Comparing Today's Credit Crisis to Yesterday's S&L Crisis
Monday, March 24, 2008PAUL KANGAS: This may sound familiar. George Bush was in the White House, a real estate boom had gone bust and critics wondered why regulators hadn't stepped in earlier. Those snapshots from the savings and loan crisis of the 1980s are strikingly similar to the financial situation the nation is coping with now. So is it a case of deja vu? Stephanie Dhue takes a look.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Bad real estate loans, misguided regulation and fluctuating interest rates sent over a thousand savings and loans into bankruptcy from the mid-80s to the early 90s. The boom in real estate then went bust. Debbie Rosenstein sold new homes back then and is still in the business.
DEBORAH ROSENSTEIN, VP, THE CHRISTOPHER COMPANIES: You have to know the process, and that's the hardest thing.
DHUE: She says the current slowdown feels as painful as the one following the S&L crisis. But what's different now is that banks and home builders are working together.
ROSENSTEIN: Last time it was very much builders and lenders at odds and this time it's not like that at all. Lenders are truly trying to work with the builders in getting them through the downturn.
DHUE: There were other key differences. S&L losses were regionally concentrated, whereas today's losses are spread around the globe. S&L's also held deposits that were explicitly guaranteed by the Federal government. Former Fed Governor Lyle Gramley says the leveraging of assets and falling home prices make the current financial situation more complex.
LYLE GRAMLEY, SR. ECONOMIC ADVISOR, STANFORD GROUP: One had a pretty good idea of what the value of the S&L assets were, so one could get a decent feel of the dimensions of the problem. We were not looking at that time at a collapse in home prices such as we are now.
DHUE: Regulatory changes and industry consolidation followed the S&L crisis. In the wake of the current financial situation, former Fed Governor Susan Phillips expects mortgage brokers to face new regulation, including licensing standards.
SUSAN PHILLIPS, DEAN, GEORGE WASHINGTON SCHOOL OF BUSINESS: There will be public relations efforts to make sure that people only deal with licensed brokers, so they will have some standards. There will be increased disclosure and they won't be doing no doc, low doc loans in the future.
DHUE: Eventually, U.S. taxpayers wound up footing the bill to bail out S&L depositors. Gramley says additional taxpayer money will be needed to help solve the current financial crisis.
GRAMLEY: The problems are the same. You've got to put in some taxpayers' money and my own feeling is that the sooner we go down that direction, the cheaper the bill will be.
DHUE: The savings and loan debacle cost taxpayers an estimated $200 billion. Observers say overall, the cost of the current crisis is likely to be much greater, but the burden for taxpayers may be smaller. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
