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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
to . The bubble burst first in Texas in and , but the trouble rapidly
spread across the Southeast to the mid-Atlantic states and New England, then swept
back across the country to California and Arizona. Before the crisis ended, house
prices had declined nationally by . from July to February —the first
such fall since the Depression—driven by steep drops in regional markets. In the
s, with the mortgages in their portfolios paying considerably less than current
interest rates, spiraling defaults on the thrifts’ residential and commercial real estate
loans, and losses on energy-related, leveraged-buyout, and overseas loans, the indus-
try was shattered.
Almost , commercial banks and thrifts failed in what became known as the
S&L crisis of the s and early s. By comparison, only banks had failed
between and . By , one-sixth of federally insured depository institu-
tions had either closed or required financial assistance, affecting of the banking
system’s assets. More than , bank and S&L executives were convicted of
felonies. By the time the government cleanup was complete, the ultimate cost of the
crisis was billion.
Despite new laws passed by Congress in and in response to the S&L
crisis that toughened supervision of thrifts, the impulse toward deregulation contin-
ued. The deregulatory movement focused in part on continuing to dismantle regula-
tions that limited depository institutions’ activities in the capital markets. In ,
the Treasury Department issued an extensive study calling for the elimination of the
old regulatory framework for banks, including removal of all geographic restrictions
on banking and repeal of the Glass-Steagall Act. The study urged Congress to abolish
these restrictions in the belief that large nationwide banks closely tied to the capital
markets would be more profitable and more competitive with the largest banks from
the United Kingdom, Europe, and Japan. The report contended that its proposals
would let banks embrace innovation and produce a “stronger, more diversified finan-
cial system that will provide important benefits to the consumer and important pro-
tections to the taxpayer.”
The biggest banks pushed Congress to adopt Treasury’s recommendations. Op-
posed were insurance agents, real estate brokers, and smaller banks, who felt threat-
ened by the possibility that the largest banks and their huge pools of deposits would
be unleashed to compete without restraint. The House of Representatives rejected
Treasury’s proposal in , but similar proposals were adopted by Congress later in
the s.
In dealing with the banking and thrift crisis of the s and early s, Con-
gress was greatly concerned by a spate of high-profile bank bailouts. In , federal
regulators rescued Continental Illinois, the nation’s th-largest bank; in , First
Republic, number ; in , MCorp, number ; in , Bank of New England,
number . These banks had relied heavily on uninsured short-term financing to ag-
gressively expand into high-risk lending, leaving them vulnerable to abrupt with-
drawals once confidence in their solvency evaporated. Deposits covered by the FDIC
were protected from loss, but regulators felt obliged to protect the uninsured deposi-
tors—those whose balances exceeded the statutorily protected limits—to prevent po-
