SVB and the S&L Bailout
How similar to the 1980s banking crisis?
Anyone calling for the bailout of Silicon Valley Bank to protect average Americans from a loss of their life’s savings would be making a specious claim. It would sound noble, but would it be true? Accounts at SVB were insured by the Federal Deposit Insurance Corporation up to $250,000. How many American families have savings greater than 250K? Not many, according to Bankrate.com.
The average savings account balance for someone with just a high school diploma is $20,100. For a college graduate, the average is $78,890. Both are a far cry from the quarter-million dollar limit placed by the FDIC. In other words, average families were not at risk at “losing their life’s savings.”
It’s generally understood the SVB rescue was to protect Silicon Valley tech start-ups and venture capital-backed companies. Ultimately, American taxpayers will have bailed-out the investment elite.
In the coming weeks the public may learn more about why the nation’s 16th largest bank failed. In fact, SVB was the second largest banking failure in US history.
According to reporting, only one member of the SVB’s twelve directors had investment banking experience. The other 11 board members were politically connected to Democratic officials and causes.
Early reports suggest SVB may have been irresponsible with depositors’ money. For example, the bank bragged it committed $5 billion “to address the systemic risk that climate change presents.” More significantly, the bank did not have a chief risk officer for nearly all of last year.
Some have suggested the SVB rescue was similar to the savings and loan bailout in the 1980s. Others have said it was nothing like the S&L situation. What follows is a refresher on exactly what occurred nearly four decades ago.
There are two types of savings institutions that appear similar to most people: banks and savings-and-loans. Generally, they provide similar services, such as savings and checking accounts, consumer loans, and residential mortgages. Banks differ in that they often work with large commercial businesses, issue credit cards, and offer investment services. Savings and loans focus more on local services, particularly offering residential mortgages. Savings and loans are also referred to as “thrifts.”
There is a third savings institution that differs markedly from the other two. Unlike banks and thrifts, credit unions are non-profit organizations. Any profits made by a credit union are returned to the members. Credit unions are locally focused and do not loan money to businesses.
There was high inflation in the late 1970s. In an attempt to counter this, the US Federal Reserve, which establishes US monetary policy, raised the discount rate it charged banks. This is the interest rate that savings institutions pay in order to borrow money from the Federal Reserve. The rate was increased from 9.5 to 12 percent. This had a devastating effect.
The discount-rate increase created a serious problem for all savings institutions, but most significantly for the nation’s four thousand federal- and state-chartered savings and loans. Many had given long term loans (such as residential mortgages) to borrowers at significantly lower interest rates. The sluggish economy made it difficult to attract new depositors, and the increased interest rates dramatically reduced the number of people qualifying for new mortgages, which had been a profit center for thrifts.
Because the depositor interest rates offered by thrifts were limited by federal regulators (by a rule called Regulation Q), some depositors withdrew their money and placed it elsewhere to get a higher rate of return.[i] In short, thrifts began losing money. In 1980, the net income for all thrifts was $781 million. In 1981 and 1982, it was negative $4.6 billion and $4.1 billion, respectively.[ii]
The Federal Savings and Loan Insurance Corporation (FSLIC) was the federal insurer for thrifts. It had only a fraction of the financial reserves available to insure the nearly half-a-trillion dollars in outstanding mortgage loans held by thrifts. A big reason was because the FSLIC charged institutions the same insurance premium regardless of how risky the investments were, instead of rates commensurate with the likelihood of failure.
About half of the nation’s nearly $1 trillion in home mortgages were held by thrifts.[iii] In fact, the thrifts’ home-mortgage business was the “main engine of the housing industry.”[iv] It became apparent to Washington lawmakers that they faced a potentially catastrophic problem.
Congress decided the best resolution to the problem was to relax regulations and permit thrifts to invest in riskier ventures, such as land development deals, in an effort to grow out of their financial predicaments.
In order to accomplish this, in 1980, the Depository Institutions Deregulation and Monetary Control Act, which gave thrifts more flexibility, was passed by Congress and signed into law by President Jimmy Carter.[v] About the time of the bill’s passage, the real estate market was starting to grow. Thrifts loaned increasing amounts of money to larger and riskier development deals.
There were some other missteps that occurred in Washington, DC. Congress approved some accounting gimmicks that allowed thrifts to mask their problems and allowed them to grow bigger while the underlying capitalization problems still existed. The federal regulator also abandoned some common sense limits on lending that increased the likelihood of failures.
Those failures finally began. Some of the riskiest real estate development deals began to collapse, which caused thrifts to fail. Losses grew worse by the day. In 1982, Washington enacted into law the Garn-St. Germain Depository Institutions Act that created a policy called “forbearance,” among other provisions. Forbearance allowed failing thrifts to remain open with the hope that they might recover. It was almost like a Ponzi scheme. Insolvent thrifts were chasing potentially more lucrative but riskier investments in an attempt to recoup their mounting losses.
Unfortunately, savings-and-loans continued going out of business at an alarming rate. Among the more notable failures included Lincoln Savings and Loan, which led to the Keating Five scandal involving Senator John McCain and four other senators. There was the Silverado Savings and Loan, one of whose board members was Neil Bush, son of then Vice President George H. W. Bush. Another famous failure was the Madison Guaranty Savings and Loan Association that was integral to the Whitewater Development Corporation scandal involving Bill and Hillary Clinton.
The Federal Savings and Loan Insurance Corporation managed the closure of 296 thrifts from 1986 to 1989. However, the mounting number of failures exhausted all of FSLIC’s money and cost taxpayers about $60 billion.[vi] This forced Washington to step in and implement a bigger and more aggressive taxpayer-funded bailout.
In August 1989, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 that created the Resolution Trust Corporation (RTC). The RTC had the responsibility of resolving the remaining insolvent thrifts that held about $400 billion in assets.
The RTC shuttered another 747 thrifts, in addition to the nearly three hundred closed by FSLIC. About one thousand of the nation’s four thousand thrifts were shut down. The entire savings and loan bailout cost US taxpayers about $160 billion.[vii]
Mark Hyman is an Emmy award-winning investigative journalist. Follow him on Twitter, Gettr, Parler, Post, and Mastodon.world at @markhyman, and on Truth Social at @markhyman81.
His books Washington Babylon: From George Washington to Donald Trump, Scandals That Rocked the Nation and Pardongate: How Bill and Hillary Clinton and their Brothers Profited from Pardons are on sale now (here and here).
[i] Kenneth J. Robinson, “Savings and Loan Crisis: 1980-1989,” Federal Reserve Bank of Dallas, November 22, 2013.
[ii] An Examination of the Banking Crises of the 1980s and Early 1990s, vol. 1, Federal Deposit Insurance Corporation, December 1997, p. 168.
[iii] Robinson, “Savings and Loan Crisis.”
[iv] L. William Seidman, Full Faith and Credit: The Great S&L Debacle and Other Washington Sagas, (New York: Times Books, 1993), 175.
[v] Robinson, “Savings and Loan Crisis.”
[vi] Seidman, Full Faith and Credit, 209.
[vii] An Examination of the Banking Crises…, 169.