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Business Culture & Dishonesty In The Banking Industry

The 1980’s was a decade of intense fiscal change for the United States. The savings and loan crisis consisted of 747 savings and loan associations failing. At the time, a Savings and Loan was a financial institution which, in the United States, accepting savings deposits. They would then turn around and provide loans to individual members in the form of mortgage, car, or personal loans. In the end, the S&L Crisis cost $160.1 billion. Of that total, the then-president George H.W. Bush provided a government bailout of $124.6. This bailout was a major contribution to the budget deficit faced during the 1990’s.

Originally, the goal of thrifts, or Savings and Loan, was to help working class citizens save and achieve part of the American dream through purchasing their own home. Banks were known at the time to only provide loans for homes to businesses and individuals, while Savings and Loan provided them to the working class. ‘Thrifts’ was changed to Savings and Loan by WWII. Their industry expanded during the 1960’s thanks to the baby boom. Because of the practices of the Savings and Loan companies during the beginning of the 1960’s, the decade was full of rate wars between them and commercial banks. The U.S. Congress took over during 1966 to limit the severe rate competition by setting limits for both of them. Thanks to alternative moves by the Savings and Loan companies to increase profits, the 1970’s saw steady growth for assets and profits.

At the end of 1979, there were inflation and high interest rates which challenged the Savings and Loan industry. Congress noted the threat both of the aforementioned posed to the continuation of hundreds of S&L and therefore passed two laws to deregulate the industry. The first of which was the Depository Institutions Deregulation and Monetary Control Act which passed in 1980. These acts also authorized more lenient account rules with regards to reporting financial conditions, eliminating restrictions on the minimum number of stockholders for S&L. Forbearance alongside the aforesaid deregulation policies were ultimately blamed for the S&L Crisis later to come.

There were a number of causes cited for the S&L crisis. The first of these causes was the Tax Reform Act of 1986. This act related to limitations on passive activity credits as well as deductions for passive activity losses. It removed tax shelters for real estate investments. This decreased the value of said investments which ended the real estate boom experienced during the mid-80’s. Until this point, passive investors had conducted most real estate investment. Syndicates of investors would combine resources and invest in either property, commercial, or residential together. Management companies came into play during this fad, to run their operations. The tax reform act reduced the value of said investments through limiting the extent in which any associated losses could be deducted from the gross income of the investors. Such measures encouraged investors to unload their less-generating properties, contributing to depleting real estate values.

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