Communing with disaster: What we can learn from the jusen and the savings and loan crises

Edward L. Rubin*

Now that the Japanese economic miracle has soured into the Japanese economic meltdown, scholars are confronted with a new challenge: instead of trying to penetrate the secret of Japan's success, they must try to unravel the enigma of its misfortunes. Professors Curtis Milhaupt and Geoffrey Miller have performed a great service in documenting one of the most dramatic of those misfortunes-the collapse of the jusen companies.l Professor Shinsaku Iwahara has also performed an equally valuable service by placing this event in the larger context of Japanese politics and society.2 But despite its recordsetting scale, the jusen problem was not unprecedented; Japan merely followed in the footsteps of its economic mentor, the United States, which experienced a very similar financial meltdown about a decade earlier. This Commentary briefly describes that event, the U.S. savings and loan crisis, and then draws some tentative conclusions on the basis of the comparison.

I. THE COLLAPSE OF THE SAVINGS AND LOAN INDUSTRY

Savings and loan institutions are generally defined as financial intermediaries that receive deposits from individuals and extend residential housing loans. Such institutions existed in the United States before the U.S. Civil War,3 but their rapid development was the product of the latter part of the nineteenth century and the result of the monetary policies that prevailed at that time.

During the Civil War, the United States had adopted a number of dramatic measures to finance the enormous cost of its military efforts against the rebelling southern states. It chartered national banks which were authorized to issue notes as circulating currency, it issued the nation's first non-redeemable paper currency since the Revolutionary War, and it sold a large number of long-term bonds.4 Once the war ended, a debate began about whether these "soft money" policies would continue, or whether the nation would return to the more restrictive practices that had previously prevailed. There was a strong economic argument, at least from the perspective of hindsight, for a soft money policy, because the United States was about to enter a period of extraordinary growth that would have readily sustained major expansion of the money supply without devaluing the currency. But a variety of factors conspired to impel the national government to reject that policy in favor of a more restrictive, or "hard money," approach. The size of national bank note issue was limited, while the paper currency issued by the national government itself (the so-called "greenbacks") was made redeemable in gold.5

One consequence of this policy was a persistent shortage of money and credit throughout the last several decades of the nineteenth century. Because of the collapse of the South's banking system resulting from its defeat in the Civil War, and the absence of banks in the recently settled and still partially wild West, most of the established banks-and most of the money-were in the northeastern and midwestern states. These banks naturally extended credit to borrowers in their vicinity; presumably, the cost of obtaining credit information was lower because the borrowers were closer, better known, and on the average, more credit-worthy. This phenomenon, when combined with the general shortage of money and credit, meant that the South and West were perpetually credit-starved. Business borrowers could avoid these regions, preferring to locate in the parts of the country where credit was available, but ordinary people continued to live in the South, and to pour into the vast farmlands of the Great Plains. In the South, they often became tenant farmers, borrowing from their landlord against their next year's crop at exorbitant prices, and consigned, because next year's crop never provided sufficient funds, to perpetual debt.6 In the West, they often managed without credit by living as subsistence farmers on their relatively extensive lands.7 Increasingly, however, people in these regions turned to savings and loan institutions to slake their otherwise unsated credit hunger.

The savings and loans were typically organized as self-help organizations in a particular locality. People who had obtained modest amounts of excess funds, but lacked convenient investment opportunities, would deposit their funds in the savings and loan, which would then extend long-term residential housing credit.8 These institutions prospered because of the familiar life cycle phenomenon: people tend to need credit when they are starting out in life and to acquire excess funds as they get older. The savings and loans can thus be regarded as intermediating between the old and the young, or, more conceptually, between each person's young adulthood and old age. Because they arose to fill a financial void, and because they did so rather well, the banking system of many southern and western states soon came to consist largely of these local, consumer-oriented institutions. Not surprisingly, the laws of these states were often designed to favor such institutions and to shield them from competition?

When the Great Depression came, the thinly capitalized savings and loans were hit hard. Indeed, they were hit so hard that even the Hoover Administration was motivated to enact regulatory legislation to protect them.10 This legislative scheme was quickly expanded under the Roosevelt Administration.ll What emerged was a system of national chartering, which ultimately enrolled about half the nation's savings and loan institutions, plus an insurance fund which covered the great majority, both state and federal. The chartering process was managed by the Federal Home Loan Bank System (FHLBS), modeled on the previously established Federal Reserve System, with twelve regional banks and a central administrative body located in Washington, D.C. The insurance was provided by the Federal Savings and Loan Insurance Corporation (FSLIC), modeled on the Federal Deposit Insurance Corporation, which covers commercial banks. There were some differences, however; unlike the Federal Reserve, FHLBS could not print money, and therefore had to issue bonds to fulfill its lender of last resort responsibilities; unlike the Federal Deposit Insurance Corporation (FDIC), the FSLIC was not an independent agency, but a part of FHLBS.12

Thus stabilized, the savings and loans began to prosper once again and soon flourished in the economic boom that followed World War II. The rapid growth of home ownership, particularly in suburban communities, created an enormous demand for residential housing credit.13 Government regulators, eager to encourage home ownership, took steps to ensure that the savings and loans, which, unlike commercial banks, could only offer residential housing credit, were adequately funded.l4 State regulators maintained the restrictive branching policies that made these institutions the only convenient depository in many small towns.15 The federal government, which required commercial banks to pay artificially low interest rates through the Federal Reserve's Regulation Q, did not regulate rates paid by savings and loans until 1966, and then permitted them to pay slightly higher rates than the commercial banks.16

The economic changes following the 1973 oil embargo spelled disaster for the savings and loans. As inflation rates climbed into double digits, depositors began to realize that they were losing money by keeping their savings in regulated depository institutions that were not allowed to pay more than 6 or 6.25% interest. The result was disintermediation, as depositors shifted their funds into higher yield investments such as money market funds.l7 By the time Jimmy Carter became president in 1977, this problem was widely recognized, but economic policy-makers were convinced that they knew the proper solution. They argued, with some justification, that depository institutions were being constrained by excessive regulation and were artificially prohibited from paying market rates of interest. As a result, these institutions could not compete effectively with other financial intermediaries for depositors' funds. What was needed, they concluded, was deregulation. In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act (DIDMCA),ls which began the process of deregulating the financial services industry; two years later, it passed the Garn-St. Germain Act,l9 which accelerated and extended the provisions of DIDMCA.

Among their many provisions, these two statutes deregulated interest rates and expanded the range of lending opportunities available to depository institutions. Interest rate deregulation worked well for commercial banks, but the general view now is that it only deepened the wounds of the savings and loans. Their assets consisted predominantly of residential mortgages, typically long-term obligations at fixed rates of interest, while their liabilities consisted entirely of individual accounts that could be withdrawn at any time. The combination is a classic asset-liability mismatch; as interest rates rose and all depository institutions, including savings and loans, had to meet the market rate, its inherent dangers became manifest.20 An institution whose assets consist of thirty-year mortgages paying 8%, and that must pay 8.5% on its liabilities in order to meet the market rate, rapidly becomes insolvent; an institution that pays 7.5% on liabilities when the market rate is 8.5% will become insolvent only slightly less rapidly. And indeed, thousands of savings and loans careened rapidly toward insolvency during the early 1980s.21

If interest rate deregulation turned out to be a solution that only weakened the institutions it was intended to strengthen, the expansion of lending opportunities made the situation even worse; in addition to having this same weakening effect, it also produced a temporary and artificial expansion of the savings and loan industry, thus increasing the scale of the impending disaster. To begin with, many of the new investments into which the savings and loan institutions now plunged with the enthusiasm characteristic of the long-denied were commercial real estate or energy loans that proved highly volatile, and often entirely unreliable, during the 1980s.22 Worse still, the expansion of lending opportunities only amplified the moral hazard that was inherent in the regulatory structure of the savings and loans.

Two sorts of moral hazard are endemic to any financial intermediary.23 First, and most simply, the assets of such intermediaries do not consist of bulky things, unusable by ordinary people, such as factories or machinery, but loans that is, cash. Thus, there is a continuing temptation to bestow these loans on one's friends, one's relatives, or oneself.24 Second, the source of the institution's funds is generally depositors, who expect only a fixed rate of interest, not profit participation. The owners of the institution retain all the profit from the use of these funds and may therefore be motivated to adopt high-risk strategies; according to the standard analysis, their ownership position contains a valuable put option, because they can "put" their company to its creditors at any time they choose.25 The restraints on the first type of hazard are regulatory laws, such as prohibitions against self-dealing, or excessive loans to one borrower.26 The restraint on the second, in the absence of government intervention, would be monitoring by depositors concerned about losing their money, and managers concerned about losing their jobs. However, deposit insurance, which is generally regarded as a social necessity, provides a government guarantee against this loss, and thus eliminates any incentive to monitor on the part of the depositors.27 Instead, regulatory laws are required once again, in this case to ensure the safety and soundness of the institution.

In the wake of the federal deregulatory legislation, both sets of regulatory laws proved inadequate. The new powers of the savings and loans created a sudden and dramatic increase in the possibilities for high-risk loans, self-dealing, and outright fraud;28 neither the FHLBS, which now came to be known as "flubs," nor the state regulators had the capacity to deal with this sudden upsurge of regulatory responsibility.29 At the same time, the perilous financial condition of many savings and loans removed their managers' concerns about losing their jobs and further weakened the stockholders' concern about losing their investments because they were going to do so anyway, absent a dramatic change of fortune. Consequently, the managers felt they might as well use the depositors' money to "bet the bank" on high risk loans in the hope that they could draw back from, or leap over, the abyss.30 The almost ineluctable result was a vast increase in insolvent institutions. In one decade, the savings and loan problem had gone from a large, but manageable, set of losses to a financial catastrophe of previously inconceivable proportions.31

The FHLBS, which insured most of the nation's savings and loans through FSLIC, was of course authorized to close those institutions which had become insolvent. But extensive closures would have quickly bankrupted the FSLIC fund and compelled the federal government to make up the loss with taxpayers' money.32 In addition, it would have seriously impaired the banking system in the southern and western states where the savings and loans still played a major role, thus awakening vague but puissant recollections from the hard money era of the nineteenth century. Finally, the savings and loans were institutions in being, which in a democratic society means that they can and will lobby the legislature for favorable treatment.33 As a result, the insolvent savings and loan institutions were generally not closed. Instead, the FHLBS and the FSLIC developed a system called "regulatory accounting," a magical regime where federal net worth requirements were lowered without economic justification, uncollectible loans were honored with a rosy future and many savings and loans were permitted to carry on their books, as valuable assets, the goodwill of their rapidlydeclining institutions and the promissory notes from their rapidly deteriorating federal insurance fund.34 This fiscal legerdemain was supported by the conviction that the situation would inevitably improve, or at least not get any worse during the careers of the politicians then in office.

After a certain amount of political denial, and the desperate hope that the crisis would somehow go away, Congress and the President at last acknowledged that several hundred billion dollars of insolvency in the savings and loan sector constituted a problem. They responded with the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA),35 one of the most ferocious regulatory statutes in U.S. history. The FHLBS was abolished, along with the desperately sick FSLIC; the regulatory function was absorbed into the Department of the Treasury, and the insurance function was transferred to the healthier FDIC. The savings and loans that were insolvent were placed under the management of a new agency, the Resolution Trust Corporation, also located in the FDIC and granted extensive powers of collection. In addition, federal bank regulators were granted greatly expanded powers; for example, the FDIC can now issue cease and desist orders against virtually any practice that it believes will lower earnings, ordering the institution to cease the practice and dismiss the officers responsible for that practice. These powers were further expanded two years later by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).36 For whatever reason, the cure seems to have worked; the hemorrhage in the savings and loan industry has slowed, although the patient is certainly not out of danger.

II. THE U.S. SAVINGS AND LOAN CRISIS AND THE JAPANESE JUSEN CRISIS

The U.S. savings and loan crisis provides a natural comparison with the jusen crisis that Professors Milhaupt, Miller and Iwahara have described and analyzed so effectively in their work. Here, attention will be directed to four themes-the relationship between the public and private realms, the nature of public policy, the extent of regulatory failure, and the limits of regulatory failure. In the interest of achieving brevity, the discussion will be merely tentative, leaving the analysis of its arguments to further inquiry.

It is natural, given the economic analysis of law that has come to dominate the financial area, to regard regulation as a government intrusion into a preexisting, and otherwise autonomously-functioning, private market. While this perspective is often useful as an analytic premise, the crises in Japan and the United States cast some doubt upon its empirical accuracy. The jusen companies and the savings and loans were undoubtedly private, profit-oriented institutions, yet neither can be regarded as the product of corporate initiative or the creation of an unregulated market. The jusen companies, as Milhaupt and Miller tell us, were organized under the "guidance" of Japan's powerful Ministry of Finance (MOF). Virtually all of the institutions that provided the initial financing for these companies were under MOF's intensive regulatory scrutiny; not only could they not have proceeded without MOF's approval, but also, in all likelihood, it would have been difficult for them to refuse to proceed if MOF truly wanted them to do so. The U.S. savings and loans might seem, at first glance, to be more independently created, being small, self-help institutions that sprang up in the dusty, isolated towns of the rural United States. But they were the inevitable spawn of national monetary policies that were probably unnecessary, and certainly the product of a conscious policy to support established financial institutions. They were, moreover, nurtured by protective, anti-competitive state law, expanded by favorable, and equally anti-competitive federal interest rate policies in the post-war era, and enticed into economic perdition by the availability of federal deposit insurance.

One can easily argue that this regulatory intervention created much of the problem, but it is much harder to identify precisely where the limits should be drawn. The entire structure of the financial services industry, in both Japan and the United States, is the product of government regulation. The relative size of the institutions within each sector of the industry, the divisions among different sectors, and indeed the boundaries of the industry in its totality, are all the result of specific regulatory decisions, and have been since the dawn of history. No national government of any significance has been willing to abandon the effort to control the financial institutions that exist within it. Indeed, there is a serious question whether governance, in any realistic sense of the term, is possible without such control. The financial services sector is a market, to be sure, but it is also a central element of political control, and political choices necessarily determine the entire shape and structure of that market.

The recognition of the interplay between the public and private realms serves to qualify the illuminating insight of Professors Milhaupt and Miller that Japan's financial services industry is organized as a regulatory cartel. They disclaim any of the normative connotations of the term "cartel,"37 but they are nonetheless committed to its conceptual implications. The term suggests an organization that disrupts the efficient allocation and pricing mechanisms of a previously competitive market. But there is no such preexisting market; there are only different methods of control. The U.S. financial services industry, with its plethora of regulators, both state and federal, and its insanely fragmented private institutions, must be the opposite of a regulatory cartel if the term is to have any meaning, but the U.S. government has exercised an equally profound effect as its Japanese counterpart. In other words, the Japanese industry may be a regulatory cartel, but this should not be taken to imply any contrast with a less regulated regime. Rather, Japan's cartelization represents the particular style of regulation that its government has chosen. The Japanese seem to favor the pattern of large institutions, interacting with each other through a complex network of informal contact. The United States has chosen a pattern of many smaller institutions interacting with numerous regulators through an equally complex network of legal, monetary, and informal controls, but its financial services industry is no less regulated, no less controlled, and no more natural, than Japan's.

A second observation that emerges from the comparison of the Japanese and U.S. financial crises is that financial services regulation in each country responds to a variety of public policies. Both the jusen companies and the savings and loans were nurtured by government policies that favored the construction of residential housing. Japanese regulatory authorities encouraged, if not required, financial companies to create the jusen companies, then gave them a truly exceptional exemption from direct regulation, and finally facilitated the transfer of vast sums of money to them from the agricultural cooperatives. U.S. authorities provided deposit insurance for savings and loans, granted them a favorable interest rate so that funds would flow to them, finagled the accounting rules to hide their fiscal nakedness, and finally permitted them to expand into unfamiliar, supposedly lucrative new lines of business to keep them afloat.

It could be argued that the source of the problem is the policy of subsidizing residential housing. In an advanced industrial society like Japan or the United States, the market for housing is likely to be efficient, absent some specific market failure that is not evident in either case. A subsidy designed to increase the amount of housing above the market-determined rate is therefore likely to be inefficient; that is, the cost of the subsidy will exceed its economic benefit. This sounds bad, but the judgment depends upon a belief that efficiency is the master value for society, and there is simply no a priori reason to assume that this belief is correct. Residential housing, which clearly affects the populace's quality of life, might be as important as efficiency, or more so. More specifically, the greatest challenge posed to the democratic, capitalist regimes of Japan and the United States was Marxism. Marxism may be a toothless old dragon these days, but at one time many people thought that the inequalities that seemed endemic to capitalist regimes would lead to their destruction at the hands of the increasingly angry and necessarily more numerous propertyless classes. The modern welfare state is generally regarded as a response, and an effective one, to the Marxist challenge. Subsidized housing for working class people is a central element of this approach. It satisfies the working class' demand for a better life in return for their hard work and it turns them into property owners with a stake in the continued stability of the regime.

To summarize thus far, the regulatory regimes in Japan and the United States cannot be criticized on the ground that these regimes have disrupted the natural operation of the market, or that they have produced economically inefficient results. There is no natural market in an area as intimately connected with government policy as financial services, and there is no a priori reason why society should be more committed to the goal of efficiency than to other goals, such as redistribution. Nonetheless, the regulatory decisions involving the jusen companies and the savings and loans are subject to criticism. No matter what one's general or specific goals, there are good and bad ways to achieve these goals, and both nations did rather badly in these cases. The lessons to be learned from these two gargantuan financial crises may not be as large as one might hope, but within their more modest ambit, they are nonetheless important.

One lesson that seems clear is that financial regulators take enormous risks when they bet on future reversals of prevailing trends to resolve a crisis that is presaged by those trends. The regulators were too slow to concede that both the jusen companies and the savings and loans were insolvent, and to contain the damage by decisive action. Had these institutions been closed before they slid into insolvency, the great bulk of the losses in both cases would have been prevented.ss In short, the most reasonable prediction, in any given situation, is that present trends are going to continue. It is possible, of course, that things will get better, but it is also possible that they will get worse; absent some very specific and reliable indication, the two possibilities are of equal likelihood, and therefore average out to the continuation of the present trend. To assume that the situation will improve is simply gambling, and it is gambling on the basis of the kind of unrealistic, magical thinking in which only compulsive gamblers, like savings and loan officers, indulge.

A second lesson is that realistic action requires that the decisionmaker, who must take that action, needs to be insulated from direct political influence. The closure of the jusen companies and the savings and loans severely damaged powerful interest groups. Remarkably, the interest groups involved were essentially the same in both Japan and the United States-over-represented rural people. In Japan, these people were present as depositors in the agricultural cooperatives that channeled so much money to the jusen companies. In the United States, they were present as citizens of states, or parts of states, whose banking system was dominated by savings and loans. Perhaps there is some lesson in this odd coincidence of interest groups, but that seems too speculative to pursue. There is certainly a lesson in the predictable coincidence of regulatory cowardice. Of course, politics cannot be eliminated from government, but there are certain decisions that can and should be insulated from direct political influence. In both Japan and the United States, for example, criminal trials are largely insulated, although this is a function that has often been considered central to the sovereign's power. In the United States, monetary control is also shielded from political influence, and demands are growing that the same protection be provided in Japan. The closure of insolvent financial institutions is a function that merits similar treatment; it can be performed technocratically, on the basis of defined criteria, and its politicization serves no valid purpose.

Third, it seems clear that an unregulated institution in an otherwise highly regulated field presents serious dangers. Regulated companies are likely to find that transferring funds to the unregulated institution provides them with an ability to avoid the restrictions that otherwise constrain them; the result is a regulatorily induced and economically unjustified flow of funds. This occurred in both Japan and the United States. The Japanese permitted the jusen companies to operate outside the scope of any regulatory agency, while the United States relaxed its regulatory supervision of savings and loan assets at precisely the time when these institutions were sliding into insolvency. In Japan, the agricultural cooperatives, with their excess deposits and otherwise severely limited investment opportunities, responded to this temptation; in the United States, the response came from ordinary depositors, whose funds were insured by the FSLIC and pooled by deposit brokers.39 The conclusion that seems to follow is that regulation must be comprehensive in scope and consistent in effect throughout the financial services industry. Deregulation of certain functions, on the basis of an economic analysis, may be beneficial, but categorical regulatory forbearance for an entire class of institutions may produce artificial funds flows that are almost necessarily inefficient, and potentially disastrous.

Finally, the experiences of Japan and the United States suggest that specialized financial institutions are a rather risky institutional arrangement. Task specialization is, of course, a basic feature of modern society, and institutional embodiments of this principle seem sensible, but it presents a specific danger for a private institution with assets at stake, and a more severe danger for financial institutions. Portfolio theory, a well-developed technique for estimating the riskiness of asset allocations, suggests that specialization should be avoided in this arena. Professor Miller, with his collaborator Jonathan Macey, has pointed out that this theory applies quite directly to financial institutions.40 Both the jusen companies and the savings and loans, having been chartered as specialized institutions to support residential housing, were tied directly to this market; when it crashed, so did they. In contrast, the commercial banks in both countries also sustained heavy losses, but because their residential housing loans were only one part of a more balanced portfolio, their financial viability was rarely compromised by the decline in real estate values. Specialized institutions, moreover, often require specialized regulators, whose own jobs depend on the continuation of the companies they regulate. This was certainly true of the FHLBS and may have been responsible for its reluctance to close institutions. It was probably not responsible for MOF's solicitude for the jusen companies, but may have been a factor in the behavior of the agricultural cooperatives.

The scope and seriousness of these regulatory failures is chastening, as indeed it should be, but it must also be placed in context. Before the jusen and savings and loan crises, Japan and the United States were extremely prosperous nations, with stable democratic regimes. After the crises, they were still prosperous and still democratic; the loss of hundreds of billions of dollars in each case produced no observable economic or political effects at the macro scale. Part of the reason for this was the resiliency of liberal, capitalist democracy, its ability to take a punch. Absolute monarchs, who derived their authority directly from the Lord, sprang from families that had ruled for centuries, and only appeared in public clad in glorious regalia that made ordinary people tremble when they passed, had their heads cut off for much less serious cases of financial mismanagement.

Another reason the crises did not produce serious disruptions is that the regulatory system in each country was ultimately able to respond, however reluctantly and awkwardly. Both countries established specially empowered agencies to take over the insolvent institutions, so as to minimize their losses and wind down their operations. Both countries were able to cobble together a financial package that would cover the losses without unduly burdening the taxpayers or endangering other, solvent institutions. Thus, modern bureaucratic regulation, despite its many failures, seems to work. It works fitfully to be sure, and it can certainly be improved, but, to quote the old but nonetheless convincing cliche about democracy, everything else seems to be worse.

1. Curtis Milhaupt & Geoffrey Miller, Cooperation, Conflict, and Convergence in Japanese Finance: Evidence from the Jusen"Problem, 29 LAW & PoL'Y INT'L Bus. 1 (1997).

2. Shinsaku Iwahara, The Li.S. and Japanese Regulatory Approach to Financial Services (1997) (unpublished manuscript, on file with the author). 3. For the early history of thrift institutions, see BRAY HAMMOND, BANKS AND POLITICS IN AMERICA 191-95 (1957); LEoN T. KENDALL, THE SAVINGS AND LOAN BUSINESS 4-5 (1962).

4. See RICHARD H. TIMBERLAKE, MONETARY POLICY IN THE UNITED STATES 129-45 (1993). See MILTON FRIEDMAN & ANNA J. SCHWARTZ, A MONETARY HISTORY OF THE UNITED STATES, 1867-1960 (1963); ARTHUR NussBAuM, A HISTORY OF THE DOLLAR (1957); TIMBERLAKE, supra note 4, at 146-97.

6. See EDWARD L. AYERS, THE PROMISE OF THE NEW SOUTH 81-103 (1992); RONALD F. DAVIS, GOOD AND FAITHFUL LABOR: FROM SLAVERY TO SHARECROPPING IN THE NATCHEZ DISTRICT, 186S1890 (1982); ERIc FoNER, RECONSTRUCION:: AMERICA'S UNFINISHED REVOLUTION 392-411 (1988); LAWRENCE GOOD)YN, THE POPULIST MOVEMENT 72-87 (1978).

7. See GoODwYN, supra note 6, at 69-72.

8. See KENDALL, supra note 3, at 14; HERMAN E. KROOSS & MARTET R. BLYN, HISTORY OF FINANCIAL INTERMEDIARIES 1971).

9. See FREDERICK F. BALDERSTON, THRIFTS IN CRISIS 11-25 (1985); LAWRENCE J. WHITE, THE S Bc L DEBACLE 34-35, 58-1 (1991) . On the regional distribution of thrifts as of the 1960s, see KENDALL, supra note 3, at 15.

10. See Federal Home Loan Bank Act, ch. 522, 47 Stat. 725 (1932) (codified as amended at 12 U.S.C. 1421-1429 (1994)). On the crisis of the Great Depression and the statutory response, see generally NED EICHLER, THE THR. r DEBACLE 7-12; KENDALL, supra note 3, at 141-47; THOMAS B. MARVELL, THE FEDERAL HOME LOAN BANK BOARD (1969).

11. See Home Owners' Loan Act, ch. 64, 48 Stat.128 (1933) (codified as amended at 12 U.S.C. 1461-1468 (1994)). See also sources cited supra note 10.

12. See BALDERSTON, supra note 9, at 12-24; KENDALL, supra note 3, at 23-30; EICHLER, supra note 10, at 12-14; WHITE, supra note 9, at 54-58. 13. See EICHLER, supra note 10, at 16-32; WHITE, supra note 9, at 58-61. 14. On the policy of encouraging residential housing, see NED EICHLER, THE MERCHANT BUILDERS (1982); WHITE, supra note 9, at 56-58. 15. See WHITE, supra note 9, at 59.

16. See S. KERRY COOPER & DONALD R. FRASER, BANKING DEREGULATION AND THE NEW COMPETITION IN THE FINANCIAL SERVICES INDUSTRY 64-65 (1984); WHITE, supra note 9, at 62-65; see generally COOPER & FRASER, supra, at 2-17. In addition, savings and loans were exempted from federal corporate income tax until 1952. See id. at 64.

17. See BALDERsTON, supra note 9, at 37-47; EICHLER, supra note 10, at 33-54; ROBERT E. LITAN, WHAT SHOULD BANKS Do? 33-35 (1987); WHITE, supra note 9, at 67-72.

18. Depository Institutions Deregulation And Monetary Control Act of 1980, Pub. L. No. 96-221, 94 Stat. 132 (codified, as amended, in scattered sections of 12 U.S.C.). See COOPER & FRASER, supra note 16, at 105-25; EICHLER, supra note 10, at 64-65; WHITE, supra note 9, at 72-74.

19. Garn-St. Germain Depository Institutions Act of 1982, Pub. L. No. 97-320, 96 Stat. 1469 (codified in scattered sections of 12 U.S.C.). See BALDERSTON, supra note 9, at 20-23; COOPER & FRASER, supra note 16, at 127-42; WHITE, supra note 9, at 72-74, 90-91. 20. See BALDERSTON, supra note 9, at 27-54; WHITE, supra note 9, at 27-54; WHITE, supra note 9, at 67-97; Gregory A. Lilly, The Savings and Loan Debacle: Moral Hazard or Market Disaster?, in THE CAUSES AND COSTS OF DEPOSITORY INSTITTUTION FAiLURES 119 (Allin E Cottrell et al. eds., 1995).

21. See EICHLER, supra note 10, at 39-50; EDWARD J. KANE, THE S & L INSURANCE MESS: How DID IT HAPPEN? 1-18 (1989); WHITE, supra note 9, at 67-72.

22. EICHLER, supra note 10, at 90-100; WHITE, supra note 9, at 106-1l; ALLIN F. COTTRELL ET AL., What Are the Connections Between Deposit Insurance and Bank Failure ?, in THE CAUSES AND COSTS OF DEPOSITORY INSTITUTION FAILURES, supra note 20, at 163; Lilly, supra note 20. 23. For an illuminating discussion of moral hazard generally, see Tom Baker, On the Genealogy of Moral Hazard, 75 TEX. L. REV. 237 (1996) . 24. See EICHLER, supra note 10, at 103-04; WHITE, supra note 9, at 114-15. 25. See Eugene Fama, Agency Problems and the Theory of the Firm, 88 J. POL. ECON. 288 ( 1980); Oliver E. Williamson, Managerial Discretion and Business Behavior, 53 AM. ECON. REv. 1032 (1963). 26. See, e.g., 12 U.S.C. 84 (1997) (limits on loans to a single borrower); 12 U.S.C. 371c (1997) (limits on loans to affiliated companies); 12 U.S.C. 375a (1997) (limits on loans to executive officers of banks). See generally, Joseph Jude Norton, Lending Limits on National Banks Under the 1982Banking Act, 101 BANKING LJ. 122 (1984).

27. Of course, this result is expected when deposit insurance schemes are established; the

purpose is to prevent bank runs. See BALDERsToN, supra note 9, at 158-70; KANE, supra note 21, at 129-40; SANGKYUN PARK, A Triggering Mechanism of Economywide Bank Runs, in THE CAUSES AND COSTS OF DEPOSITORY INSTITUTION FAILURES, supra note 20, at 213.

28. See EICHLER, supra note 10, at 103-16; WHITE, supra note 9, at 115-19. For popular, "inside" accounts of these activities, see JAMES RING ADAMS, THE BIG FIX: INSIDE THE S & L SCANDAL (1990); PAUL ZANE PILZER, OTHER PEOPLE'S MONEY: THE INSIDE STORY OF THE S & L MESS (1989); STEPHEN PIZZO ET AL., INSIDE JOB: THE LOOTING OF AMERICA'S SAVINGS AND LOANS (1989).

29. See EICHLER, supra note IO, at 73-78; KANE, supra note 21, at 63-68; WHITE, supra note 9, at 88-92.

30. See KANE, supra note 21, at 63-70; LITAN, supra note 17, at 109-11;James R. Barth et al., Moral Hazard and the Thrift Criss: An Analysis of 1988 Resolutions, in FEDERAL RESERVE BANK OF CHICAGO, BANK SYSTEM RISK: CHARTING A NEW COURSE 344 ( 1989); REBEL A. COLE ET AL., Deregulation Gone Awry: Moral Hazard in the Savings and Loan Industry, in THE CAUSES AND COSTS OF DEPOSITORY INsTITUTION FAILURES, supra note 20, at 29.

31. See JAMES R. BARTH, THE GREAT SAVINGS AND LOAN DEBACLE (1991); EICHLER, supra note 10, at 86-120; KANE, supra note 21, at 1-22; WHITE, supra note 9, at 99-122. 32. See EICHLER, supra note 10, at 73-95; KANE, supra note 21, at 95-120.

33. See EIcHLER, supra note 10, at 55-66; KANE, supra note 21, at 51-57. 34. See EICHLER, supra note 10, at 79-80; KANE, supra note 10, at 79-80; KANE, supra note 21, at 10-22, 76-93; WHITE, supra note 9, at 82-87, 112-13.

35. Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183; see WHITE, supra note 9, at 175-203. 36. Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. No. 102-242, 105 Stat. 2236; Act of Oct. 28, 1992, Pub. L. No. 102-550, 106 Stat. 4075; Act of Oct. 28, 1992, Pub. L. No. 102-558, 106 Stat. 4224.

37. See Milhaupt & Miller, supra note 1,at Part ILC.

38. See KANE, supra note 21, at 145-78, Jonathan R. Macey & Geoffrey P. Miller, Kaye, Scholer FIRREA and the Desirability of Early Closure: A View of the Kaye, Scholer Case from the Perspective of Bank Regulatory Policy, 66 S. CAL. L. REV. 1115 ( 1993).

39. On brokered deposits, see George J. Bentson, Brokered Deposits and Insurance Reform, in ISSUESIN BANK REGULATION, Spring 1984, at 17; WHITE, supra note 9, at 125-28. As White points out, however, savings and loans could have attracted deposits by any number of mechanisms. 40. See Jonathan Macey & Geoffrey Miller, Bank Failures, Risk Monitoring, and the Market for

Bank Control, 88 CoLUM. L. REv. 1153 (1988); see also Lrr.AN, supra note 17, at 89-98; DAVID R. MEINSTER & RODNEY D. JOHNSON, Bank Holding Company Diversification and the Risk of Capital Impairmet, 10 BELL J. ECON. 683 (1979).

* Richard W. Jennings Professor of Law, University of California, Berkeley.

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