Savings and Loan Crisis

The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of about 747 out of the 3,234 savings and loan associations in the United States. A savings and loan or "thrift" is a financial institution that accepts savings deposits and makes mortgage, car and other personal loans to individual members—a cooperative venture known in the United Kingdom as a Building Society. "As of December 31, 1995, RTC estimated that the total cost for resolving the 747 failed institutions was $87.9 billion." The remainder of the bailout was paid for by charges on saving and loan accounts—which contributed to the large budget deficits of the early 1990s.

William K. Black wrote that Paul Volker as Chairman of the Federal Reserve helped create a criminogenic environment for the Savings and Loans in 1979 by doubling the interest rate (to reduce inflation): S&Ls made long-term loans at fixed interest using short-term money. When the interest rate increased, the S&Ls could not attract adequate capital and became insolvent. Rather than admit to insolvency, some CEOs of S&Ls became "reactive" control frauds by inventing creative accounting strategies that turned their businesses into Ponzi schemes that looked highly profitable, thereby attracting more investors and growing rapidly, while actually losing money. The push of the Reagan administration for deregulation made it harder to catch the fraud. This had two effects: Most obviously, it meant that the fraud continued longer and substantially increased the economic losses involved. Secondly, it attracted "opportunistic" control frauds who were looking for businesses they could subvert into Ponzis. For example, Charles Keating paid $51 million from Michael Milken's junk bond operation for Lincoln Savings and Loan, which at the time had a negative net worth exceeding $100 million.