DEREGULATION

During 1980 and 1982, Congress passed two laws deregulating S&Ls. The
Depository Institution Deregulation Monetary Act of 1980 (in which the FDIC
limits were raised from $40k to $100k), and the Garn-St. Germain Depository
Institutions Act of 1982. The Legislation authorized the use of more lenient
accounting rules for financial reporting, and eliminated restrictions on the
minimum number of S&L shareholders. It also eliminated the deposit interest rate
ceilings mentioned earlier. These maneuvers, coupled with a decline in regulatory
oversight, were factors that led to the S&L collapse. The laws were intended to
help the S&Ls get back on track, but they were also significant because, for the
first time, the government sought to increase S&L profits rather than promote
home ownership. The legislation also resulted in more lending then was prudent,
especially in commercial real estate for which S&Ls were not experienced in
assessing risks.
In November of 1980, The Federal Home Loan Bank Board (the now defunct
regulator of S&Ls) removed the limits on amounts of brokered deposits an S&L
could hold. Brokered deposits allow brokers to pool depositors money and create
$100,000 instruments (the new FDIC limit). These instruments were placed, for a
specified period of time, with the S&Ls offering the highest return. Although the
S&L had use of those funds, brokered deposits actually helped keep insolvent
S&Ls liquid, delaying regulators from closing them.
In August of 1981, the U.S. Congress passed the Tax Reform Act of 1981.
Powerful tax incentives were created for real estate investment by individuals, and
a huge boom in real estate ensued.
In January of 1982, The Bank Board reduced the requirement that an insured S&L
had to have a net worth equal to or greater than 4% of its total deposits down to
3%. It had already been reduced from 5% to 4% just 14 months earlier. Moreover,
now that accounting reporting rules had been relaxed, it was much easier to reach
the 3% threshold.

Deregulation had given the S&Ls many of the capabilities of commercial banks
without the regulations of commercial banks (i.e., to make consumer loans, and
issue credit cards). S&Ls could elect to be under federal charter and thereby
deposits were insured against loss by the government. This encouraged S&Ls to
be more speculative. In December of 1982, in response to massive defections of
state chartered S&Ls to federally chartered S&Ls, California allowed its S&Ls to
invest in any venture without limitation. Texas and Florida followed suit.
By the end of the S&L crisis, 5% of S&Ls had invested in junk bonds. A bond is
basically a contract in which a corporation or government borrows money (aka
bond issuer) from an investor (bond holder) and pays interest at fixed intervals
(coupons) and repays the principal at a later date (maturity). The higher the credit
rating (basically the likelihood the principal and interest will be paid on time)
given to a bond by a credit rating agency, the safer the bond. Junk bonds are rated
below investment grade, and have high yields because they have a higher risk of
default.
From 1982-1985, The Bank Board reduced its regulatory staff starting salaries for
regulators. In 1983 the starting salary for an examiner was $14k a year and the
average examiner had two years of experience. During this period of oversight
retraction, S&L assets increased by 56%.

In 1983, The FHLBB eliminated the limits on loan to value ratios for S&Ls. They
were now free to loan up to 100% of the appraised value of a home.
In March of 1984, Bank giant, Empire Savings of Texas, fails. A pattern of
criminal activities is revealed. The failure cost taxpayers $300 million. In
reaction, the FHLBB begins reversing deregulation, by placing limits on S&Ls.
For example, direct investments by an S&L are limited to the greater of 10% of the
S&L’s assets or two times the S&L’s net worth-- so long as the regulatory
definition of required net worth is met.
In March of 1985, The governor of Ohio closes all S&Ls. Eventually S&Ls that
can qualify for FDIC insurance are allowed to re-open.
In May of 1985, S&L failures in Maryland, cost its taxpayers $185 million.
In the midst of the S&L collapse, The U.S. Congress passes the Tax Reform Act of
1986. This Act was significant in many ways: it lowered the top tax rate on
individuals from 50% to 28%, while raising the bottom bracket from 11% to 15%;
it increased the home mortgage interest deduction; it eliminated the interest
deduction on credit cards; it encouraged everyone with equity in their homes to
refinance which led to an explosion of second mortgages and its less stigmatic
cousin, the HELOC (Home Equity Line of Credit). Second mortgages and
HELOC’s were tantamount to using one’s home as an ATM. Also of great import,
TRA 1986 limited tax deductions on investor’s passive activity (losses and gains)
essentially eliminating tax shelters, especially for real estate (passive activity is
explained in greater detail later on). Prior to 1986, it was commonplace for
investors to pool money in syndicates, buying/developing both commercial and
residential properties and hiring companies to manage those properties. TRA 1986
also limited deductions of losses from investor gross income on losing properties.
This led to large-scale dumping of those properties, which torpedoed real estate
values.
In May of 1987, S&L accounting reporting standards were tightened. By the end
of 1987, the combined losses from Texas S&Ls alone exceeded half of all S&L
losses in America, and 70% of the twenty largest losses in the U.S. were in Texas.
And in February 1988, the FHLBB unveiled a plan to consolidate and package
insolvent Texas S&Ls, and sell them to the highest bidder-- 205 S&Ls were
disposed of with assets of $100 billion.
In August of 1989, FIRREA is passed by The U.S. Congress (Financial Institution
Reform Recovery and Enforcement Act). It abolished the FHLBB & the FSLIC
(Federal S&L Insurance Corporation). It also promulgated meaningful S&L
regulations, including satisfactory net worth requirements, as well as funding for
criminal prosecutions of S&L crimes by The Justice Department. A bureau of The
U.S. Treasury Department replaced the FHLBB & the FDIC replaced The FSLIC.
From 1986 – 1995, federally insured S&Ls declined in the U.S. by 50%, from
3234 to 1645.
By 2004, S&L bailouts had cost the U.S. taxpayers over $124 billion. By the end
of 2004, 886 S&Ls remained with assets of $1.35 trillion.
There were two other significant events that took place in the 1980s which are
worthy of mention:
First, October 19, 1987 – Aka “Black Monday” – the Dow Jones Industrial
Average fell almost 22% in a single day-- 508 points (The DIJA is a stock market
index tracking 30 large "blue chip" public companies performance during a
standard trading session). The sell off began in Hong Kong, then Europe, then
followed by the U.S. To this day, no one knows what triggered the sell off-- panic
for no apparent reason. Remember, the Kabbalist does not subscribe to the notion
of "suddenly." Somewhere there was a seed planted, and because of the disconnect
caused by time, space and motion, we can not see that this was a consequence of a
seed planted.
Second, November 9, 1989, the collapse of The U.S.S.R. As The Berlin Wall
comes down, capitalists worldwide are emboldened. They conclude that
communism is a failed system. By the way, and not insignificant the eighties are
dubbed “the me generation.” A whole generation named for acting for the self
alone!