Savings and loan associations were built to be boring. Neighbors pooled their deposits, and the thrift lent the money back out as 30 year fixed rate mortgages. Then the inflation of the late 1970s arrived, the Federal Reserve raised interest rates, and depositors fled to money market funds paying 12 or 13 percent. Thrifts earning 5 or 6 percent on old mortgages were barred by Regulation Q from raising what they paid. Their business model had become mathematically impossible.

This episode explains how Washington’s rescue turned a squeeze into a catastrophe. Congress raised deposit insurance to $100,000 and let thrifts move into commercial real estate, while examinations were cut. When losses mounted, the insurance fund was too broke to close failed institutions, so regulators let them stay open under invented accounting rules. Insolvent thrifts then gambled for resurrection with insured money. By the end, 1,043 thrifts had failed and the bill to taxpayers reached $123.8 billion.

• Thrift examinations fell by 26 percent between 1981 and 1984, just as the Garn-St Germain Act of 1982 opened the door to construction loans and commercial property.
• Regulators cut net worth requirements from 5 percent to 3 percent and let thrifts count goodwill as capital. A new thrift could hold $1.3 billion in assets on $2 million of capital.
• Falling oil prices and the Tax Reform Act of 1986 crushed commercial real estate values. In 1988 Texas accounted for 40 percent of the nation’s thrift failures.
• Charles Keating’s Lincoln Savings and Loan cost $2.6 billion to resolve and tied five senators, the Keating Five, to pressure on regulators. Fraud still made up only an estimated 10 to 15 percent of total losses.
• The Resolution Trust Corporation closed 747 thrifts and recovered about 78 percent of book value. An estimated $60 billion of the losses came from regulatory forbearance alone.