Monday, June 1, 2009

The Memory Hole

Paul Krugman's column in today's Times reminds us of the second-biggest federal bailout in U.S. history, which held first place until the current taxpayer-financed bailout took the crown. The similarities are striking, and the fact that it was twenty short years ago either shows how staggeringly little the banking and finance industry and the federal government have learned, or more likely the extent to which they were willing to ignore these lessons in the interest of making the smallest sliver of the population rich beyond it's wildest dreams. It's worth a small trip down memory lane, or more descriptively, the memory hole.

Savings and Loans (called Building and Loans in the early years) were conceived in the 19th century as non-profits designed to promote savings and home ownership. By the end of that century they had changed to a for-profit model, but their primary mission was still community-based. They saw their most successful period during the Baby-Boom years following World War II, with returning veterans starting families and buying homes in huge numbers. The so-called "stagflation" of the 70's, particularly in the wake of the energy crisis, coupled with the federal regulations on mortgage qualification, made it difficult for the S&L's to make loans, and many were facing failure.

Enter Ronald Reagan who saw government as the Problem and not the Solution (so why did he dedicate most of his life to participating in it, then?). He signed two major S&L deregulations in the early 80's: the Depository Institutions Deregulation and Monetary Control Act in 1980, and The Garn-St. Germain Depository Institutions Act in 1982. What these two laws did was to relax accounting rules, allow the S&L's to make riskier investments with no government oversight, and allow them to make mortgage loans to people who were at high risk of default. Um... does any of this sound familiar?

Between 1985 and 1990, Savings and loans began collapsing under the weight of bad loans, bad investments, and pyramid schemes which took advantage of lax government oversight. Of great interest were the collapse of Lincoln Trust, in which five U.S. senators were implicated; the so-called "Keating Five" included Senator John McCain of Arizona. The Silverado Savings and Loan Collapsed in 1988 after their director, Neil Bush, the son and brother of Presidents Bush and Bush, approved $100,000,000 in bad loans for two of his business partners.

Another story in today's Times talks about how banks are gearing up to fight the new list of finance regulations proposed by the Obama administration. And the beat goes on, all the way down the memory hole.