Jekyll_text

70 THE CREATURE FROM JEKYLL ISLAND HOME, SWEET LOAN 71
from $40,000 to $100,000 for each account. Those with more than
that merely had to open several accounts, so, in reality, the sky was
the limit. Clearly this had nothing to do with protecting the
common man. The purpose was to prepare the way for brokerage
houses to reinvest huge blocks of capital at high rates of interest
virtually without risk. It was, after all, insured by the federal
government.
In 1979, Federal Reserve policy had pushed up interest rates,
and the S&Ls had to keep pace to attract deposits. By December of
1980, they were paying 15.8% interest on their money-market
certificates. Yet, the average rate they were charging for new
mortgages was only 12.9%. Many of their older loans were still
crunching away at 7 or 8% and, to compound the problem, some of
those were in default, which means they were really paying 0%.
The thrifts were operating deep in the red and had to make up the
difference somewhere.
The weakest S&Ls paid the highest interest rates to attract
depositors and they are the ones which obtained the large blocks of
brokered funds. Brokers no longer cared how weak the operation
was, because the funds were fully insured. They just cared about
the interest rate.
On the other hand, the S&L managers reasoned that they had to
make those funds work miracles for the short period they had
them. It was their only chance to dig out, and they were willing to
take big risks. For them also, the government's insurance program
had removed any chance of loss to their depositors, so many of
them plunged into high-profit, high-risk real-estate developments.
Deals began to go sour, and 1979 was the first year since the
Great Depression of the 1930s that the total net worth of federally
insured S&Ls became negative. And that was despite expansion
almost everywhere else in the economy. The public began to
worry.
FULL FAITH AND CREDIT
The protectors in Washington responded in 1982 with a joint
resolution of Congress declaring that the full faith & credit of the
United States government stood behind the FSLIC. That was a
reassuring phrase, but many people had the gnawing feeling that
somehow, we were going to pay for it ourselves. And they were
right. Consumer Reports explained:
Behind the troubled banks and the increasingly troubled
insurance agencies stands "the full faith and credit" of the
Government—in effect, a promise, sure to be honored by Congress,
that all citizens will chip in through taxes or through inflation to make
all depositors whole.
The plight of the S&Ls was dramatically brought to light in
Ohio in 1985 when the Home State Savings Bank of Cincinnati
collapsed as a result of a potential $150 million loss in a Florida
securities firm. This triggered a run, not only on the thirty-three
branches of Home State, but on many of the other S&Ls as well. The
news impacted international markets where overseas speculators
dumped paper dollars for other currencies, and some rushed to
buy gold.
Within a few days, depositors demanding their money caused
$60 million to flow out of the state's $130 million "insurance" fund
which, true to form for all government protection schemes, was
terribly inadequate. If the run had been allowed to continue, the
fund likely would have been obliterated the next day. It was time
for a political fix.
Chi March 15, Ohio Governor Richard Celeste declared one of
the few "bank holidays" since the Great Depression and closed all
seventy-one of the state-insured thrifts. He assured the public there
was nothing to worry about. He said this was merely a "cooling-off
period . . . until we can convincingly demonstrate the soundness of
our system." Then he flew to Washington and met with Paul
Volcker, chairman of the Federal Reserve Board, and with Edwin
Gray, chairman of the Federal Home Loan Bank Board, to request
federal assistance. They assured him it was available.
A few days later, depositors were authorized to withdraw up to
$750 from their accounts. On March 21, President Reagan calmed
the world money markets with assurances that the crisis was over.
Furthermore, he said, the problem was "limited to Ohio." 2
This was not the first time there had been a failure of statesponsored
insurance funds. The one in Nebraska was pulled down
^ 1983 when the Commonwealth Savings Company of Lincoln
failed. It had over $60 million in deposits, but the insurance fund
1. "
How Safe Are
2. -
Your Deposits?", Consumer Reports, August, 1988, p. 503.
Ohio Bank Crisis That Ruffled World/' US. News & World Report, April 1, 1985,
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