by William Patalon, Money Morning
It was the spring of 1985, and I was in my second year as a reporter for The Record, a small weekly published in my home county an hour north of Baltimore.
A state-chartered thrift, Old Court Savings and Loan, failed – spotlighting all sorts of unseemly behavior about the institution’s insiders, as well as folks who “did business” with it. The collapse – which resulted in 35,000 depositors having their accounts frozen (some wouldn’t be paid back until the 1990s) and cost the state of Maryland millions of dollars – also highlighted the dark side of financial regulation.
For an aggressive cub reporter like me, the collapse was indoctrination by fire. I was introduced to the “land flip,” where a single piece of property was sold three or four times in a single day – with each transaction adding 50% or more to the land’s assessed “value.”
And I learned about the changing culture of the once-staid banking and thrift industries.
A Money-Making Noun
The lending business used to be a simple one – so simple, in fact, that it was said to be governed by the “3-6-3 rule.”
Here’s what that meant: During the four decades that spanned the 1950s through the 1980s, the lending industry was so stable that the standing joke was that bankers could take in deposits at 3%, lend the money out at 6% – and be out on the golf course by 3 p.m.
Deregulation turned the market on its head – especially with S&Ls. New rules let thrifts venture into commercial real-estate lending – even taking stakes in projects. And once-staid thrifts – originally created to finance home mortgages in their immediate communities – went global, advertising for deposits and attracting them by offering the highest possible rates (11.5%) on the “jumbo” certificates of deposit (CDs).
Money poured in, bolstering the risk the S&Ls faced.
In short, deregulation was a game-changer, an “agent of change” that altered the field of battle on which thrifts waged financial warfare.
