that all citizens will chip in through taxes or through inflation to make ail depositors whole.
The plight of the S&Ls was dramatically brought to light in Ohio in 1985 when the Home State Savings Bank of Cincinnati collapsed as a result of a potential $150 million loss in a Horida securities firm. This triggered a run, not only on the thirty-three branches of Home State, but on many of the other S&Ls as well. The news impacted international markets where overseas speculators dumped paper dollars for other currencies, and some rushed to buy gold.
Within a few days, depositors demanding their money caused $60 million to flow out of the state's $130 million 'insurance' fund which, true to form for all government protection schemes, was terribly inadequate. If the run had been allowed to continue, the fund likely would have been obliterated the next day. It was time for a political fix.
On March 15, Ohio Governor Richard Celeste declared one of the few 'bank holidays' since the Great Depression and closed all seventy-one of the state-insured thrifts. He assured the public there was nothing to worry about. He said this was merely a 'cooling-off period ... until we can convincingly demonstrate the soundness of our system.' Then he flew to Washington and met with Paul Volcker, chairman of the Federal Reserve Board, and with Edwin Gray, chairman of the Federal Home Loan Bank Board, to request federal assistance. They assured him it was available.
A few days later, depositors were authorized to withdraw up to $750 from their accounts. On March 21, President Reagan calmed the world money markets with assurances that the crisis was over.
Furthermore, he said, the problem was 'limited to Ohio.'2
This was not the first time there had been a failure of state-sponsored insurance funds. The one in Nebraska was pulled down ln when the Commonwealth Savings Company of Lincoln
failed. It had over $60 million in deposits, but the insurance fund 1- 'How Safe Are Your Deposits?',
Ohio Bank Crisis That Ruffled World,'
had less than $2 million to cover, not just Commonwealth, but the whole system. Depositors were lucky to get 65 cents on the dollar, and even that was expected to take up to 10 years.1
AN INVITATION TO FRAUD
In the early days of the Reagan administration, government regulations were changed so that the S&Ls were no longer restricted to the issuance of home mortgages, the sole reason for their creation in the first place. In fact, they no longer even were required to obtain a down payment on their loans. They could now finance 100% of a deal—or even
Developers, builders, managers, and appraisers made millions. The field soon became overbuilt and riddled with fraud. Billions of dollars disappeared into defunct projects. In at least twenty-two of the failed S&Ls, there is evidence that the Mafia and CIA were involved.
Fraud is not necessarily against the law. In fact, most of the fraud in the S&L saga was, not only legal, it was encouraged by the government. The Garn-St. Germain Act allowed the thrifts to lend an amount of money equal to the
1. 'How Safe Are Deposits in Ailing Banks, S&Ls?,'
HOME, SWEET LOAN
73
THE FALLOUT BEGINS
In spite of the accounting gimmicks which were created to make the walking-dead S&Ls look healthy, by 1984 the fallout began- The FSLIC closed one institution that year and arranged for the merger of twenty-six others which were insolvent. In order to persuade healthy firms to absorb insolvent ones, the government provides cash settlements to compensate for the liabilities. By 1984, these subsidized mergers were costing the FDIC over $1 billion per year. Yet, that was just the small beginning.
Between 1980 and 1986, a total of 664 insured S&Ls failed.
Government regulators had promised to protect the public in the event of losses, but the losses were already far beyond what they could handle. They could not afford to close down all the insolvent thrifts because they simply didn't have enough money to cover the pay out. In March of 1986, the FSLIC had only 3 cents for every dollar of deposits. By the end of that year, the figure had dropped to two-tenths of a penny for each dollar 'insured.' Obviously, they had to keep those thrifts in business, which meant they had to invent even more accounting gimmicks to conceal the reality.
Postponement of the inevitable made matters even worse.
Keeping the S&Ls in business was costing the FSLIC $6 million per day. By 1988, two years later, the thrift industry as a whole was losing $9.8 million per day, and the unprofitable ones—the corpses which were propped up by the FSLIC—were losing $35.6 million per day. And, still, the game continued.
By 1989, the FSLIC no longer had even two-tenths of a penny for each dollar insured. Its reserves had vanished altogether. Like the thrifts it supposedly protected, it was, itself, insolvent and looking for loans. It had tried offering bond issues, but these fell far short of its needs. Congress had discussed the problem but had failed to provide new
