixon is only revealed to Tanner at the point of signing the final purchase agreement nearly one year after this. [Pizzo, Fricker, and Muolo, 1989, pp. 188-192, 234, 231-235; Black, 2005, pp. 38]

Entity Tags: R.W. Tanner, Donald Dixon, Herman K. Beebe, Woody Lemons, Dondi Group, Vernon Savings and Loan

Category Tags: 1980s Savings and Loan Crisis

About one month after their first meeting in Austin (see (early 1981)), Don Dixon and R.W. Tanner sign an agreement selling Vernon Savings and Loan to Dixon for $5.8 million in cash, or about 1.4 times its book value. The deal already had verbal clearances, to Tanner, from the Texas state thrift regulator and the federal government’s regional thrift regulators in Little Rock, Arkansas. [O'Shea, 1991, pp. 8] However, it will turn out that the papers signed at this time are not the final word on the terms of Dixon’s eventual acquisition of Vernon Savings and Loan. There is to be at least one more round of negotiations, which will result in a considerable reduction of the cash portion of the transaction. The deal is not finally consummated for nearly another year. [Pizzo, Fricker, and Muolo, 1989, pp. 191]

Entity Tags: Donald Dixon, Vernon Savings and Loan, Herman K. Beebe, R.W. Tanner

Category Tags: 1980s Savings and Loan Crisis

Rep. Fernand J. St. Germain (D-RI), with 28 co-sponsors, introduces HR 6267, the “Net Worth Guarantee Act” officially entitled “A bill to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans.” [Library of Congress, 5/19/2008] As introduced, the bill would create a fund for loans to those troubled banks and savings and loans institutions that would have to be put into receivership if their condition deteriorates to a small degree from the bill’s qualifying requirements. The provisions are as follows:
bullet Amendments to the Federal Deposit Insurance Act (which regulates the Federal Deposit Insurance Corporation, FDIC), the National Housing Act (which regulates the Federal Home Loan Bank Board, FHLBB), and the Federal Credit Union Act (the National Credit Union Administration Board, NCUAB) so that the regulated bodies can guarantee the net worth of qualified insured institutions.
bullet Requirements that a qualifying depository institution be one that is threatened with insolvency, as measured by very low net worth and a recent trend of losses; that the institution be one that mainly serves the residential mortgage industry, as measured by the share of its loans or other assets that are held in or collateralized by residential mortgages or real estate; and that it continue in this service under the net worth guarantee, as measured by the share of its new deposits that it devotes to certain types of mortgages.
bullet Rules for determining the initial amount of the guarantee, and for either extending or phasing out the assistance to a given institution. Extensions after two years are to be contingent upon a showing that “certified continued earnings losses are caused by general market conditions and not by the actions of the institution.”
bullet Creation of a Net Worth Guarantee Account in the US Treasury in the amount of $8.5 billion to cover the payment of any guarantees.
bullet A sunset date for new extensions of guarantees.
bullet An oversight process in which the three bank regulating bodies report quarterly to Congress on their activities in granting guarantees, and the comptroller of the currency provides semiannual audits. [Library of Congress, 5/14/2008; Library of Congress, 5/14/2008]
Fate in the House - The Net Worth Guarantee Act passes the House of Representatives on May 20, 1982, with amendments that extend the coverage to qualifying State-chartered commercial banks, and qualifying national banks whether or not they are members of the FDIC; that add investment in residential housing co-operative stock and mortgages on multifamily rental projects to the qualifying activities for sustaining the guarantee; that alter the exit path from the program; that add compliance with community credit provision requirements under the Community Reinvestment Act of 1977; that make the Treasury senior to holders of existing subordinated debt of any guaranteed bank that later winds up in receivership; and that clearly give the sunset date as September 30, 1984. [Library of Congress, 5/14/2008; Library of Congress, 5/14/2008; Library of Congress, 5/14/2008]
Eventual Fate - With substantial amendments that address other banking regulatory issues besides the net worth of depository institutions, the bill finally passes the Senate under several short titles, of which the primary is “Depository Institutions Amendments of 1982,” superseding S.2879 sponsored by Sen. E.J. “Jake” Garn. The bill is enacted with the signature of President Ronald Reagan on October 15, 1982 as the Garn-St. Germain Depository Institutions Act of 1982. [Library of Congress, 5/14/2008]

Entity Tags: Charles Schumer, Steny Hoyer, Fernand J. St. Germain

Category Tags: 1980s Savings and Loan Crisis, US Financial Deregulation

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