What The Savings and Loan Crisis Tells Us About Investing

The Savings and Loan Crisis of the 1980s is recognized as the most catastrophic collapse of the banking industry since the Great Depression. This crisis, according to the General Accounting Office, caused an estimated $132.1 billion loss to taxpayers. How could this happen? What went wrong? How can we ensure it won’t happen again? These are the questions we aim to answer when analyzing past events in order to predict future outcomes.

In short, the crisis occurred because savings and loan institutions broke an important financial rule: don’t over fund long-term loans with short-term debt. The savings and loan (S&L) companies accepted deposits and savings while making loans on real estate and other long-term items. These S&L’s planned on paying the short-term rate to depositors with the higher interest rate they’d receive from giving loans. They then would make money by pocketing the difference between the long-term and short-term rates. During the 1980s, the rising interest rates destroyed many S&L’s because the short-term rate paid to depositors became greater than the long-term rate they received from the loans. This caused a ripple effect in the banking industry that lasted until the early 1990s. However, it was not only the S&L’s negligence of the rules that contributed to the loss of many investors money.

Widespread corruption, scandals, and imprudent transactions plagued this time period. One scandal worth highlighting is the Lincoln Savings and Loan collapse, which shows the role the government can also play in corruption. Lincoln’s chairman, Charles Keating, served five years in prison for violating an investment regulation when he covered up to $135 million in unreported losses. The Federal Home Loan Bank Board (FHLBB) was already worried about the riskiness of the S&L’s operations and after hearing about Lincoln’s loss cover-up, rumors circulated that they were going to seize Lincoln for being insolvent. This event unearthed the Keating Five Political Scandal where Keating’s government connections led five senators to pressure the members of the FHLBB to drop the seizure of Lincoln. Even after the FHLBB board recommended that Lincoln be seized by the government, these five senators continued to advocate for Keating. Once the press released information about Keating’s involvement in the meetings between the senators and the FHLBB, the government seized Lincoln in 1989 once its parent company went bankrupt. This story is important to understand because it demonstrates how the combination of selfish business practices and government corruption takes the biggest toll on the stakeholders who knew nothing about it.

At Fogel Capital Management, we understand that your hard earned money deserves to be invested in companies that you can trust. Our team specializes in using past events, such as the ones mentioned in this article, to analyze future events’ probabilities. Fogel Capital invests in quality companies with trustworthy management in order to protect you from falling victim to such scandals. To reserve a free consultation and to learn more about how we can help you invest your money securely, call (772) 223-9686.