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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 6:16:03 PM
From: ridingycurve  Read Replies (1) of 110194
 
Sorry, I didn’t address your second question.

The obvious problem with the S&L industry was that it suffered from nearly insurmountable interest rate risk. In its infinite wisdom congress attempted to address this problem by throwing open the doors to higher yielding, lower duration lending. Particularly, those were commercial and commercial real estate lending for which S&L personnel had no training and expertise. Additionally, S&L’s had neither the capital nor the loss reserves necessary to engage higher risk forms of lending.

There were also extraordinary powers granted for direct investment, whereby S&L’s effectively took ownership interests in projects in lieu of interest payments. While many poor quality loans and loan participations were underwritten in good faith, crooks spotted the sugar tit represented by the expanded powers and bailed into the industry on both sides of the desk.

To compound matters, Federal Home Bank Board examiners were not trained for review of complex lending, and often could not identify poor quality loans when they was staring them in the face. It was not until the regulatory function was moved to the FHLB System (later the OTS) that the examination staff began to come up to speed in both experience and numbers. This was partially accomplished by hiring experienced examiners away from other bank regulatory agencies.

One other factor of note……..for an extended period of time “classified” loans had no regulatory significance for either capital requirements or enforcement actions. In fact, the OTS had no enforcement powers similar to those granted to the other regulatory agencies (cease and desist, removal from office, and withdrawal of deposit insurance in the case of the FDIC). The OTS could bark, but it couldn’t bite.
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