From Buildings and Loans to Bail-Outs: A History of the American Savings and Loan Industry, 1831-1995

Published by EH.NET (January 2005)

David L. Mason, From Buildings and Loans to Bail-Outs: A History of the American Savings and Loan Industry, 1831-1995. New York: Cambridge University Press, 2004. xii + 349 pp. $50 (cloth), ISBN: 0-521-82754-X.

Reviewed for EH.NET by Richard H. Keehn, Department of Economics, University of Wisconsin – Parkside.

David L. Mason, assistant professor of history at Young Harris College, utilized prior experience with the Bank of America and the Resolution Trust Corporation, industry sources, government documents, and background as a business historian to write a comprehensive history of the building and loan industry in the United States from 1831 to1995. He uses four broad themes to explore thrift history: (1) a study of the business practices of S&Ls, including the problems associated with borrowing short and lending long, (2) the history and behavior of the national trade association from the 1890s until its demise in 1991, (3) the evolving relationship between S&Ls and various state and federal governmental units, and (4) the role of the S&L industry in promoting home ownership and thrift in the United States. Each is covered in nine chapters, centered around important industry changes or economic events. The book includes an introduction and a concluding chapter providing a useful perspective on the thrift industry.

The first chapter traces the roots of the American buildings and loans movement to the building society movement in eighteenth-century England. The first American building society began in Philadelphia in 1831 to provide home loans and instill the idea of systematic savings in working people. The early American associations, stressing thrift and mutual cooperation, were small ventures operating on the terminating plan, meaning that the association ceased operations when all members had repaid their loans or paid for their shares in full. Associations gradually adopted more permanent forms of organization and, by 1900, 5,356 organizations had total assets of more than $571 million, reflecting rapid growth in numbers and the small size of the average association. The industry trade association, the U.S. League of Local Buildings and Loan Associations, was formed in 1892 to popularize the benefits of thrift and home ownership and to improve the public image of thrifts, damaged by the practices of some newer and large, often banker-organized, associations that did not have the local emphasis of the traditional smaller non-profit associations.

Chapter 2 covers the years 1900-1929 and the increasing importance of the League. Of special interest is the development of ethnic thrifts serving members in particular ethnic neighborhoods and the role of women as members and staff in early thrifts. The impact of World War I and the postwar consumer goods and home building expansion on the thrift industry is well documented. Chapter 3 focuses on the gradual development of state regulation beginning as early as 1860. The national trade association favored state regulation but the crisis of the early 1930s led to greatly increased federal oversight of thrifts.

Major topics in Chapter 4, focusing on the years 1930-1945, include improvements in the national trade association under long-time leader Morton Bodfish, the impact of the Great Depression, and new federal agencies and regulations impacting the thrift industry. These federal initiatives included the Federal Home Loan Bank Board, the Federal Savings and Loan Insurance Corporation (FSLIC), federal charters for thrifts, the Federal Housing Administration (FHA) and the National Recovery Administration. While the Great Depression battered the industry, it emerged in 1945 in a strong position as the largest single provider of home mortgages.

Mason sees the years 1946-55, reviewed in Chapter 5, as the glory years for savings and loans. By the latter year, average thrift size had increased to $6 million, while the number of associations decreased due to mergers and workouts of weaker associations. By 1955, S&Ls provided 36% of real estate mortgages and their deposits were up to 70% of commercial bank savings deposits. Thrifts faced increasing competition from government entities, including the Veterans Administration and FHA, but made use of the secondary mortgage market created by the Federal National Mortgage Association (FNMA). Close ties developed between S&Ls and their regulators, who became more industry friendly.

Chapter 6, covering the years 1956-1966, highlights the growing division between large associations and the large number of more traditional small thrifts. Slower economic expansion impacted S&L growth, and the relationship with regulators became less “cozy.” A major change in 1966 was the extension of Regulation Q interest rate ceilings to thrifts, with an allowable rate 0.25% above that of banks. Mason documents that, by 1965, average thrift size had increased to $21 million and S&Ls held 26% of consumer savings and originated 46% of single-family home mortgages.

Chapter 7’s title, “Lost Opportunities 1967-79,” makes clear Mason’s view that this period, marked by slow economic growth, high interest rates and inflation, was an opportunity lost to make changes in industry organization and structure. Spread management became a problem and disintermediation threatened the viability of some thrifts. Consumer activism, racial and social, further complicated thrift management problems, as did the widening gap between small and large thrifts that made it difficult for the trade association (whose name changed to the U.S. League of Savings and Loans in 1974) to develop a reform package acceptable to members.

Mason calls the period 1979-1988, covered in Chapter 8, “Deregulation and Disaster,” as growing problems associated with borrowing short and lending long led to increased disintermediation, losses and failures. This period saw the rise of “high flyers,” associations that acquired fewer funds from the local market and had substantially less of their total assets invested in traditional mortgages than traditional thrifts. Mason provides an excellent review of these developments and the resulting regulatory and Congressional responses, including the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 and the Garn-St. Germain Act of 1982 that provided broader asset powers for thrifts, new accounting rules and regulatory forbearance to shore up failing institutions. He shows that these actions did not solve the problems but served mainly to hide the seriousness of the thrift industry crisis. Two appendices, “Fraud, Forbearance, and Failure” and “Success the Old-fashioned Way,” present case studies of a high flyer and a more traditional thrift.

Resolving the crisis and restoring confidence 1989-1995 are the foci of Chapter 9. The Financial Institutions Relief, Recovery and Enforcement Act (FIRREA) of 1989 was designed to deal with the problems exposed in the 80s. The act eliminated the FSLIC with its functions taken over by the FDIC, the FHLBB was replaced by the new Office of Thrift Supervision, and the process of re-regulating the thrift industry began. Between 1980 and 1994, 1,295 thrifts with total assets of $621 billion were gone. The Resolution Trust Corporation (RTC) was established to dispose of failed S&L assets and that agency ultimately resolved 747 S&Ls, sold $402 billion of the assets and recovered 78% of book value of those assets. Mason provides an excellent analysis of the crisis and why the 1980s reforms failed. While fraud was important in some high-profile cases, he believes that the major causes were a rigid institutional and regulatory structure and human error factors, including flawed piecemeal deregulation, lax oversight (including forbearance), and misguided lending in new areas where association managers had little or no experience. By 1995, the thrift industry had shrunk but did not disappear and large and small thrifts continued to operate side-by-side, but the share of residential mortgages originated by thrifts fell from 47% to 15%. The national trade association was a casualty, merging with former rival, the National Council of Savings Institutions, then becoming part of America’s Community Bankers, a trade association for thrifts, savings banks, and commercial community banks. By 1995, the term S&L was used by only 60% of thrifts, down from 90% in 1977.

The antecedents to and the nineteenth-century development of the buildings and loans movement in America, trade association efforts to make the industry more professional and standardized, new data on ethnic thrifts, and the role of women in the movement are important contributions. One of the book’s strengths is the coverage of post-World War II developments, especially the buildup to and the causes of the crisis of the 1980s. Mason provides an excellent review of the crisis and aftermath, including political and economic factors, actions by thrifts and other financial market participants, and responses of regulators and Congress to try and cope with the changing environment. Partial and piecemeal deregulation, inept oversight, human error and fraud are carefully evaluated as contributing factors. Several tables report thrift numbers and total assets for benchmark years from 1888 to 1995. The extensive list of sources will be especially useful to researchers.

Many readers will wish Mason had been able to continue his history beyond 1995 since the savings and loan industry was substantially different by 2004. Mason’s insights on the continued shrinking of the thrift industry post 1995 would be enlightening. Credit unions, another cooperative financial intermediary, are not mentioned at all and savings banks rate only a very brief mention, despite their importance as an early financial intermediary.

In the 1970s and 1980s, Regulation Q prevented nominal interest rates paid on savings from rising, but high nominal rates did not deter borrowing because real interest rates fell as the rate of inflation increased. Noting the difference between nominal and real rates would have improved Mason’s discussion of spread management and disintermediation problems.

Historically, banks concentrated on larger depositors and business lending and new institutional types, including savings and loans, appeared throughout the nineteenth and early twentieth centuries to fill needs not met by existing institutions. This led to functional and geographic segregation within the financial sector and these boundaries increased substantially in the crisis atmosphere of the 1930s. Mason suggests that attempts to lower these boundaries in the 1980s, at least the way it was done, contributed to subsequent problems. At times he seems overly supportive of thrift industry appeals for special treatment. He does not emphasize the inefficiencies in resource allocation arising from this excessive financial market segmentation, and caused in part by the protection accorded thrifts.

These reservations do not detract from Mason’s accomplishment in providing an excellent, well-researched and well-written history of the thrift industry in the United States. The book should be read by those interested in financial intermediaries, trade associations, and government-business relations.

Richard H. Keehn is an emeritus professor of economics at the University of Wisconsin-Parkside. His primary research areas are banking and business history with a special focus on Wisconsin banking and manufacturing development.