Difference between revisions of "Savings and loan association" - New World Encyclopedia

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[[Category:Politics and social sciences]]
 
[[Category:Politics and social sciences]]
 
[[Category:Economics]]
 
[[Category:Economics]]
  
  
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A '''savings and loan association''' is a [[financial institution]] which specializes in accepting [[savings]] deposits and making [[mortgage]] loans. The term is mainly used in the [[United States]]; similar institutions in the [[United Kingdom]] and some [[Commonwealth of Nations|Commonwealth]] countries are called [[building societies]]. They are often [[mutual]]ly held (often called [[mutual savings bank]]s), meaning that the depositors and borrowers are members with voting rights and have the ability to direct the financial and managerial goals of the organization. It is possible for a savings and loan to be [[stock]]-based and even publicly traded. This means, however, that it truly no longer is an association and depositors and borrowers no longer have any managerial control.
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A '''savings and loan association''' (S&L) is a [[financial institution]] which specializes in accepting [[savings]] deposits and making [[mortgage]] loans. The term is mainly used in the [[United States]]; similar institutions in the [[United Kingdom]] and some [[Commonwealth of Nations|Commonwealth]] countries are called building societies. They are often mutually held (often called [[mutual savings bank]]s), meaning that the depositors and borrowers are members with voting rights and have the ability to direct the financial and managerial goals of the organization. While it is possible for a savings and loan to "demutualize" and become [[stock]]-based and even publicly traded, this means that it truly no longer is an association, and depositors and borrowers no longer have any managerial control.
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Originally established as cooperative associations that allowed their members to obtain loans for the purpose of buying a home, they were intended to dissolve after all the members had made their purchase. However, many sought to continue, expanding and diversifying their services. S&Ls went through difficult times in their efforts to maintain solvency as the market was hit by [[inflation]], and corruption within their ranks led to disaster. In the late twentieth century, the savings and loan crisis resulted in a wave of failures in the United States, with the government paying out substantial sums to counteract the effects. While no longer the popular entities they were, savings and loan associations continue to exist, providing a range of [[banking]] services to the public. To be true to their founding spirit, however, the S&L needs to find its niche again, serving a community of which it is an integral part and which has ownership over it.
  
 
== Overview ==  
 
== Overview ==  
  
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A savings and loan association is a financial institution, organized cooperatively or corporately, that holds the funds of its members or clients in interest-bearing accounts and certificates of deposit, invests these funds chiefly in home mortgage loans and may also offer checking accounts and other banking services. <ref> Editors of the American Heritage Dictionary. 2006. ''The American Heritage Dictionary.'' Houghton Mifflin. ISBN 978-0618701728. Retrieved July 18, 2007. </ref> The overriding goal of the savings and loan association was to encourage savings and investment by common people and to give them access to a financial intermediary that otherwise had not been open to them in the past. The savings and loan was also there to provide loans for the purchase of large ticket items, usually homes, for worthy and responsible borrowers. The early savings and loans were in the business of "neighbors helping neighbors."
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A '''savings and loan association''' (S&L) is a financial institution, organized cooperatively or corporately, that holds the funds of its members or clients in [[interest]]-bearing accounts and certificates of deposit, invests these funds chiefly in home mortgage loans, and may also offer checking accounts and other [[banking]] services.<ref> ''The American Heritage Dictionary.'' (Houghton Mifflin, 2006. ISBN 978-0618701728). </ref> The overriding goal of the savings and loan association was to encourage [[savings]] and [[investment]] by common people and to give them access to a financial intermediary that had not been open to them in the past. The savings and loan association was also there to provide loans for the purchase of homes, for worthy and responsible borrowers. The early savings and loans were in the business of "neighbors helping neighbors."
  
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At the beginning of the [[19th century]], [[banking]] was still something only done by those that had [[asset]]s or [[wealth]] that needed safekeeping. The first savings bank in the United States, the [[Philadelphia Savings Fund Society]], was established on December 20, 1816, and by the 1830s, had begun to thrive in the Northeast. Savings and loans accepted deposits and used those deposits, along with other capital that was in their possession, to make loans. What was revolutionary was that the management of the savings and loan was determined by those that held deposits and in some instances had loans.  The amount of influence in the management of the organization was determined based on the amount on deposit with the institution. Savings and loan associations became widespread following the Civil War. More than a third of the 16,000 such institutions in the United States at the end of the 1920s were sucked into the whirlpool of the Great Depression, stimulating the most long-lived of President Herbert Hoover's efforts to combat it. <ref name=Teck> Teck, A. 1968. ''Mutual Savings Banks and Savings and Loan Associations.'' University Presses of California, Columbia, and Princeton. ISBN 978-0231031240. Retrieved July 18, 2007. </ref>
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A '''building society''' is a financial institution similar to a savings and loan association. Owned by its members, it offers banking and other [[financial services]], especially [[mortgage loan|mortgage lending]]. The term "building society" first arose in the nineteenth century, in the [[United Kingdom]], from working men's [[co-operative]] savings groups: by pooling savings, members could buy or build their own homes. In the UK building societies actively compete with [[bank]]s for most "banking services" especially mortgage lending and [[deposit account|deposit]] accounts.<ref>[http://www.bsa.org.uk/ Building Societies Association]''www.bsa.org.uk''. Retrieved July 22, 2007. </ref>
  
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In the [[United Kingdom]], the first savings bank was founded in 1810 by the [[Reverend]] [[Henry Duncan]], [[Doctor of Divinity]], the minister of [[Ruthwell]] [[Church]] in [[Dumfriesshire]], [[Scotland]]. It is home to the '''Savings Bank Museum''', in which there are records relating to the history of the [[savings bank]] movement in [[Great Britain]], as well as family memorabilia relating to Henry Duncan and other prominent people of the surrounding area. However the main type of institution similar to U.S. savings and loan associations in the United Kingdom is not the savings bank, but the [[building society]] and had existed since the 1770s.
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== History ==
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=== Building societies ===
  
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== Evolution ==
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The original Building Society was formed in the [[United Kingdom]] in 1774. Most of the original societies were fully "terminating," meaning that they would be dissolved when all members had purchased a house. In the 1830s and 1840s a new development took place with the "Permanent Building Society," where the society continued on a rolling basis, continually taking in new members as earlier ones completed purchases. The main legislative framework for the Building Society was the Building Society Act of 1874, with subsequent amending legislation in 1894, 1939, and 1960.
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The savings and loan association became a strong force in the early [[20th century]] through assisting people with home ownership, through [[mortgage]] lending, and further assisting their members with basic [[saving]] and [[investing]] outlets, typically through passbook savings accounts and term certificates of deposit.
 
  
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=== Early Mortgage Lending ===
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In the 1980s, British [[banking]] laws were changed to allow building societies to offer banking services equivalent to normal banks. The management of a number of societies still felt that they were unable to compete with the banks, and a new Building Society Act was passed in response to their concerns. This permitted societies to "[[demutualise]]." If more than 75 percent of members voted in favor, the building society would then become a [[limited company]] like any other. Members' mutual rights were exchanged for shares in this new company. A number of the larger societies made such proposals to their members and all were accepted. Some became independent companies quoted on the [[London Stock Exchange]], others were acquired by larger financial groups.  
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The latest of mortgages were not offered by banks, but by [[insurance]] companies, and they differed greatly from the mortgage or home loan that is familiar today. Most early mortgages were short term with some kind of balloon payment at the end of the term, or they were interest-only loans which did not pay anything toward the principal of the loan with each payment. As such, many people were either perpetually in debt in a continuous cycle of refinancing their home purchase, or they lost their home through forclosure when they were unable to make the balloon payment at the end of the term of that loan.
 
  
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This bothered government regulators who then established the [[Federal Home Loan Bank]] and associated [[Federal Home Loan Bank Board]] to assist other banks in providing funding to offer long term, [[amortization|amortized]] loans for home purchases. The idea was to get banks involved in lending, not insurance companies, and to provide realistic loans which people could repay and gain full ownership of their homes. Savings and loan associations sprung up all across the United States because there was low-cost funding available through the Federal Home Loan Bank for the purposes of mortgage lending.
+
However, a number of investors appeared who would open a [[savings]] account with a mutual building society, thereby obtaining voting rights in the society, and pressurize for a vote on [[demutualization]], with the intent of receiving a windfall payment as a result. Such investors were termed "[[carpetbagger]]s." After a number of large demutualizations pressured by these carpetbaggers, most of the remaining societies modified their rules of membership in the late 1990s. New membership rules ensure that anyone newly joining a society would, for the first few years, be unable to get any profit out of a demutualization. With the chance of a quick profit removed, the demutualizations slowed considerably.
  
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=== High Interest ===
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=== Early S&L associations ===
  
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Savings and loans were given a certain amount of preferential treatment by the [[Federal Reserve]] inasmuch as they were given the ability to pay higher [[interest]] rates on savings deposits compared to a regular [[commercial bank]]. The idea was that with marginally higher savings rates, savings and loans would attract more deposits that would allow them to continue to write more [[mortgage]] loans which would keep the mortgage market liquid and funds would always be available to potential borrowers. <ref name=Teck/>
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The first savings and loan association was the Oxford Provident Building Society in Frankfort, [[Pennsylvania]], established in 1831 with 40 members. Patterned after the building societies in the UK, Oxford Provident received regular weekly payments from each member and then lent the money to individuals until each member could build or purchase his own home. The success of this association led to others throughout the Northeast and by 1890 they had spread to all states.
  
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However, savings and loans were not allowed to offer [[check (finance)|check]]ing accounts until the late 1970s. This impacted the attractiveness of being a savings and loan customer and required many of them to hold accounts across multiple institutions so they could have access to checking and receive competitive savings rates all at the same time.
+
Savings and loans accepted deposits and used those deposits, along with other [[capital]] that was in their possession, to make loans. What was revolutionary was that the management of the savings and loan was determined by those that held deposits and in some instances held loans. The amount of influence in the management of the organization was determined based on the amount on deposit with the institution.  
  
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== Savings and Loan Crisis ==
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S&L associations became widespread following the [[American Civil War|Civil War]]. However, more than a third of the 16,000 such institutions at the end of the 1920s were sucked into the whirlpool of the [[Great Depression]], stimulating the most long-lived of President [[Herbert Hoover]]'s efforts to combat it.<ref>A. Tech. ''Mutual Savings Banks and Savings and Loan Associations.'' (University Presses of California, Columbia, and Princeton, 1968. ISBN 978-0231031240).</ref>
  
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The '''Savings and Loan crisis''' of the 1980s was a wave of [[savings and loan association]] failures in the [[United States]] in which over one thousand savings and loan institutions failed in "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time." <ref name=Galbraith> Galbraith, John. 1993. ''The Culture of Contentment.'' Houghton Mifflin Company. ISBN 978-0395669198. Retrieved July 18, 2007.</ref> The ultimate cost of the crisis is estimated to have totaled around one hundred fifty billion dollars, about one hundred twenty-five billion of which was consequently and directly subsidized by the U.S. government, which contributed to the large [[budget deficit]]s of the early 1990s. The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990-1991 economic [[recession]].
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== Functions ==
 +
The savings and loan association became a strong force in the early twentieth century through assisting people with home ownership, through [[mortgage]] lending, and further assisting their members with basic [[savings]] and [[investing]] outlets, typically through passbook savings accounts and term certificates of deposit.
  
−
In the 1970s, many [[bank]]s, but particularly S&Ls, were experiencing a significant outflow of low-rate deposits, as interest rates were driven up by [[Federal Reserve]] actions to restrict the money supply, a move Federal Reserve Chairman [[Paul Volcker]] instituted to wring inflation out of the economy, and as depositors moved their money to the new high-interest [[money-market funds]]. At the same time, the institutions had much of their money tied up in long-term [[mortgage loan]]s that were written at fixed interest rates, and with market rates rising, were worth far less than face value. That is, in order to sell a 5% mortgage to pay requests from depositors for their funds in a market asking 10%, a savings and loan would have to discount their asking price. This meant that the value of these loans, which were the institution's assets, was less than the deposits used to make them and the savings and loan's net worth was being eroded. <ref name=Galbraith/>
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=== Mortgage lending ===
 +
The earliest mortgages were not offered by banks, but by [[insurance]] companies, and they differed greatly from the mortgage or home loan that is familiar today. Most early mortgages were short term with some kind of balloon payment at the end of the term, or they were interest-only loans which did not pay anything toward the principal of the loan with each payment. As such, many people were either perpetually in debt in a continuous cycle of refinancing their home purchase, or they lost their home through foreclosure when they were unable to make the balloon payment at the end of the term of the loan.
  
−
Under financial institution regulation which had its roots in the Depression era, federally chartered S&Ls were only allowed to make a narrowly limited range of loan types. Early in the administration of president [[Ronald Reagan]], this range was expanded when the [[Federal Home Loan Bank]] Board eased some of its restrictions pertaining to S&Ls, specifically to try to remedy the impact rising interest rates were having on S&L net worth. And it was the status of an institution's net worth that could trigger a requirement that the Federal Home Loan Bank declare an S&L insolvent and take it over for liquidation.  Also in 1980, Congress raised the limits on [[deposit insurance]] from $40,000 to $100,000 per account. This was significant because a failed S&L by definition had a negative net worth and thus would likely not be able to pay off depositors in full from its loans. Increasing FDIC coverage also permitted managers to take more risk to try to work their way out of insolvency so that the government would not have to take over an institution. With that goal in mind, early in the [[Reagan administration]], the deregulation of federally chartered S&Ls accelerated rapidly (see the [[Garn - St Germain Depository Institutions Act]] of 1982), putting them on a more equal footing with commercial banks. S&Ls could now pay higher market rates for deposits, borrow money from the [[Federal Reserve]], make commercial loans, and issue credit cards. They were also allowed to take an ownership position in the real estate and other projects to which they made loans and they began to rely on brokered funds to a considerable extent. This was a departure from their original mission of providing savings and mortgages.
+
This bothered government regulators who then established the [[Federal Home Loan Bank]] and associated [[Federal Home Loan Bank Board]] to assist other banks in providing funding to offer long term, [[amortization|amortized]] loans for home purchases. The idea was to get banks involved in lending, not insurance companies, and to provide realistic loans which people could repay and gain full ownership of their homes. Savings and loan associations sprung up all across the United States because there was low-cost funding available through the Federal Home Loan Bank for the purposes of mortgage lending.
  
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=== Fallout ===
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=== High interest ===
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The damage to S&L operations led Congress to act, passing a bill in September 1981 allowing S&Ls to sell their mortgage loans and use the cash generated to seek better returns; the losses created by the sales were to be amortised over the life of the loan and any losses could also be offset against taxes paid over the preceding ten years. This all made S&Ls eager to sell their loans. The buyers - major Wall Street firms - were quick to take advantage of the S&Ls lack of expertise, buying at 60-90% of value and then transforming the loans by bundling them as, effectively, government backed bonds (by virtue of [[GNMA|Ginnie Mae]],[[FHLMC|Freddie Mac]], or [[FNMA|Fannie Mae]] guarantees). S&Ls were one group buying these bonds, holding $150bn by 1986, and being charged substantial fees for the transactions. A large number of S&L customer's defaults and [[bankruptcy|bankruptcies]] ensued, and the S&Ls that had overextended themselves were forced into insolvency proceedings themselves. In 1980 there were four thousand two S&Ls trading, by 1983 nine hundred sixty-two of them had collapsed. <ref name=Fricker>  Fricker, Mary. Muolo, Paul. Pizzo, Steven. 1991. ''Inside Job: The Looting of America's Savings and Loans.'' Harpercollins. ISBN 978-0060986001. Retrieved July 18, 2007. </ref>
 
  
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For example, in March 1985, it came to public knowledge that the large [[Cincinnati, Ohio]]-based ''[[Home State Savings Bank]]'' was about to collapse. [[Ohio]] Gov. [[Dick Celeste|Richard F. Celeste]] declared a bank holiday in the state as ''Home State'' depositors lined up in a "run" on the bank's branches in order to withdraw their deposits. Celeste ordered the closure of all the state's S&Ls. Only those that were able to qualify for membership in the [[Federal Deposit Insurance Corporation|FDIC]] were allowed to reopen. Claims by Ohio S&L depositors drained the state's deposit insurance funds. A similar event also took place in [[Maryland]].
+
Savings and loans were given a certain amount of preferential treatment by the [[Federal Reserve]] inasmuch as they were given the ability to pay higher [[interest]] rates on savings deposits compared to a regular [[commercial bank]]. The idea was that with marginally higher savings rates, savings and loans would attract more deposits that would allow them to continue to write more [[mortgage]] loans which would keep the mortgage market liquid and funds would always be available to potential borrowers.<ref>Ibid.</ref>
  
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The U.S. government agency [[Federal Savings and Loan Insurance Corporation]], which at the time insured S&L accounts in the same way the [[Federal Deposit Insurance Corporation]] insures commercial bank accounts, then had to repay all the depositors whose money was lost. <ref name=Fricker/>
+
However, S&Ls were not allowed to offer [[check (finance)|check]]ing accounts until the late 1970s. This impacted the attractiveness of being a savings and loan customer and required many of them to hold accounts across multiple institutions so they could have access to checking and receive competitive savings rates all at the same time.
  
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=== Major Players ===
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== Savings and loan crisis ==
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The most notorious figure in the S&L crisis was probably [[Charles Keating]], who headed [[Lincoln Savings and Loan Association|Lincoln Savings]] of [[Irvine, California]]. Keating was convicted of [[fraud]], [[racketeering]], and [[Conspiracy (crime)|conspiracy]] in 1993, and spent four and one-half years in prison before his convictions were overturned. In a subsequent [[plea agreement]], Keating admitted committing bankruptcy fraud by extracting $1 million from the parent corporation of Lincoln Savings while he knew the corporation would collapse within weeks.Another character that was just as instrumental in the failure of S&L's was [[Herman  K. Beebe]]. He was a convicted felon and [[Mafia]] associate. He had many connections to the intelligence community and was considered godfather of the dirty Texas S&Ls. He initially started his career in the insurance business and eventually banking, specifically; [[Savings and Loan]] Banks. Herman Beebe played a key role in the Savings and Loan scandals. Houston Post reporter Pete Brewton linked Beebe to a dozen failed S & L's. Altogether, Herman Beebe controlled, directly or indirectly, at least 55 banks and 29  S & L's in eight states. What is particularly interesting about Beebe's participation in these banks and savings and loans is his unique background. Herman Beebe had served nine months in federal prison for bank fraud and had impeccable credentials as a financier for New Orleans-based organized crime figures, including [[Carlos Marcello|Vincent and Carlos Marcello]].
 
  
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Keating's attempts to escape regulatory sanctions led to the [[Keating five]] political scandal, in which five U.S. senators were implicated in an influence-peddling scheme to assist Keating. Three of those senators &mdash; [[Alan Cranston]], [[Don Riegle]], and [[Dennis DeConcini]] &mdash; found their political careers cut short as a result. Two others &mdash; [[John Glenn]] and [[John McCain]] &mdash; were exonerated of all charges and escaped relatively unscathed.
+
The Savings and Loan crisis of the 1980s was a wave of savings and loan association failures in the [[United States]]. Over one thousand savings and loan institutions failed in "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time."<ref>John Galbraith. ''The Culture of Contentment.'' (Houghton Mifflin Company, 1993. ISBN 978-0395669198). </ref> The ultimate cost of the crisis is estimated to have totaled around one hundred fifty billion dollars, about one hundred twenty-five billion of which was consequently and directly subsidized by the U.S. government.
  
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[[Neil Bush]] was director of [[Silverado Savings and Loan]] when the institution collapsed in 1988, costing taxpayers $1.6 billion. Neil Bush was accused of giving himself a loan from Silverado with the cooperation of Ken Good, of Good International, although Bush stated it was not a conflict of interest. Neil Bush is a brother of President [[George W. Bush]].
+
In the 1970s, many [[bank]]s, but particularly savings and loans, were experiencing a significant outflow of low-rate deposits as interest rates were driven up by [[Federal Reserve]] actions to restrict the [[money supply]], a move Federal Reserve Chairman [[Paul Volcker]] instituted in an attempt to reduce [[inflation]], and as depositors moved their money to the new high-interest [[money-market funds]]. At the same time, the institutions had much of their money tied up in long-term [[mortgage loan]]s that were written at fixed interest rates, and with market rates rising, were worth less than face value. This meant that the value of these loans, which were the institution's assets, was less than the deposits used to make them and the savings and loan's net worth was being eroded.<ref>Ibid. </ref>
 +
 
 +
Under financial institution regulation which had its roots in the [[Great Depression|Depression]] era, federally chartered savings and loans were only allowed to make a narrow range of loan types. Early in the administration of president [[Ronald Reagan]], this range was expanded when the [[Federal Home Loan Bank]] Board eased some of its restrictions pertaining to S&Ls, specifically to try to remedy the impact rising interest rates were having on S&L net worth. It was the status of an institution's net worth that could trigger a requirement that the Federal Home Loan Bank declare an S&L insolvent and take it over for liquidation.
 +
 
 +
In 1980, Congress raised the limits on [[deposit insurance]] from $40,000 to $100,000 per account. This was significant because a failed S&L by definition had a negative net worth and thus would likely not be able to pay off depositors in full from its loans. Increasing FDIC coverage also permitted managers to take more risk to try to work their way out of insolvency so that the government would not have to take over an institution.
 +
 
 +
With that goal in mind, early in the Reagan administration, the deregulation of federally chartered S&Ls accelerated rapidly, putting them on a more equal footing with commercial banks. The [[Garn - St Germain Depository Institutions Act]] of 1982 enabled S&Ls to diversify their activities with the view of increasing profits. They could now pay higher market rates for deposits, borrow money from the Federal Reserve, make commercial loans, and issue credit cards. They were also allowed to take an ownership position in the real estate and other projects to which they made loans and they began to rely on brokered funds to a considerable extent. This was a departure from their original mission of providing savings and mortgages.
 +
 
 +
However, as the Federal Reserve drove interest rates ever higher in the fight against inflation, S&Ls with few exceptions became insolvent. And, noting the possibilities that deposit insurance on what were often worthless assets offered, a number of opportunists and even criminals entered the scene. S&L customer defaults and [[bankruptcy|bankruptcies]] ensued, and the S&Ls that had overextended themselves were forced into insolvency proceedings. In 1980 there were four thousand two S&Ls trading, by 1983 nine hundred sixty-two of them had collapsed.<ref>Mary Fricker, Paul Muolo, and Steven Pizzo. ''Inside Job: The Looting of America's Savings and Loans.'' (Harpercollins, 1991. ISBN 978-0060986001). </ref>
 +
 
 +
For example, in March 1985, it came to public knowledge that the large [[Cincinnati]], [[Ohio]]-based Home State Savings Bank was about to collapse. Ohio Governor [[Richard F. Celeste]] declared a bank holiday in the state as ''Home State'' depositors lined up in a "run" on the bank's branches in order to withdraw their deposits. Celeste ordered the closure of all the state's S&Ls. Only those that were able to qualify for membership in the [[Federal Deposit Insurance Corporation]] (FDIC} were allowed to reopen. Claims by Ohio S&L depositors drained the state's deposit insurance funds. A similar event also took place in [[Maryland]].
 +
 
 +
The U.S. government agency [[Federal Savings and Loan Insurance Corporation]], which at the time insured S&L accounts in the same way the FDIC insures commercial bank accounts, then had to repay all the depositors whose money was lost.<ref>Ibid.</ref>
 +
 
 +
The most notorious figure in the S&L crisis was probably [[Charles Keating]], who headed [[Lincoln Savings and Loan Association|Lincoln Savings]] of [[Irvine, California]]. Keating was convicted of [[fraud]], [[racketeering]], and [[Conspiracy (crime)|conspiracy]] in 1993, and spent four and one-half years in prison before his convictions were overturned. In a subsequent [[plea agreement]], Keating admitted committing bankruptcy fraud by extracting $1 million from the parent corporation of Lincoln Savings while he knew the corporation would collapse within weeks.
 +
 
 +
Keating's attempts to escape regulatory sanctions led to the "Keating five" political scandal, in which five U.S. senators were implicated in an influence-peddling scheme to assist Keating. Three of those senators &mdash; [[Alan Cranston]], [[Don Riegle]], and [[Dennis DeConcini]] &mdash; found their political careers cut short as a result. Two others &mdash; [[John Glenn]] and [[John McCain]] &mdash; were exonerated of all charges and escaped relatively unscathed.<ref>Michael Lowy. ''High Rollers: Inside the Savings and Loan Debacle.'' (Praeger Publishers, 1991. ISBN 978-0275939885).</ref>
 +
 
 +
Also instrumental in the failure of S&Ls was [[Herman K. Beebe]], a convicted felon and [[Mafia]] associate. Beebe initially started his career in the insurance business and eventually banking, specifically S&Ls. Altogether, Herman Beebe controlled, directly or indirectly, at least fifty-five banks and twenty-nine savings and loan associations in eight states.<ref>Ibid.</ref>
 +
 
 +
== Today ==
 +
 
 +
After the crisis, the need for savings and loan association declined. In order to ensure stricter security measures, Congress passed the Gram-Leach-Bliley Act, which enforced securities underwriting and insurance subsidiaries. These security measures prevent a similar savings and loan crisis from taking place again.
 +
 
 +
Previously, in 1980, savings and loan associations made up forty percent of residential mortgage loans. By the end of the twentieth century, however, this number dropped to under twenty percent while the percentage of mortgage bank loans and commercial bank loans climbed, surpassing savings and loan associations. Savings and loan associations have not been completely eliminated from the picture; there are still many running today. Citizens Savings and Loan Association, founded in 1884, is currently the oldest running savings and loan association in Kansas.<ref> [http://www.citizensfsb.com/aboutcsl.htm Citizens Savings and Loan Association FSB.] ''www.citizensfsb.com''. Retrieved August 1, 2007. </ref> Downey Savings opened its doors in California in 1957 and continues to serve California and Arizona.<ref> [http://www.downeysavings.com/ Downey Savings]''downeysavings.com''. Retrieved August 1, 2007. </ref> Naugatuck Valley Savings and Loan was founded in 1922 and still serves its home state of Connecticut.<ref> [http://www.nvsl.com/html/about/ Naugatuck Valley Savings and Loan] ''www.nvsl.com''. Retrieved August 1, 2007. </ref>
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 +
Today, most savings and loan associations also allow checking and savings accounts, something associations of the past did not allow. At this point in time, whether or not savings and loan associations will increase is indeterminable, as their necessity is waning; but if they manage to keep up with modern banks and technology, there could be a resurgence of savings and loan associations.
 +
 
 +
== Popular Culture ==
 +
 
 +
* In [[Harold Pinter]]'s murder mystery ''The Birthday Party & the Room,'' Goldberg berates Stanley saying: "No society would touch you. Not even a building society."
 +
 
 +
* In the 1946 [[Frank Capra]] classic film ''It's a Wonderful Life,'' George Bailey (played by [[Jimmy Stewart]]) gives up his dreams of travel and [[college]] to stay home and manage Bailey Building and Loan Society after his father passes away. Many of the people of the town depended on this savings and loan association to keep a roof over their heads. The danger of a "run" is memorably portrayed in this story.<ref>James Berardinelli, [http://www.reelviews.net/movies/i/its_wonderful.html ''It's a Wonderful Life: Film Review.''] (1997). Retrieved July 22, 2007. </ref>
  
 
== Notes ==
 
== Notes ==
Line 54: Line 87:
  
 
== References ==
 
== References ==
−
* Fricker, Mary. Muolo, Paul. Pizzo, Steven. 1991. ''Inside Job: The Looting of America's Savings and Loans.'' Harpercollins. ISBN 978-0060986001.
+
* Curry, Timonthy and Lynn Shibut [http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf The Cost of Savings & Loan Crisis: Truth & Consequences] FDIC Banking Review. Retrieved August 7, 2007.
−
* Galbraith, John. 1993. ''The Culture of Contentment.'' Houghton Mifflin Company. ISBN 978-0395669198.  
+
* Fricker, Mary, Paul Muolo, and Steven Pizzo. 1991. ''Inside Job: The Looting of America's Savings and Loans.'' Harpercollins. ISBN 978-0060986001.
 +
* Galbraith, John Kenneth. 1993. ''The Culture of Contentment.'' Houghton Mifflin Company. ISBN 978-0395669198.  
 
* Lowy, Michael. 1991. ''High Rollers: Inside the Savings and Loan Debacle.'' Praeger Publishers. ISBN 978-0275939885.
 
* Lowy, Michael. 1991. ''High Rollers: Inside the Savings and Loan Debacle.'' Praeger Publishers. ISBN 978-0275939885.
 
* Teck, A. 1968. ''Mutual Savings Banks and Savings and Loan Associations.'' University Presses of California, Columbia, and Princeton. ISBN 978-0231031240.
 
* Teck, A. 1968. ''Mutual Savings Banks and Savings and Loan Associations.'' University Presses of California, Columbia, and Princeton. ISBN 978-0231031240.
Line 61: Line 95:
  
 
==External links==
 
==External links==
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*[http://www.ots.treas.gov/ Office of Thrift Supervision]
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All links retrieved December 23, 2022.
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*[http://www.bsa.org.uk/ Building Societies Association]  
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*[http://www.fdic.gov/bank/historical/s&l/ FDIC: The S&L Crisis: A Chrono-Bibliography]
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*[http://www.fdic.gov/bank/historical/s&l/ FDIC: The S&L Crisis: A Chrono-Bibliography]  
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*[http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf The Cost of Savings & Loan Crisis: Truth & Consequences]
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*[http://www.bsa.org.uk/consumer/factsheets/100009.htm The History of Building Societies] from the Building Societies Association website.  
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*[http://www.ex.ac.uk/~RDavies/arian/scandals/classic2.html#thrifts Classic Financial and Corporate Scandals]
 
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Latest revision as of 17:07, 23 December 2022


A savings and loan association (S&L) is a financial institution which specializes in accepting savings deposits and making mortgage loans. The term is mainly used in the United States; similar institutions in the United Kingdom and some Commonwealth countries are called building societies. They are often mutually held (often called mutual savings banks), meaning that the depositors and borrowers are members with voting rights and have the ability to direct the financial and managerial goals of the organization. While it is possible for a savings and loan to "demutualize" and become stock-based and even publicly traded, this means that it truly no longer is an association, and depositors and borrowers no longer have any managerial control.

Originally established as cooperative associations that allowed their members to obtain loans for the purpose of buying a home, they were intended to dissolve after all the members had made their purchase. However, many sought to continue, expanding and diversifying their services. S&Ls went through difficult times in their efforts to maintain solvency as the market was hit by inflation, and corruption within their ranks led to disaster. In the late twentieth century, the savings and loan crisis resulted in a wave of failures in the United States, with the government paying out substantial sums to counteract the effects. While no longer the popular entities they were, savings and loan associations continue to exist, providing a range of banking services to the public. To be true to their founding spirit, however, the S&L needs to find its niche again, serving a community of which it is an integral part and which has ownership over it.

Overview

A savings and loan association (S&L) is a financial institution, organized cooperatively or corporately, that holds the funds of its members or clients in interest-bearing accounts and certificates of deposit, invests these funds chiefly in home mortgage loans, and may also offer checking accounts and other banking services.[1] The overriding goal of the savings and loan association was to encourage savings and investment by common people and to give them access to a financial intermediary that had not been open to them in the past. The savings and loan association was also there to provide loans for the purchase of homes, for worthy and responsible borrowers. The early savings and loans were in the business of "neighbors helping neighbors."

A building society is a financial institution similar to a savings and loan association. Owned by its members, it offers banking and other financial services, especially mortgage lending. The term "building society" first arose in the nineteenth century, in the United Kingdom, from working men's co-operative savings groups: by pooling savings, members could buy or build their own homes. In the UK building societies actively compete with banks for most "banking services" especially mortgage lending and deposit accounts.[2]

History

Building societies

The original Building Society was formed in the United Kingdom in 1774. Most of the original societies were fully "terminating," meaning that they would be dissolved when all members had purchased a house. In the 1830s and 1840s a new development took place with the "Permanent Building Society," where the society continued on a rolling basis, continually taking in new members as earlier ones completed purchases. The main legislative framework for the Building Society was the Building Society Act of 1874, with subsequent amending legislation in 1894, 1939, and 1960.

In the 1980s, British banking laws were changed to allow building societies to offer banking services equivalent to normal banks. The management of a number of societies still felt that they were unable to compete with the banks, and a new Building Society Act was passed in response to their concerns. This permitted societies to "demutualise." If more than 75 percent of members voted in favor, the building society would then become a limited company like any other. Members' mutual rights were exchanged for shares in this new company. A number of the larger societies made such proposals to their members and all were accepted. Some became independent companies quoted on the London Stock Exchange, others were acquired by larger financial groups.

However, a number of investors appeared who would open a savings account with a mutual building society, thereby obtaining voting rights in the society, and pressurize for a vote on demutualization, with the intent of receiving a windfall payment as a result. Such investors were termed "carpetbaggers." After a number of large demutualizations pressured by these carpetbaggers, most of the remaining societies modified their rules of membership in the late 1990s. New membership rules ensure that anyone newly joining a society would, for the first few years, be unable to get any profit out of a demutualization. With the chance of a quick profit removed, the demutualizations slowed considerably.

Early S&L associations

The first savings and loan association was the Oxford Provident Building Society in Frankfort, Pennsylvania, established in 1831 with 40 members. Patterned after the building societies in the UK, Oxford Provident received regular weekly payments from each member and then lent the money to individuals until each member could build or purchase his own home. The success of this association led to others throughout the Northeast and by 1890 they had spread to all states.

Savings and loans accepted deposits and used those deposits, along with other capital that was in their possession, to make loans. What was revolutionary was that the management of the savings and loan was determined by those that held deposits and in some instances held loans. The amount of influence in the management of the organization was determined based on the amount on deposit with the institution.

S&L associations became widespread following the Civil War. However, more than a third of the 16,000 such institutions at the end of the 1920s were sucked into the whirlpool of the Great Depression, stimulating the most long-lived of President Herbert Hoover's efforts to combat it.[3]

Functions

The savings and loan association became a strong force in the early twentieth century through assisting people with home ownership, through mortgage lending, and further assisting their members with basic savings and investing outlets, typically through passbook savings accounts and term certificates of deposit.

Mortgage lending

The earliest mortgages were not offered by banks, but by insurance companies, and they differed greatly from the mortgage or home loan that is familiar today. Most early mortgages were short term with some kind of balloon payment at the end of the term, or they were interest-only loans which did not pay anything toward the principal of the loan with each payment. As such, many people were either perpetually in debt in a continuous cycle of refinancing their home purchase, or they lost their home through foreclosure when they were unable to make the balloon payment at the end of the term of the loan.

This bothered government regulators who then established the Federal Home Loan Bank and associated Federal Home Loan Bank Board to assist other banks in providing funding to offer long term, amortized loans for home purchases. The idea was to get banks involved in lending, not insurance companies, and to provide realistic loans which people could repay and gain full ownership of their homes. Savings and loan associations sprung up all across the United States because there was low-cost funding available through the Federal Home Loan Bank for the purposes of mortgage lending.

High interest

Savings and loans were given a certain amount of preferential treatment by the Federal Reserve inasmuch as they were given the ability to pay higher interest rates on savings deposits compared to a regular commercial bank. The idea was that with marginally higher savings rates, savings and loans would attract more deposits that would allow them to continue to write more mortgage loans which would keep the mortgage market liquid and funds would always be available to potential borrowers.[4]

However, S&Ls were not allowed to offer checking accounts until the late 1970s. This impacted the attractiveness of being a savings and loan customer and required many of them to hold accounts across multiple institutions so they could have access to checking and receive competitive savings rates all at the same time.

Savings and loan crisis

The Savings and Loan crisis of the 1980s was a wave of savings and loan association failures in the United States. Over one thousand savings and loan institutions failed in "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time."[5] The ultimate cost of the crisis is estimated to have totaled around one hundred fifty billion dollars, about one hundred twenty-five billion of which was consequently and directly subsidized by the U.S. government.

In the 1970s, many banks, but particularly savings and loans, were experiencing a significant outflow of low-rate deposits as interest rates were driven up by Federal Reserve actions to restrict the money supply, a move Federal Reserve Chairman Paul Volcker instituted in an attempt to reduce inflation, and as depositors moved their money to the new high-interest money-market funds. At the same time, the institutions had much of their money tied up in long-term mortgage loans that were written at fixed interest rates, and with market rates rising, were worth less than face value. This meant that the value of these loans, which were the institution's assets, was less than the deposits used to make them and the savings and loan's net worth was being eroded.[6]

Under financial institution regulation which had its roots in the Depression era, federally chartered savings and loans were only allowed to make a narrow range of loan types. Early in the administration of president Ronald Reagan, this range was expanded when the Federal Home Loan Bank Board eased some of its restrictions pertaining to S&Ls, specifically to try to remedy the impact rising interest rates were having on S&L net worth. It was the status of an institution's net worth that could trigger a requirement that the Federal Home Loan Bank declare an S&L insolvent and take it over for liquidation.

In 1980, Congress raised the limits on deposit insurance from $40,000 to $100,000 per account. This was significant because a failed S&L by definition had a negative net worth and thus would likely not be able to pay off depositors in full from its loans. Increasing FDIC coverage also permitted managers to take more risk to try to work their way out of insolvency so that the government would not have to take over an institution.

With that goal in mind, early in the Reagan administration, the deregulation of federally chartered S&Ls accelerated rapidly, putting them on a more equal footing with commercial banks. The Garn - St Germain Depository Institutions Act of 1982 enabled S&Ls to diversify their activities with the view of increasing profits. They could now pay higher market rates for deposits, borrow money from the Federal Reserve, make commercial loans, and issue credit cards. They were also allowed to take an ownership position in the real estate and other projects to which they made loans and they began to rely on brokered funds to a considerable extent. This was a departure from their original mission of providing savings and mortgages.

However, as the Federal Reserve drove interest rates ever higher in the fight against inflation, S&Ls with few exceptions became insolvent. And, noting the possibilities that deposit insurance on what were often worthless assets offered, a number of opportunists and even criminals entered the scene. S&L customer defaults and bankruptcies ensued, and the S&Ls that had overextended themselves were forced into insolvency proceedings. In 1980 there were four thousand two S&Ls trading, by 1983 nine hundred sixty-two of them had collapsed.[7]

For example, in March 1985, it came to public knowledge that the large Cincinnati, Ohio-based Home State Savings Bank was about to collapse. Ohio Governor Richard F. Celeste declared a bank holiday in the state as Home State depositors lined up in a "run" on the bank's branches in order to withdraw their deposits. Celeste ordered the closure of all the state's S&Ls. Only those that were able to qualify for membership in the Federal Deposit Insurance Corporation (FDIC} were allowed to reopen. Claims by Ohio S&L depositors drained the state's deposit insurance funds. A similar event also took place in Maryland.

The U.S. government agency Federal Savings and Loan Insurance Corporation, which at the time insured S&L accounts in the same way the FDIC insures commercial bank accounts, then had to repay all the depositors whose money was lost.[8]

The most notorious figure in the S&L crisis was probably Charles Keating, who headed Lincoln Savings of Irvine, California. Keating was convicted of fraud, racketeering, and conspiracy in 1993, and spent four and one-half years in prison before his convictions were overturned. In a subsequent plea agreement, Keating admitted committing bankruptcy fraud by extracting $1 million from the parent corporation of Lincoln Savings while he knew the corporation would collapse within weeks.

Keating's attempts to escape regulatory sanctions led to the "Keating five" political scandal, in which five U.S. senators were implicated in an influence-peddling scheme to assist Keating. Three of those senators — Alan Cranston, Don Riegle, and Dennis DeConcini — found their political careers cut short as a result. Two others — John Glenn and John McCain — were exonerated of all charges and escaped relatively unscathed.[9]

Also instrumental in the failure of S&Ls was Herman K. Beebe, a convicted felon and Mafia associate. Beebe initially started his career in the insurance business and eventually banking, specifically S&Ls. Altogether, Herman Beebe controlled, directly or indirectly, at least fifty-five banks and twenty-nine savings and loan associations in eight states.[10]

Today

After the crisis, the need for savings and loan association declined. In order to ensure stricter security measures, Congress passed the Gram-Leach-Bliley Act, which enforced securities underwriting and insurance subsidiaries. These security measures prevent a similar savings and loan crisis from taking place again.

Previously, in 1980, savings and loan associations made up forty percent of residential mortgage loans. By the end of the twentieth century, however, this number dropped to under twenty percent while the percentage of mortgage bank loans and commercial bank loans climbed, surpassing savings and loan associations. Savings and loan associations have not been completely eliminated from the picture; there are still many running today. Citizens Savings and Loan Association, founded in 1884, is currently the oldest running savings and loan association in Kansas.[11] Downey Savings opened its doors in California in 1957 and continues to serve California and Arizona.[12] Naugatuck Valley Savings and Loan was founded in 1922 and still serves its home state of Connecticut.[13]

Today, most savings and loan associations also allow checking and savings accounts, something associations of the past did not allow. At this point in time, whether or not savings and loan associations will increase is indeterminable, as their necessity is waning; but if they manage to keep up with modern banks and technology, there could be a resurgence of savings and loan associations.

Popular Culture

  • In Harold Pinter's murder mystery The Birthday Party & the Room, Goldberg berates Stanley saying: "No society would touch you. Not even a building society."
  • In the 1946 Frank Capra classic film It's a Wonderful Life, George Bailey (played by Jimmy Stewart) gives up his dreams of travel and college to stay home and manage Bailey Building and Loan Society after his father passes away. Many of the people of the town depended on this savings and loan association to keep a roof over their heads. The danger of a "run" is memorably portrayed in this story.[14]

Notes

  1. ↑ The American Heritage Dictionary. (Houghton Mifflin, 2006. ISBN 978-0618701728).
  2. ↑ Building Societies Associationwww.bsa.org.uk. Retrieved July 22, 2007.
  3. ↑ A. Tech. Mutual Savings Banks and Savings and Loan Associations. (University Presses of California, Columbia, and Princeton, 1968. ISBN 978-0231031240).
  4. ↑ Ibid.
  5. ↑ John Galbraith. The Culture of Contentment. (Houghton Mifflin Company, 1993. ISBN 978-0395669198).
  6. ↑ Ibid.
  7. ↑ Mary Fricker, Paul Muolo, and Steven Pizzo. Inside Job: The Looting of America's Savings and Loans. (Harpercollins, 1991. ISBN 978-0060986001).
  8. ↑ Ibid.
  9. ↑ Michael Lowy. High Rollers: Inside the Savings and Loan Debacle. (Praeger Publishers, 1991. ISBN 978-0275939885).
  10. ↑ Ibid.
  11. ↑ Citizens Savings and Loan Association FSB. www.citizensfsb.com. Retrieved August 1, 2007.
  12. ↑ Downey Savingsdowneysavings.com. Retrieved August 1, 2007.
  13. ↑ Naugatuck Valley Savings and Loan www.nvsl.com. Retrieved August 1, 2007.
  14. ↑ James Berardinelli, It's a Wonderful Life: Film Review. (1997). Retrieved July 22, 2007.

References
ISBN links support NWE through referral fees

  • Curry, Timonthy and Lynn Shibut The Cost of Savings & Loan Crisis: Truth & Consequences FDIC Banking Review. Retrieved August 7, 2007.
  • Fricker, Mary, Paul Muolo, and Steven Pizzo. 1991. Inside Job: The Looting of America's Savings and Loans. Harpercollins. ISBN 978-0060986001.
  • Galbraith, John Kenneth. 1993. The Culture of Contentment. Houghton Mifflin Company. ISBN 978-0395669198.
  • Lowy, Michael. 1991. High Rollers: Inside the Savings and Loan Debacle. Praeger Publishers. ISBN 978-0275939885.
  • Teck, A. 1968. Mutual Savings Banks and Savings and Loan Associations. University Presses of California, Columbia, and Princeton. ISBN 978-0231031240.
  • White, Lawrence. 1991. The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation. Oxford University Publishers. ISBN 0195067339.

External links

All links retrieved December 23, 2022.

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