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Some of the most important examples of criminogenic behavior and control fraud in our history were encountered and eventually resolved during the S&L crisis era. And yet we went on to repeat the same behavior patterns in the immediately following twenty years. Before trying to answer the title question, a historical timeline is necessary for reference. The major events and dates are outlined in the first section which follows.
S&L Crisis Timeline – Major Events
1979 – Paul Volcker appointed Federal Reserve Chairman by Pres. Carter.
1979-1981 – Volcker's Fed raises federal funds rate to a high of 20% in June, 1981.
1981 – Richard T. Pratt appointed chairman of the Federal Home Loan Bank Board (Bank Board), the national regulator for S&Ls by Pres. Reagan.
1982 – Pres. Reagan signs the Garn-St. Germain Act deregulating S&Ls. Bill was proposed by Pratt.
1983 – Pratt resigns and is replaced as chairman fellow board member by Edwin Gray.
1987 – Pres. Reagan appoints M. Danny Wall as chairman, declining to reappoint Gray.
1989 – Pres. George H. W. Bush signs taxpayer-financed bailout measure known as the FIRREA authorizing $50 billion to close failed banks.
1990 – M. Danny Wall resigns as Bank Board chairman, under pressure (re-Lincoln S&L).
1990 – Pres. George H.W. Bush appoints Timothy Ryan as chairman.
1986-1995 – Over 1,000 banks with total assets of over $500 billion failed.
1999 – Crisis cost was determined to be $153 billion, with taxpayers footing the bill for $124 billion, and the S&L industry paying the rest.
Beat Inflation, Break the Bank
Fed Chairman Paul Volcker's inflation control efforts in the late 1970s and early 1980s did great damage to S&Ls, which were overwhelmingly portfolio lenders making long-term, fixed rate mortgages funded by extremely short-term deposits.
S&Ls were exposed to severe interest rate risk. On a market value basis, the industry was insolvent by roughly $150 billion by mid-1982. Bank Board Chairman Pratt (an academic expert in "modern finance" who had served as the S&L trade association's top economist) drafted a bill (informally known then as "the Pratt bill") modeled on state of Texas deregulation. Deregulating at a time of mass insolvency was significantly insane, but Pratt was an anti-regulator of great fervor. Using econometric techniques to choose Texas as the model – without recognizing that Texas S&Ls' superior reported income was as fictional (reported income and capital arising from merging two insolvent, unprofitable S&Ls) – was insane and caused severe losses.