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A Literature Review

The massive savings and loan failures of the late eighties and early nineties did not go unnoticed. Thousands of pages of testimony at congressional hearings have been published. Newspapers have published chronologies, accounts of local S&L failures, and anecdotes of senior citizens losing their savings. Numerous books have been written with titles like Who Robbed America?, S&L Hell, and The Greatest-Ever Bank Robbery. These journalistic commentaries tend to either be strictly factual accounts or moralistic, strident attacks on politicians and bankers. Both of these varieties tend to examine the deep issues raised by the crisis on a very superficial level, often leaping to unwarranted conclusions and unjust accusation. While they make for vivacious reading, they tend to obfuscate more than elucidate. A fuller analysis of the crisis is missing, perhaps because such an analysis lacks the sensational headlines of the moralizing condemnation or the convenient skimming of the factual chronology. Unfortunately, both fail to provide the reader with any meaningful context for a true understanding and a grounds from which to make judgments about those people involved.

The academic world generally does not suffer from such failings. The contrast between academic and non-academic accounts sometimes reveals that the non-academic perspectives have everything absolutely wrong. There are several reasons for this discrepancy: better training on the part of the academics, different audiences, and lack of hard-and-fast deadlines. The best writing combines the academic's rigor with the journalist's lively style. The challenge for either group was writing about an economy-shaking event while that event was still transpiring. Contemporary histories frequently lack the objectivity that comes with temporal distance. Important causal agents only become obvious after the fact, and available to only a few astute observers during the catastrophe. Academic writers tend to wait longer to compose their treatises on contemporary events and thus tend to be more rigorous in their evaluation than journalists writing while the iron is hot.

For these and other reasons, only a few good books and a handful of articles have been written on the subject. The S&L crisis was not as devastating as the Great Depression or as unique as the Civil War, but it did have a serious impact on the body politic and the economy at the time and we are still experiencing some of the aftershocks today. One must wonder at the dearth of academic material on what many regard as a meaningful end to one of the most prosperous decades in American history. The academic treatments also tend to be very specialized. They focused on either the political or the economic side of the crisis. Whichever perspective they adopt, they ignore—or superficially treat—the other. While this may enable them to hone in on specific insights by forestalling the inevitable questions, it certainly does not help the reader to understand the broader issues involved. In fact, the specialist's myopia may be counterproductive since it blinds the writer to facts in other fields that might illuminate—or even contradict—his or her conclusions. Ultimately, reality is multifaceted and simultaneous—though it may be useful to occasionally separate out aspects of an event for consideration by various disciplines, one can only obtain a full understanding through exploration of an issue from all appropriate angles.

This historiography will explore the literature on the savings and loan crisis. As noted earlier, much has been written about this episode in American history. First, we will give a brief account of the crisis and the history that preceded it because an establishment of context is vital before we can examine and evaluate what has been written about the crisis, the next section of the literature review. Once we have critically assessed the existing works, we can then list their deficiencies and sketch remedies for those. These remedies can only be suggestions, due to the limitations imposed by this paper's focus. However, those remedies could easily serve as the foundation for a separate essay.

The savings and loan industry as we know it today came into existence in the 1930s during the Great Depression. However, they had already been in existence for one hundred years by that time. The first savings and loan association was founded on January 3, 1831 in Frankford, Pennsylvania. It was designed to enable its depositors to purchase homes, one by one, as funds became available.1 That purpose would later become its mandate, as the Federal Home Loan Bank Act of 1932 enshrined promotion of home ownership as the primary raison d'être for the savings and loans. The period in between these two critical events is replete with S&Ls struggling to remain relevant in the economy and combat competition. S&Ls in the mid-nineteenth century were an exclusively local phenomena. A group of citizens would pool their money and distribute loans to each member in turn. They were non-professional financial institutions but they served a definite purpose and a crucial need, since commercial banks typically would not lend to the poor or recent immigrants. In the 1880s, though, a number of S&Ls had higher aspirations and sought to operate nationally through branch offices and deposits by mail. The local S&Ls could not compete with the national ones and so sought state bans on national savings and loan institutions through the formation of the United States League of Local Building and Loan Associations—the precursor to the powerful United States League of Savings Institutions.2

Thus began a close alliance between savings and loans and the government. The Great Depression tightened the bonds of that relationship due to the widespread S&L failures and their subsequent foreclosing of borrowers' homes. The federal government undertook measures designed to increase stability in that industry: the Federal Home Loan Bank Act of 1932 set up a national network of Federal Home Loan banks arranged similarly to the Federal Reserve System for banks that supplied funds during tough times; the Home Owners' Loan Act of 1933 empowered the Federal Home Loan Bank Board (FHLBB)—the S&L's industry's overseer—to charter federal S&Ls and established a temporary means by which homeowners could refinance their delinquent mortgages on terms that they could afford; and the National Housing Act of 1934 created the S&L industry's deposit insurance fund, the Federal Savings and Loan Insurance Corporation (FSLIC).3 This legislative triumvirate formed the foundation for the savings and loan industry throughout the industry's remaining existence.

The fifties and sixties were the heyday of the S&Ls because of the postwar housing boom and a series of favorable government actions. The industry flourished because it was able to price rates paid to depositors relatively freely, while banks were restricted by rate ceilings imposed by the Federal Reserve. Similarly, S&Ls were given tax breaks that effectively allowed them to pay no federal income taxes. Finally, throughout the period, the government allowed the S&Ls to diversify their portfolios—increasing their holdings in commercial real estate and securities while diminishing their mortgage holdings.4 It also allowed S&Ls to participate in investments that yielded high returns—a move that would come back to bite them later as those risky investments crashed.

The seventies were a period of stagnation for the S&Ls due to the rampant inflation and spiraling interest rates. The effects of disintermediation came to the fore, as they held low-interest, long-term mortgages and high-interest, short-term deposits. This resulted in a credit crunch since S&L executives could not reasonably lend money at the interest rates they had to pay on deposits in order to stay solvent. They entered the next decade full of hope for some remedy to their predicament.

They got one. Ronald Reagan and his administration slowed and then ended the inflation of the seventies. Congress enacted the Depository Institutions Deregulation and Monetary Control Act of 1980 which eased restrictions on reserve requirements, allowed the S&Ls to offer new credit instruments, and raised the deposit insurance coverage ceiling from $40,000 to $100,000 per account.5 These had the desired effects and the industry prospered once again. Subsequent relaxation of regulation allowed S&Ls to broker deposits nationally, invest up to 10% of their portfolio in high-yield corporate bonds (otherwise known as "junk" bonds), and eliminate loan-to-value ratio restrictions on secured loans. This deregulation enabled S&Ls to attract deposits by paying premium rates while simultaneously either lending that money at lucrative rates or parking that money in high-yielding, high-risk investments. Since deposit insurance would cover any mistakes made and S&Ls were much cheaper to purchase than banks due to their size, many high-flying businessmen bought S&Ls with little knowledge of the potential for insolvency. They then ran them as short-term cash machines until they stopped allowing withdrawals. Naturally, there were S&L operators that were reasonable and not profligate. However, they were forced to offer premium rates and competitive lending packages in order to compete. They soon found themselves in the same boat—albeit not as luxurious of one as the big spenders—as their investments turned sour or commercial real estate experienced a downturn. As S&L after S&L failed and the rest of them were left teetering on the edge of insolvency, the FSLIC became insolvent. Congress failed to appropriate sufficient funds to prop up the FSLIC and so it too failed. Public confidence in both government and the S&L industry vanished as costs (or the potential costs) of the crisis mounted in the hundreds of billions of dollars.

The S&L industry was effectively terminated by the 1989 passage of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). This act eliminated the FHLBB and transferred regulatory control to the Office of Thrift Supervision (OTS) in the Treasury Department. The FSLIC was transferred to the Federal Deposit Insurance Corporation (FDIC), which was the bank's deposit insurance fund. Funds were appropriated to assist teetering S&Ls and replenish the FSLIC. Housing programs were enacted and administered by the Federal Home Loan banks, regulatory restrictions were tightened, and criminal penalties were stepped up for financial institution fraud. The death knell had sounded for the industry as an independent entity. Obviously, the complete story cannot be told in this forum since it is a review of the secondary literature on the crisis.

Now that we have some basic context, let us take a look at what writers have said about the crisis. First we will examine the journalistic accounts and then the academic ones. Since these terms are used many times in the literature review, it is crucial that they be properly understood. A "journalistic" account is one that explores the chronology of events without delving into their natures, one which—like a newspaper article—focuses on personalities. This does not mean that "journalistic" books are inherently bad or of lesser quality; they have a different focus because they aim at a different audience. This also does not mean that "journalistic" works lack footnotes or extensive research, a common charge against reporters. "Academic" writing is that which examines the crisis on a more abstract level. Rather than chronicling events, academic writing seeks to illuminate underlying causes and relate events to other events. By and large, though, academic writing should strive for integration—the tying together of separate disciplines and fields. "Academic" is not necessarily produced by professors or those affiliated with universities, nor are "journalistic" works produced solely by non-academics. As mentioned previously, the best writing combines the both styles: conveying an organized and thorough analysis through lively writing and a human orientation.

In reviewing the literature on this subject, we will focus on understanding how the authors comprehended the causes of the crisis. We will do this because there is relatively little disagreement on the effects. One can directly see that there is no S&L industry in existence today or look at the expenditures of the government in bailing out the Federal Savings and Loan Insurance Corporation (FSLIC, pronounced "fizz-lick"). Understanding the long, complex chain of events that precipitated those effects is another story entirely. First, it involves quite a bit of economic understanding. Second, practically every event that transpired during the crisis seemed to have a unique cause. Finally, writers tend to play down causes that contradict their basic world-view. Where and how an author assigns blame speaks volumes about his beliefs and perspective. Our examination of causation in the literature will also serve to show the uniqueness of the proposed paper's perspective.

In surveying the journalists' accounts of the crisis, one finds some fairly solid efforts that bear mention and a smattering of casual treatments. The best of the bunch is Martin Lowy's High Rollers: Inside the Savings and Loan Debacle (1991). Lowy is a lawyer who has represented the New York State Superintendent of Banks, the Federal Deposit Insurance Corporation (FDIC), and many financial institutions over the course of his career. He argues that fraud was not the cause of the S&L crisis but was instead a symptom, used to "conceal the failing institution's true financial condition." Lowy contends that the S&L crisis was a "fundamental economic failure of a substantial part of our financial system."6 For Lowy, the crisis evolved in three phases: first, losses in 1978 through 1982 resulting from interest rate increases; second, losses from risky loans made from 1982 through 1985 that they did not record until 1986 through 1989 due to accounting practices; and finally, losses due to the government's hesitation in closing insolvent S&Ls after 1989.7 As far as he goes, Lowy makes some valid points—he spends roughly a third to a half of the book explaining the nature of S&Ls and how the crisis happened. Unfortunately, he often gets mired in personalities and omits much of the historical context of the S&Ls. These faults aside, he thoroughly understands the thrift industry and is very lucid in explaining it—much more so than his fellow non-academic writers.

L. William Seidman's Full Faith and Credit: The Great S&L Debacle and Other Washington Sagas (1993) stands out from among the other journalistic accounts since it was written by the chairman of the FDIC from 1985 until 1991 and a former dean of Arizona State University's College of Business. Although the book reads like a memoir and has no footnotes or references, his unique perspective on events as head of the banking industry's regulatory body more than compensates for any inadequacies. He argues that the S&L industry was doomed from the start because it "defied the first safety rule taught in Finance 101" by borrowing money (deposits) at short terms at high rates and selling money (mortgages) at long terms and low rates. Seidman believes that the whole crisis resulted from "a witch's brew consisting of four equal portions of misguided policy": first, the S&L industry was allowed to venture into new sources of revenue and engage in risky projects; second, the S&L was permitted to substitute more lenient regulatory accounting principles (RAP) for the traditional generally accepted accounting principles (GAAP); third, the government regulators were ordered to go easier on the S&L industry; and finally, Congress increased the deposit insurance ceiling from $40,000 per account to $100,000.8 He further notes that "high-flying speculators did not take long to realize that owning an S&L was a key to the Treasury."9

Thus, Seidman believes that the S&L crisis was a mixture of malformed government institutions with a human nature primed for taking advantage of it. Like many of the Founding Fathers, Seidman holds that the purpose of government is to place limitations on human corruptibility. As he puts it, "do not underestimate the ability of private-sector bankers and financial executives to do dumb things."10 The solution, for Seidman, is to re-establish government control over our financial institutions by placing control over the banking system in one regulatory agency and giving regulators more access and more power over their charges. This is a perspective and outlook wholly consonant with one who has spent a decade in the upper echelons of government service.

The last of the good journalistic efforts is Paul Zane Pilzer and Robert Deitz's Other People's Money: The Inside Story of the S&L Mess (1989). Pilzer, an adviser to the Bush administration and multimillionaire businessman, and Deitz, a Pulitzer Prize-nominated journalist for the Dallas Times Herald, offer a terse and lucid account of the S&L crisis that is heavy on personality but light on details and context—although they do spend an inordinate amount of pages describing the disagreement between Franklin Roosevelt and Huey Long on deposit insurance. The pair concludes that the fundamental cause of the S&L debacle is a deposit insurance system that "encourag[es] speculation, greed, fraud, and mismanagement on the part of thrift owners."11 To reform that system, Pilzer and Deitz propose that deposit insurance extend only to one account per person and that it only cover the first $10,000 at 100% (90% after that up to $100,000). They also suggest increasing the penalties for white-collar theft from a financial institution since they believe that such fraud was prevalent. Finally, they want the "concept of thrift that built this nation [to] be restored to the American character" through tax incentives and new types of savings accounts.12 Their perspective seems to be an admixture of journalistic insiderism—that the real decisions in government are made in back-room, closed-door meetings—and confidence in the power of the relatively free market. This is exactly the point of view one would expect from a collaboration between a businessman and a reporter.

The remainder of the journalistic efforts are almost exactly what one would read in the newspapers. They all have sensational headlines for book titles with dramatic exposés for content. One can comprehend James Ring Adam's The Big Fix by its subtitle: "How an Unholy Alliance of Politics and Money Destroyed America's Banking System." His predominantly anecdotal account views the crisis as prosecuted by crooked businessmen and the politicians they bought. His writing style is exemplified by this passage: "[E]ach coup has brought more open involvement by the politicians. Subtlety has dropped away, until members of Congress applied crude extortion on behalf of their pet swindlers."13 The heroes of his story are the dedicated government regulators who uncovered their schemes.

Michael Waldman's Who Robbed America? A Citizen's Guide to the S&L Scandal takes much the same tack as Adams. Written by the director of Public Citizen's Congress Watch, this book predictably indicts the wealthy investors and depositors of the failed thrifts and the Congressmen in their pocket. Waldman's basic argument is that deregulation led to a "Wild West atmosphere."14 His resolution for the problem is to tax the wealthy to pay for the bailout, to create a citizen's oversight group for the financial industry, to publicly finance Congressional elections, to use racketeering laws in the prosecution of white-collar criminals operating out of financial institutions, and to end "destructive" deregulation.15 His account of the causes and proposal for resolution reveal his motivations; for him, corrupt businessmen bribe otherwise aboveboard politicians into overlooking their transgressions and corruption. Since the businessmen who committed fraud have been punished, he thinks it is time to soak the rich through progressive taxation since they, presumably, all benefitted from the debacle.

The authors of Inside Job: The Looting of America's Savings and Loans contend that the S&L crisis was part of an organized network of fraud. Stephen Pizzo, Mary Fricker, and Paul Muolo—all reporters at the time—dance around the conclusion that the mob was behind the looting of the industry. As they put it, they "never once examined a thrift—no matter how random the choice—without finding someone there whom we already knew from another failed S&L."16 The implication is that that network was the Mafia and that implication is confirmed in several places when S&L officials are mentioned as "exchang[ing] their Mafia bona fides" or being "associated with one of the Mafia's most powerful godfathers, Carlos Marcello."17 This is the only book of the lot that makes such claims and accusations, but the book contains impressive endnotes and it would be surprising if organized crime was not involved in some fashion in such a profitable industry.

The last two books are at the bottom of an already deep barrel. Kathleen Day's oddly-titled S&L Hell: The People and Politics behind the $1 Trillion Savings and Loan Scandal (1993) is nothing but personality, with nearly no analysis. The following passage says it all:

Other treatments of the S&L crisis have offered a range of explanations for the industry's problems: the influence of organized crime, a conspiracy on Wall Street, imperfections in the market, and so on. All of these—to which, perhaps, the roles of greed and ambition should be added—may have played some part. But while the temptation is great to offer the debacle as a paradigm for the failures of regulation, this book doesn't advance a grand theory. If there are some obvious lessons for the future to be learned from these stories, I've left them for the reader to draw.18

The other book, Martin Mayer's The Greatest-Ever Bank Robbery, faces similar problems albeit with a little more analysis. He regards deposit insurance as the ultimate culprit, but buries that conclusion in a narrative made difficult to read by the number of dramatis personae used. Institutions and structures, if they play a role at all, are entirely secondary. His writing style is also much more glib than any of the other authors: "I have used in my chapter headings the metaphor of an automobile accident because it's fun."19

In sum, all of these journalistic works discuss the same events but arrive at different conclusions and write at different levels of detail. There are a couple of excellent works that go to considerable lengths in covering their subject and make cogent arguments and then there are plenty that read like very long newspaper articles. Generally, though, they view the S&L crisis as resulting from industry excesses and symbolic for what they regard as the excesses of the eighties. They also were in agreement that the savings and loan industry occupied a unique position in the American economy, largely because it had a powerful lobbying group. They varied in the intensity with which they blamed the industry—some placed the blame solely on the S&Ls while others spread the responsibility among several players, including the government, organized crime, real estate markets, and securities traders. These variations define the evaluative hierarchy used in this review.

Academic writings follow a similar hierarchy of value. There are a couple of works at the top and then it goes down from there. Perhaps the best account of the whole crisis is James Barth's The Great Savings and Loan Debacle, published as a Special Analysis Report by the American Enterprise Institute Press in 1991. Barth is currently a finance professor at Auburn University, but spent his time during the S&L crisis as the chief economist of the FHLBB and OTS from September 1987 through November 1989. Barth sees a number of factors contributing to the S&L crisis and one unifying cause. Among the factors, Barth cites a rigid institutional design, high and volatile interest rates, deterioration in asset quality, federal and state deregulation, fraudulent practices, increased competition in the financial services industry, changes in tax law, and increased participation in risky activities.20 The more fundamental cause, he argues, is federal deposit insurance itself.21 Deposit insurance acted to repress the discipline that was supplied previously by depositors. Government regulators, acting as proxies for depositors, attempted to control the risky activities but did not "reorganize or close inadequately capitalized institutions in a timely manner" resulting in heavy losses.22

In order to counteract what he regards as the negative incentives inherent in deposit insurance, Barth offers the following proposals: enactment of "narrow bank" rules that stipulate that all insured deposits must be matched by 100% reserves and that any lending or ancillary activities should be engaged in using excess capital rather than deposits; retention of the deposit insurance system while lowering the amounts protected or seeking coinsurance; supplanting federal deposit insurance in favor of industry-sponsored deposit insurance; usage of reinsurance, whereby a private reinsurer would insure the difference between the government's coverage and the institution's total deposits by charging a premium based on risk—this premium would then be used by the government for computation of its premium since the private reinsurer has a larger incentive to accumulate accurate information than the government.23 His conclusions about reform are surprising given his extensive participation in the regulatory apparatus, but they obviously stem from a disdain for unwarranted government interference in the banking industry.

The next best academic work is Lawrence White's The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation, published by the Oxford University Press in 1991. White is an New York University professor and noted economist who served as a board member on the FHLBB from November 12, 1986 until August 18, 1989. With these impeccable credentials, White's book seeks to divine and divulge the lessons of the S&L crisis for regulators. He views the S&L crisis as caused by the limitations of the regulators—the opposite of the view propounded by Barth. He attributes the cause of the crisis to six factors: flawed information systems used by regulators, non-risk based deposit insurance premiums, deregulation that was sound but poorly implemented, and cleanup legislation that did not provide adequate funds or fundamental reforms.24 In fact, he explicitly states:

[T]he cause of the problem was the creation in the early 1980s of a specific set of opportunities, capabilities, and incentives for risk-taking by thrifts that were reinforced by a set of perverse federal policy actions that weakened the safety-and-soundness regulatory system at a time when it needed to be substantially strengthened—and all of these events interacted, with an exquisite sense of timing, with movements in the price of oil and changes in the tax laws. In essence, the cause of the problem was the specific way in which the deposit insurance system for thrifts was structured and administered in the early 1980s.25

For White, then, the causes of the S&L crisis were institutional. The structure of the thrift system was set up in a certain way, the thrifts took advantage of that structure, economic conditions revealed the weaknesses in the structure, and the structure tumbled down. To prevent this from happening again, we must rebuild the structure and strengthen its defects. He suggests a number of reforms: switching from GAAP to a system he calls market value accounting, essentially forcing management to reveal all assets and liabilities in terms of their current market value instead of their historical market value; tying deposit insurance premiums to the riskiness of the institution; early intervention and prompt disposal of ailing thrifts; extending deposit insurance coverage to 100% of deposits; increasing the use of long-term subordinated debt, which would act as a front-line of defense for insolvent institutions before invoking deposit insurance protection; and setting up the Treasury as an automatic backup for deposit insurance funds instead of requiring Congressional approval for Treasury expenditures to cover deposit insurance shortfalls. As we will see over the course of the literature survey, these are the most radical reforms proposed and they underscore White's regulator background and perspective.

The remaining academic books on the subject focus exclusively on political aspects of the crisis. Mark Carl Rom's Public Spirit in the Thrift Tragedy, published by the University of Pittsburgh Press in 1996, is an excellent account of Congress' action and reaction to the events of the crisis. Rom wants to show that Congressmen were actually motivated by public spirit.26 Rom positions his view as an antipode to public choice theory, which argues that politicians—like everyone else—act solely in their own self-interest and use their power to advance their careers and material well-being. While his thesis is interesting, it has little relevance to the topic at hand. The motivations of those who handled the evolving crisis do not explain fundamentally why it happened. There was too much history there; it is obvious that Congress and administration officials were primarily reacting to events, struggling to right a listing ship that inevitably sunk. Ultimately, Rom's work focuses on his thesis and not on the underlying causes of the crisis—although he does offer some suggestions for causes that differ little from those of the previous two works.

Ned Eichler suggests that a trio of factors—ideology, personality, and circumstance—caused the crisis in his 1989 book The Thrift Debacle, published by the University of California Press. The ideology of deregulation had taken hold of the country's elected officials and it was well-suited to the thrift industry, which had long been subsidized and sheltered by the federal government. For personality, Reagan appointee to the FHLBB Richard Pratt "brought fierce determination, contempt for the industry he was about to supervise, and arrogance to the job."27 The circumstances of the thrift industry round out the litany of factors. Eichler's lays the fundamental blame, though, on Ronald Reagan:

But the history of the thrift debacle must someday place the primary blame where it belongs, on Reagan, an ideological puritan who proclaimed the virtues of deregulation and then left its implementation to men ill equipped to handle such a delicate task. When asked why he did not ever brief Reagan on the severity of the thrift situation, its causes, and the steps required to deal with it, [former FHLBB chairman] Gray replied that Reagan had no interest in the matter.28

This is certainly a unique attribution of responsibility. The source of the S&L industry's problems, though, predates Reagan's terms and it is problematic to assign blame to Reagan for even those areas over which he delegated authority. The President of the United States suffers from the same limitations as every other human being: limited knowledge and fallible judgment.

The last of the academic works is Big Money Crime: Fraud and Politics in the Savings and Loan Crisis, published in 1997 by the University of California Press. Its authors—Kitty Calavita, Henry Pontell, and Robert Tillman—make the incredible claim that everybody else has gotten it wrong about the S&L crisis. In actuality, the crisis occurred due to the criminal activities of the S&L executives. They start the book right off with the following bold statement:

We believe a different approach is in order, as a number of myths have come to permeate popular understandings of the S&L scandal. Too often, for example, economists and financial experts have attributed the disaster to faulty business decisions or business risks gone awry. We argue instead that deliberate insider fraud was at the center of the disaster. Furthermore, we contend that systematic political collusion—not just policy error—was a critical ingredient in this unprecedented series of frauds.29

Their chronicling of the crimes committed by S&L insiders is fascinating, but overstated. To argue as they do that honest mistakes played little or no part in the crisis or that the whole system was corrupt is ludicrous since it is demonstrably wrong. Individual S&L managers committed plenty of crimes, to be sure, but one would expect criminals to be attracted to the huge amounts the S&Ls dealt with and it was not nearly as widespread as the authors contend. Moreover, that crime points to a larger issue: what allowed criminals to engage in their crimes undetected for so long? It was assuredly the system that failed and permitted such frauds.

The academic writers, then, tend to vary along the same continuum as the journalistic writers. As mentioned earlier, the journalistic authors assigned different degrees of culpability to the savings and loan industry—some more and some less. The extremes, though, were farther along the continuum than their journalistic counterparts; the authors that held the industry less guilty found them almost blameless while those who argued that the industry was culpable found them exclusively so—even criminal. Their focus is what unites all of the works: they all target the institutions for special analysis, introducing the human elements anecdotally. Whether they discuss the political dimensions of the crisis or the economic ones, all of the academics subject the institutional structures to thorough analysis. The only problem, already mentioned, is that they tend to focus on the institutions that fit in their particular specialty—economists examine the economic aspects of the industry while political scientists and sociologists look at the political issues.

One common element obtains throughout these works. Nearly all of them, in some form or another, blame the crisis on deregulation. Like the current California electrical troubles, deregulation is not responsible for the crisis. The financial services industry is, and always has been, one of the most heavily regulated areas of the economy. The deregulation put forth by the Reagan administration in the eighties eliminated some of the more odious regulations such as interest rate caps, portfolio diversification restrictions, and interstate banking restrictions. The industry as a whole was still left very much regulated and controlled. A myriad of regulatory agencies and an army of bureaucrats still oversaw the nation's financial institutions. As economist Richard Salsman put it, "these freedoms were not 'permitted' out of any desire by politicians to strengthen the banking system, but simply to forestall the collapse of some of the unsound institutions within it. Ceilings on interest rates were lifted only after they had led to massive disintermediation."30 The rescinded regulations were, perhaps, the wrong ones to roll back since they encouraged unethical and irrational behavior. However, the remaining regulations did the same if not more so. Deposit insurance, which was left, allowed executives to take risky moves because the executives knew that the depositors would always be safe. Similarly, the lack of owner equity meant that these same executives would suffer no financial repercussions should they bet incorrectly. Moreover, the Federal Reserve and the FHLBB propped up failing institutions much longer than they should have thereby prolonging their lives and increasing the costs of the eventual bailout. What existed in the eighties was not deregulation—since that would mean wholesale elimination of regulations—but decreased regulation. This is an important distinction to remember and take note of because it can lead to a masking of blame when industry is blamed on the assumption that it is acting freely when it is not.

The works covered in this literature review suffer from a number of deficiencies. The covered books' biggest problem is that they are too specialized. The journalistic accounts focused mostly on the players in the S&L crisis, such as Charles Keating, Neil Bush, and the Keating Five. They typically only delved into institutional analysis in the final chapter when they offered up their plan for resolution. The academic accounts, on the other hand were suffused with institutional analysis, but it was typically restricted to either the economic or political aspects of the crisis. The best work would include an analysis of both areas. An economic understanding of the S&L industry is invaluable to explaining why the industry regularly appealed to Congress for assistance. Similarly, an examination of the industry's economic underpinnings without an exploration of the political dimensions omits half the story since the S&L industry was essentially a creature of the government's creation. The economic and political aspects of the S&L crisis were, in other words, inextricably intertwined; devoting insufficient space to either leaves the story untold. To be sure, not all of the works dramatically fail in this regard. Lowy's High Rollers, Seidman's Full Faith and Credit, Barth's The Great Savings and Loan Debacle, and White's The S&L Debacle all come close to achieving that integration, but each falls short.

All of the works also fail to adequately contrast the savings and loans with the banks. The crisis presents a prime opportunity to compare the S&Ls with the banks since they were both encountered the same troubles and faced much the same regulatory environment. The banking industry still exists today—and in a much stronger form. The S&Ls are gone, no longer in existence. This fact alone merits considerable attention. When two industries face the same obstacles and one dies while the other thrives, something important is happening. A thorough examination of this situation could provide the key to understanding the nature and causes of the S&L crisis. Without going into detail—which would require another essay—it appears that the S&L industry went bust because there was never a market rationale for its existence. Thus, when their situation worsened, they could only beg Congress for a bailout. The failing banks, on the other hand, were bought out by stronger banks. These newly-merged banks were then able to ride out the hard times and eventually prospered. Clearly, the juxtaposition of the savings and loans and the banks yields useful insights into the crisis.

The final deficiency of the literature reviewed is its national scope. While the issues are clearly national, showing how the issues played out at the local level offers three benefits. First, it limits the number of concretes to consider. This enables the reader to keep a better handle on the facts presented and the arguments made. Too many of the journalistic efforts presented dozens of characters in their narratives. Second, a local perspective narrows the focus of a work. Rather than skimpily researching dozens of institutions, regulatory agencies, and individuals, a local focus allows the writer to throughly research a handful of entities. Finally, although the S&L crisis played itself out nationally, the circumstances of a couple major cities were repeated over and over. For example, the S&Ls in Phoenix and Dallas could almost be archetypes for the rest of the nation since there was little variation from their collapse. What some of the works should have done is explored the national issues and then show how those theories actually looked at the local level. In so doing, one could not help but unite the economic and political aspects of the crisis since one would be looking at the actual situations within an already-developed theoretical framework.

What this field needs, then, is a broad work that juxtaposes the banking industry with the savings and loans and applies the knowledge gained to the local level. Let us now turn our attention to these three aspects—broadness, inclusion of the banking industry, and localness—of a proposed paper that would remedy the deficiencies noted in the current literature. To insure depth of analysis, the paper should be divided into two major sections: context and analysis. The first section would begin with a chronology of events in order to provide the reader with a basic framework to understand the events. An exploration of the major regulations affecting banks and S&Ls would follow and that would be followed by a look at the market conditions surrounding banks and S&Ls in the seventies and eighties. The paper would next cover the changes that occurred in the banking industry and then the actual events of the crisis. Finally, the paper would deal with the aftermath of the debacle and the look of banking today. The analytical portion of the paper would address some of the more theoretical points raised by the context-defining section. A survey of the different theories of causation and an evaluation of their merits would start off the analysis. Finally, the paper would explore the author's thesis and hypothesis of causation. Possible objections would be raised and, one hopes, refuted. This structure seems to cover the most territory with the most efficiency. Moreover, the ordering of the sections exemplifies the need for conclusions to await the explication of the relevant facts of reality. Within each section, parts are ordered in logical progression—each building on the one prior. By the end, the whole structure should stand or fall based on the foundations laid in the first section and the construction methods used in the second.

The work should focus on three subjects: the savings and loan industry, the banking industry, and the federal government. These are the three key players, so to speak, in the S&L debacle. There are other minor players that can be brought in for bit parts including junk bonds, commercial real estate, and criminal executives. These were not monolithic entities: the banking industry, for example, is composed of huge multinational banks, community banks, and banking associations. However, they all faced a similar, basic set of problems that united their interests. This allows us to treat them as a single unit instead of discussing them separately due to inconsequential differences—inconsequential insofar as they did not represent fundamental distinctions. We will study these three principals by first examining the historical contexts with which they came to the events of the late eighties. For the S&L industry, we will look at its founding in the nineteenth century, its troubles in the latter half of that century, its enshrinement in the American firmament by the New Deal, its growth in the fifties, retrenchment in the sixties and seventies, its peak in the early eighties, its collapse in the late eighties, and its elimination in the early nineties. For the banking industry, we will start a little later with the rise of the national banks in the late nineteenth century then move on to the creation of the Federal Reserve System in 1913, the bank runs of the Great Depression, the establishment of deposit insurance in the New Deal legislation of the thirties, the technological changes of the sixties and seventies, the changes to banking law of the eighties, the rise of the national bank in the late eighties and nineties, and the banking climate of today. In our study of the federal government's interaction with these two industries, we will examine the creation of the Federal Reserve System, the issuance of a myriad of regulations governing every aspect of the two industries, the changes made to those regulations over the period, and the changes in the political environment over time. In covering all of these areas, we can fully establish the context necessary for understanding the course of the S&L debacle.

The concentration on local events would permit the writer to show how the industries affected and were affected by the communities they served. Since banks and S&Ls at the time were strictly local (and perhaps regional) enterprises, adopting a national perspective is not particularly useful. The paper should center around a major city that changed and was changed by the S&Ls. Phoenix, Arizona is a particularly poignant example of such a city. Its real estate market attracted national investment from both banks and savings and loans. Moreover, it had both a thriving banking community and a thriving thrift community. Because of its phenomenal growth during the fifties, sixties, and seventies, Phoenix's real estate market practically ached for all the capital financial institutions could muster. When that market collapsed in the mid-eighties, it took these same financial institutions with it. The holdings of these failed institutions were either bought by stronger banks or sold off at substantial discounts. There is plenty of research to conduct along such lines and the documentation produced by the industry and its regulators is voluminous. Newspaper accounts of the time would probably have innumerable stories about the local impact of the S&L crisis.

To review, this paper's proposed thesis is that the thrift industry faced a similar set of problems as the commercial banking industry during the 1980s—disintermediation, increased competition, disincentives introduced by deposit insurance, deregulation, fraud, and mismanagement—but was hamstrung by government edict while the banks were considerably freer. When events took a turn for the worse, the failing savings and loans required government assistance whereas the failing banks were bought by larger banks. The lesson of the S&L debacle, then, is not that Congress should make regulations more stringent or that we should reform deposit insurance; instead, we should eliminate government intervention in the banking system. The S&L industry substantially duplicated the role and function of the banks and was dwindling in impact until 1933 when the Roosevelt administration resurrected it and gave it special advantages. There is no reason why the government should be in the business of propping up one industry in preference to another. The preceding will constitute the thesis and theme of the paper.

This proposed paper would add to the scholarship available on this crisis. Its perspective is unique in that it compares and contrasts the banking industry, which survived, with the thrift industry, which did not. In seeking to answer why the discrepancy exists, the paper would yield valuable insights into why some businesses fail and the why public solutions often produce undesired and undesirable results. In addition, it would provide comment on an area where little exists currently: the state of banking during the savings and loan crisis. Finally, it would address theoretical concerns about centralized banking and offer potential substitutes for its shortcomings.

1 Barth, James R. The Great Savings and Loan Debacle. (Washington, D.C.: AEI Press, 1991), 9.

2 Ibid., 12-3.

3 Ibid., 15-6.

4 Although it was nothing spectacular (something like 15% of assets in non-mortgages and later 40%), this diversification enabled S&Ls to spread the effects of disintermediation across their entire portfolio thereby reducing its effects.

5 Ibid., 123-4.

6 Lowy, Martin. High Rollers: Inside the Savings and Loan Debacle. (New York: Praeger Publishers, 1991), 4.

7 Ibid., 3.

8 Seidman, L. William. Full Faith and Credit: The S&L Debacle and Other Washington Sagas. (New York City: Times Books, 1993), 177-8.

9 Ibid., 179.

10 Ibid., 273.

11 Pilzer, Paul Zane and Robert Deitz. Other People's Money: An Inside Story of the S&L Mess. (New York City: Simon and Schuster, 1989), 237.

12 Ibid., 237-48.

13 Adams, James Ring. The Big Fix: Inside the S&L Scandal. (New York City: Wiley and Sons, 1990), ix.

14 Waldman, Michael. Who Robbed America? A Citizen's Guide to the S&L Scandal. (New York City: Random House, 1990), 7.

15 Ibid., 146-80.

16 Pizzo, Stephen, Mary Fricker, and Paul Muolo. Inside Job: The Looting of America's Savings and Loans. (New York City: McGraw-Hill, 1989), 7.

17 Ibid., 124, 231.

18 Day, Kathleen. S&L Hell: The People and Politics behind the $1 Trillion Savings and Loan Scandal. (New York City: Norton and Co., 1993), 10.

19 Mayer, Martin. The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry. (New York City: Scribner's, 1990), 305.

20 Barth, 37-47.

21 Ibid., 48.

22 Ibid., 100.

23 Ibid., 108-11.

24 White, Lawrence. The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation. (New York City: Oxford University Press, 1991), 3-5.

25 Ibid., 223. Emphasis in original.

26 Rom uses Kelman's definition: "Public spirit is an inclination to make an honest effort to achieve good public policy." Rom, Mark Carl. Public Spirit in the Thrift Tragedy. (Pittsburgh, PA: University of Pittsburgh Press, 1996), 14.

27 Eichler, Ned. The Thrift Debacle. (Berkeley, CA: University of California Press, 1989), 129-30.

28 Ibid., 136.

29 Calavita, Kitty, Henry Pontell, and Robert Tillman. Big Money Crime: Fraud and Politics in the Savings and Loan Crisis. (Berkeley, CA: University of California Press, 1997), 1.

30 Salsman, Richard M. Breaking the Banks: Central Banking Problems and Free Banking Solutions. (Great Barrington, MA: American Institute for Economic Research, 1990), 114.