The Savings & Loan Crisis

I started hunting for a good reference after reading Assiduous Reader lystgl‘s quotation in the comments to September 30.

Timothy Curry and Lynn Shibut of the FDIC wrote a paper for the FDIC Banking Review, The Cost of the Savings and Loan Crisis: Truth and Consequences.

It seems, not surprisingly, that there are a lot of estimates of the cost, which I assume are influenced by political considerations:

Over time, misinformation about the cost of the crisis has been widespread; some published reports have placed the cost at less than $100 billion, and others as high as $500 billion.

Some numbers which provide perspective – and will, I assume, not be particularly controversial – are provided in Table 1. From 1986-1989, there were 296 failures with assets of $125-billion addressed by the Federal Savings and Loan Insurance Corporation; from 1989-1995 there were 747 failures with assets of $394-billion addressed by Resolution Trust Corp.

As of year-end 1986, 441 thrifts with $113 billion in assets were book insolvent, and another 533 thrifts, with $453 billion in assets, had tangible capital of no more than 2 percent of total assets. These 974 thrifts held 47 percent of industry assets.

One of the problems with estimating the costs of this mess is ‘what to do about interest charges’:

During the FSLIC and RTC eras, the industry contributed $38.3 billion sometimes in partnership with the Treasury) in funding for the cleanup. Special government-established financing entities (FICO and REFCORP) raised these funds by selling long-term bonds in the capital markets. The Treasury contributed another $99 billion, 14 some or all of which was also borrowed because the federal government was experiencing large budget deficits during the period. When some analysts tabulated the costs of the cleanup, they included not only the principal borrowed but also interest costs for periods of up to 30 to 40 years on some or all of the borrowings.

Including the financing costs in addition to principal could easily double or triple the estimates of the final cost of the cleanup. However, in our view, including financing costs when tallying the costs of the thrift crisis is methodologically incorrect. It is invalid because, in present value terms, the amount borrowed is equal to the sum of the interest charges plus debt repayment. Adding the sum of interest payments to the amount borrowed would overstate the true economic cost of resolving the crisis.

The authors present their calculations with admirable clarity – I don’t know how much dispute there still might be over the total figure, but their tables look like a very good place to start reconciling differences – and conclude:

The savings and loan crisis of the 1980s and early 1990s produced the greatest collapse of U.S. financial institutions since the Great Depression. Over the 1986–1995 period, 1,043 thrifts with total assets of over $500 billion failed. The large number of failures overwhelmed the resources of the FSLIC, so U.S. taxpayers were required to back up the commitment extended to insured depositors of the failed institutions. As of December 31, 1999, the thrift crisis had cost taxpayers approximately $124 billion and the thrift industry another $29 billion, for an estimated total loss of approximately $153 billion. The losses were higher than those predicted in the late 1980s, when the RTC was established, but below those forecasted during the early to mid-1990s, at the height of the crisis.

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