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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: Ramsey Su who wrote (68915)8/27/2006 5:08:07 PM
From: ridingycurve   of 110194
 
You are correct. It was called Regulation Q and it allowed S&L's to pay slightly higher rates than commercial banks. As we all know, home ownership is a God given right and must be encouraged at all cost.

Why did Reg Q go away? It was essentially rendered obsolete by the emergence of the capital markets. Savers were presented higher yield alternatives, with money market mutual funds one of the primary competitors.

The effect was devastating, and thus was written the first chapter in the demise of the S&L industry. It had to pay ever escalating rates to attract and hold deposits. Once the average cost of funds and G&A expense exceeded fixed-rate loan income, the negative earnings quickly diminished capital. Capital, incidentally, was only required to be 2% since the S&L business model was regarded as so safe.

Many shops became insolvent, but the FSLIC did not have nearly the resources to liquidate them. Thus was born "regulatory capital", whereby realized losses from the sale of underwater loan pools were miraculous deemed to be capital.

All the losses that developed later were simply the result of misguided attempts by congress to salvage the industry rather than bite the bullet.
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