Until 1989, S&Ls were regulated by the FHLBB and insured by the
FSLIC within a legislative and historical framework separate from the one that surrounded commercial banks.
Combined with
FSLIC insurance this encouraged risky real-estate investments whose values declined in the late 1980s.
Therefore, when the RTC, FDIC, or
FSLIC filed an action against the D&Os of a failed thrift, D&O insurers often denied coverage for the claims under the regulatory exclusion.
In addition to creating the FHA and the
FSLIC, the National Housing Act of 1934 authorized the creation of national mortgage associations, which were intended to be federally chartered private organization that bought and sold qualifying first mortgages.
As has been already illustrated, there are many examples where conflicts arise from agency problems, such as the case where the
FSLIC used the provision of tax benefits to induce acquirers to take over failed S&Ls.
When the number and size of bank failures picked up in the late 1980s and losses to the FDIC mounted, there was widespread fear that the banks would go the way of the S&Ls and the FDIC the way of the
FSLIC.
What kept insolvent S&Ls from being closed down by depositor runs was the willingness of the
FSLIC to promise depositors credible protection against loss.
Rather than maximizing recoveries for
FSLIC, FADA had wasted
FSLIC funds .
If the project failed, it was the
FSLIC, not the S&L, that took the hit.
Additionally, the
FSLIC was replaced by the Savings Association Insurance Fund, administered by the Federal Deposit Insurance Corporation (FDIC).
In 1985, the
FSLIC and the Federal Home Loan Bank Board (FHLBB) also started the Management Consignment Program.
Rom acknowledges congressional delay in recapitalizing
FSLIC but attributes it to the understandable concern of congressmen to delay proposals until their local concerns were heard.
