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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

funds). Moreover, critics argued, the regulatory constraints on industries across the
entire economy discouraged competition and restricted innovation, and the financial
sector was a prime example of such a hampered industry.
Years later, Fed Chairman Greenspan described the argument for deregulation:
“Those of us who support market capitalism in its more competitive forms might ar-
gue that unfettered markets create a degree of wealth that fosters a more civilized ex-
istence. I have always found that insight compelling.” 

THE SAVINGS AND LOAN CRISIS:
“THEY PUT A LOT OF PRESSURE ON THEIR REGULATORS”
Traditional financial institutions continued to chafe against the regulations still in
place. The playing field wasn’t level, which “put a lot of pressure on institutions to get
higher-rate performing assets,” former SEC Chairman Richard Breeden told the
FCIC. “And they put a lot of pressure on their regulators to allow this to happen.” 
The banks and the S&Ls went to Congress for help. In , the Depository Insti-
tutions Deregulation and Monetary Control Act repealed the limits on the interest
rates that depository institutions could offer on their deposits. Although this law re-
moved a significant regulatory constraint on banks and thrifts, it could not restore
their competitive advantage. Depositors wanted a higher rate of return, which banks
and thrifts were now free to pay. But the interest banks and thrifts could earn off of
mortgages and other long-term loans was largely fixed and could not match their
new costs. While their deposit base increased, they now faced an interest rate
squeeze. In , the difference in interest earned on the banks’ and thrifts’ safest in-
vestments (one-year Treasury notes) over interest paid on deposits was almost .
percentage points; by , it was only . percentage points. The institutions lost al-
most  percentage points of the advantage they had enjoyed when the rates were

capped. The  legislation had not done enough to reduce the competitive pres-
sures facing the banks and thrifts.
That legislation was followed in  by the Garn-St. Germain Act, which signifi-
cantly broadened the types of loans and investments that thrifts could make. The act
also gave banks and thrifts broader scope in the mortgage market. Traditionally, they
had relied on -year, fixed-rate mortgages. But the interest on fixed-rate mortgages
on their books fell short as inflation surged in the mid-s and early s and
banks and thrifts found it increasingly difficult to cover the rising costs of their
short-term deposits. In the Garn-St. Germain Act, Congress sought to relieve this
interest rate mismatch by permitting banks and thrifts to issue interest-only, bal-
loon-payment, and adjustable-rate mortgages (ARMs), even in states where state
laws forbade these loans. For consumers, interest-only and balloon mortgages made
homeownership more affordable, but only in the short term. Borrowers with ARMs
enjoyed lower mortgage rates when interest rates decreased, but their rates would
rise when interest rates rose. For banks and thrifts, ARMs offered an interest rate
that floated in relationship to the rates they were paying to attract money from de-
positors. The floating mortgage rate protected banks and S&Ls from the interest rate