What is the Savings and Loan Crisis?

The savings and loan crisis, also known as the S&L crisis, is one of the largest financial scandals in the history of the United States. Precipitated by a variety of factors in the 1970s and 1980s, the crisis lead to the insolvency of hundreds of savings and loan companies and resulted in new regulations meant to prevent similar crises from occurring in the future. Although the exact causes of the savings and loan crisis are a matter of some debate, the resulting financial disaster required a multi-billion US Dollar bailout from the federal government, and may have been a factor in the economic recession of the early 1990s and the US economic crisis beginning in 2007.

A savings and loan association, or thrift, is a financial organization that mainly offers housing and consumer loans. After World War II, these associations expanded tremendously in the wake of the baby boom and a flourishing United States' economy. The industry was carefully regulated, and by the late 1960s, could not offer investors the sizable returns that money and stock market investing could. As a result, the government passed several laws leading to the deregulation of the industry, often considered one of the major factors leading to the savings and loan crisis.

With fewer regulations to fulfill, savings and loan associations could invest in ventures with more risk, but that could give potentially much higher returns. One cause of the savings and loan crisis cited by many economists is the fact that savings and loan companies were federally insured at the same rate regardless of the risk level of investments. This led to more and more risky investments backed by taxpayer money, allowing already struggling companies to fall deeper into debt without consequences.

There are dozens of suggested causes for the savings and loan crisis, primarily focusing on the effects of deregulation and lack of efficient oversight, the stunning success of secondary lending companies that could offer better returns and rates on loans than the S&L associations, and collapse of housing markets throughout the United States in the 1980s. Unfortunately, the crisis was hidden and compounded by regulatory boards which started taking more and more drastic measures to protect failing associations in order to prevent the appearance of a financial crisis.

In 1989, President George Herbert Walker Bush unveiled a bailout plan called the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) in the wake of revelations about the level of insolvency in the S&L industry. This plan removed the original regulatory boards and replaced them with new ones, expanded the powers of the then-successful secondary lending organizations, and created an entity to attempt the resolution of nearly 800 S&L associations now deemed insolvent. According to some estimates, the resulting plan has cost US taxpayers in excess of $120 billion US Dollars (USD) since implementation.