Savings and loan crisis
Roughly 745 savings and loan institutions -- which took in deposits and made home loans -- failed during this crisis that peaked in the 1980s. The S&Ls, also known as thrifts, had engaged in risky financial maneuvers to compete with other institutions offering depositers higher interest rates.
The nub of the savings and loan crisis of the 1980s was rising interest rates and investments like junk bonds which offered consumers higher interest rates than savings and loans traditionally paid to their passbook depositors. The addition of certificates of deposit (CDs) that paid competitive interest rates helped, but savings and loan companies had their funds tied up in long term mortgages, many issued at lower rates. Hence, many failed to make profits and began to turn in losses.
But to keep depositors from drawing out their deposits, S&Ls raised the interest rates paid on their CDs, and some made risky loans in an effort earn higher returns. Because their depositors were insured by the Federal government under FSLIC (Federal Savings and Loan Insurance Corporation), the Federal government was on the hook to cover their losses. Resolving the huge accumulated losses required a major Federal program.
Related Fool Articles
Recent Mentions on Fool.com
- Lessons From How This CEO Earned $144 Million for Himself and Billions More for Investors
- A Shining Example of Warren Buffett's Superhuman Stock-Picking
- 4 Bank Stocks You Should Avoid at All Costs
- How Much Did the Financial Crisis Cost Bank of America?
- The 1 Reason M&T Bank Is a Long-Term Buy
- The Best Bank Stock to Own for the Next Recession