It’s a Wonderful Life

No, this isn’t a post on movies (although I actually prefer that subject matter).  The point I’d like to make is that all the inspirational goodness of Jimmy Steward’s character, and even the goodness of Savings and Loan institutions at that time, as presented in the movie It’s a Wonderful Life, is gone forever and will never come back.  The movie and its storyline are simply history, a glimpse of what actually may have been the good ol’ days, at least through the eyes of film maker Frank Capra.

Savings and Loan Companies began as an alternative to what had been insurance companies lending money for home purchases.  In most cases these companies wrote a short-term mortgage with a balloon payment when the term ran out.  In some cases they collected interest only, which kept the borrower in continuous debt. Such mortgages usually ended in foreclosure.  S and Ls, on the other hand, were generally mutually owned by both depositors and borrowers who all had a voice in how the business was run.

 S and L’s, or thrifts as they are sometimes called, were originally community based lending institutions, serving, for the most part, local home buyers, and were highly regulated under law.  They were stable, respected, trusted, and did more for home-ownership than any other commercial business.  They were profit-making, of course, but regulatory controls did not leave them room for mindless greed at the expense of their depositors and their borrowers.  In fact they were inclined to work with those borrowers, actually helping them through hard times (my parents have told me of their own experience with a thrift that had done business with my mother’s family through a couple of generations).  The controls on interest made them anything but a “money market” investment, thus eliminating any temptations for greed.

That, of course, is now history.  How we got from there to here is the real story.  As for history, I’ll try to sum up an applicable part of it (with a little help from Questia, Wikipedia and few other research sources):

In 1929 there was a major depression.  There was a run on banks, meaning people trying to withdraw their money.  Because it was lent out or otherwise invested, frequently where it should not have been invested, not in the vault, banks could not meet the demand.  They were wiped out.  And the stock market crashed…briefly speaking.

In 1933 the Glass Steagall Act was passed by Congress in an attempt to further avoid what had happened in 1929.  It essentially barred commercial banks from making securities-side investments, or any investments—or affiliations—that commercial banks should not be involved in.  The Glass Steagall Act also put into practice what was called Regulation Q.  Regulation Q limited the amount of interest banks could pay, including most specifically not allowing interest to be paid on checking accounts.  Given the Act was a response to the Great Depression, it is reasonable to assume these measures were intended to prevent another such disastrous financial event by regulating what had led to abuses.

In 1956 the Bank Holding Company Act barred banks from interstate acquisition and expansion, depending upon state laws.  In other words, banks only operated in their home state and could not gobble up other banks all over the country and thus become one big nation-wide bank with too much power and control (some of that was commentary).

In1980 the Depository Institutions Deregulation and Monetary Control Act was the beginning of getting rid of the Glass Steagall Act.  One of its first moves was to allow what were called Negotiable Order of Withdrawal accounts (NOW accounts), which allowed banks to create an interest-bearing savings account against which checks could be drawn, thus defeating Regulation Q mentioned above.  It was the beginning of the end of deposit-interest controls, which would eventually affect S and Ls as well.

A couple of years later in 1982 the Garn-St Germain Act created "money market deposit accounts."  For the most part it simply deregulated the Savings and Loan industry.  Garn was a Republican and St Germain a Democrat; it was passed during the Reagan administration, and as a Senator from Arizona, following in Goldwater’s footsteps, McCain voted for that particular deregulation.  It was a bi-partisan doing, however.  Also that year federal regulations allowed banking across state lines. (I remember at the time a friend thought it was great he could access his bank in other states.  I mentioned there was a good reason why that was not allowed before, and soon enough he’d see why.  One problem, as I see it, is that these deregulations seemed like an improvement or convenience for most people.)  What came next was a vivid example of deregulation.

On August 10, 1987, Ronald Reagan stated, “I am today signing H.R. 27, the Competitive Equality Banking Act of 1987, which recapitalizes the Federal Savings and Loan Insurance Corporation (FSLIC) and makes a number of other changes in the Federal regulation of banking. From the outset, our guiding principle in working with the Congress on this bill has been to avoid a taxpayer bailout…for an industry that has the wherewithal to help itself. The Congress is clearly on notice that industry resources are to be relied upon to finance the FSLIC operations, now and in the future.”  The FSLIC is to S and Ls what the Federal Deposit Insurance Corporation (FDIC) is to bank deposits, insuring accounts up to $100,000.

In the mid-eighties deregulation seemed to move quickly, doing away with all the safeguards put in place after the Great Depression of 1929.  Major banks are allowed to own discount brokerage subsidies and establish holding companies; there is an end of deposit-interest-rate controls; companies like Sears charter non-bank banks; regional interstate compacts are upheld by the Supreme Court which later also okays discount brokerage subsidies of national banks. Between FDR’s term and Reagan’s term there were only 262 bank failures—that from 1945 to 1981.  Between 1983 and 1987, because of deregulation, there were 481 bank failures.  From 1986 to 1995, savings and loans went from 3,234 in number to 1,645 in the United States.

In 1989 the Financial Institutions Reform, Recovery and Enforcement Act was signed into law.  Conceived as a cure for the S and L crisis, it precipitated the demise of S and Ls as they once existed.

1. The Federal Home Loan Bank Board (FHLBB) and the Federal Savings and Loan Insurance Corporation (FSLIC) were abolished.
2. The Office of Thrift Supervision (OTS), a bureau of the Treasury Department, was created to charter, regulate, examine, and supervise savings institutions.
3. The Federal Housing Finance Board (FHFB) was created as an independent agency to oversee the 12 federal home loan banks (also called district banks).
4. The Savings Association Insurance Fund (SAIF) replaced the FSLIC as an ongoing insurance fund for thrift institutions (like the FDIC, the FSLIC was a permanent corporation that insured savings and loan accounts up to $100,000). SAIF is administered by the Federal Deposit Insurance Corp.
5. The Resolution Trust Corporation (RTC) was established to dispose of failed thrift institutions taken over by regulators after January 1, 1989. The RTC will make insured deposits at those institutions available to their customers.
6. FIRREA gives both Freddie Mac and Fannie Mae additional responsibility to support mortgages for low- and moderate-income families.