S&L

The S&L crisis of the 80’s was predictable and was destined to happen. These type companies known as, “Thrifts” originate from the Civil War days but only became prominent when they started making home mortgage loans in the 1930’s as anyone who has watched the movie, “It’s A Wonderful Lilfe”, can attest. The reason they were doomed to a crisis is mathematical. If you offer a $100,000 mortgage at 6% for 30 years your monthly payment is $600. Even if you assume that is all interest it is a return of 7.2% per year. Well all it takes to get the Thrift in trouble is for short term rates to go higher than 7.2%. If interest rates increase above 7.2% say to 8% the bank must now pay 8% on deposits and they are receiving less than that on their earnings. They can, of course, start charging more on new mortgages but they will have a large portion of their portfolio earning the lower rate. As rates continue to climb the situation is exacerbated and eventually the crisis of 1987 happened. The bailout for that was several hundred billions which at that time seemed like a lot of money but pales by today’s standards.

Now we have the same situation involving commercial banks. Here is an excerpt from Investment Banking magazine dated July 12, 2010.



The practice of short-term borrowing and long-term lending contributed to the near-collapse of the world financial system in late 2008 when short-term financing dried up. Banks suddenly found themselves starved for cash, and some would have collapsed without central bank support.



Get ready for some more bailouts to go along with state debts, and pension debts.