Fraud, Free Markets, and the S & Ls

Mike Rozeff reports:

The savings and loan (S & L) industry was a creation of the New Deal, regulated by the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation. By 1980 the industry as a whole was insolvent. The government did not want to close down these institutions as the insurer (FSLIC) didn’t have enough money. It did not want to give up its control, and it did not want to fund a bailout. The "solution" it chose contained several elements, detailed by George Akerlof and Paul Romer in their article Looting: The Economic Underworld of Bankruptcy for Profit. The government changed the accounting rules pertaining to net income and net worth. It removed interest ceilings on deposits. It allowed the thrifts to make much riskier investments, including direct real estate and real estate development. It allowed thrifts to concentrate more assets on one borrower. It allowed a single owner to own a thrift. It weakened capital requirements drastically. It allowed land to be contributed as capital. It allowed goodwill created by acquisitions to remain on the books and be depreciated over a 40-year period (as compared with a previous maximum of 10 years.) It removed the limit on the ratio of a mortgage loan to the underlying value, so that loans could be made with no down payments. The FSLIC insurance limit increased from $40,000 to $100,000.

You'll want to read the whole thing.