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Memoirs of a Financial Fireman
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10266 |
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BOOK WORLD
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| Issue
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12 / 1993 |
1,495 Words |
| Author
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John Attarian
John Attarian, a freelance writer in Ann Arbor, Michigan, has
contributed several economics articles and book reviews to The
World & I. He is the author of Social Security: False
Consciousness and Crisis (Transaction Publishers, 2002). |
FULL FAITH AND CREDIT
The Great S&L Debacle and
Other Washington Sagas
L. William Seidman
New York: Times Books, 1993
320 pp., $25.00
The eighties were the most tumultuous time for banks and savings and loans (S&Ls, also known as thrifts) since 1933, and L. William Seidman was in the thick of it. On October 15, 1985, he became chairman of the Federal Deposit Insurance Corporation (FDIC), which insures deposits at its member banks. With passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), deposit insurance at the thrifts was transferred to the FDIC, the Resolution Trust Corporation (RTC) was formed to liquidate assets of failed thrifts, and Seidman became its chairman as well as the FDIC's. He wore both hats until October 15, 1991. Full Faith and Credit is his chatty humorous, insightful, and wise account of those years and of his previous service in the Ford administration.
Seidman puts his finger on the S&Ls' inherent potential for disaster through borrowing short-term (for example, with passbook accounts) and lending long-term (in thirty-year residential mortgages):
The simple fact is that the savings and loans had always taken a tremendous interest-rate risk. They gambled that short-term interest rates would always be lower than the long-term interest rates, and until the great inflations of the 1970s, they won their bet. Moreover, they hardly worried about it, because the law set the rates of the deposits. But when inflation arrives, interest rates go up, and there is no law that people have to keep their deposits in S&Ls at low rates. So the S&Ls are in trouble unless they pay higher rates, and then they are in double trouble because they are paying more for money on deposit than they are recovering in interest income.
The Ford administration cooled inflation, giving the S&Ls a temporary reprieve. But when inflation soared again under Jimmy Carter, the thrifts were back in the soup. In the eighties, a combination of factors exposed the thrifts' borrow short/lend long flaw and brought on disaster.
This, Seidman argues, was primarily the government's doing. "The disaster of the savings and loan industry during the 1980s was caused by a series of policy
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