‘89 Ended Decade of Failure for Nation’s Banks and S&Ls; : Economy: Some experts think the collapse of money institutions won’t stop in the ‘90s. Orange County had its share of bad news.
Savings and loans collapsed in 1989 at the highest rate ever and bank closings fell only slightly short of a post-Depression high, capping a decade of failure for the nation’s financial institutions, regulators said Wednesday.
The year was the finale for a disastrous decade for the nation’s financial institutions. All told, 1,894 institutions closed their doors during the 1980s: 1,059 banks and 835 S&Ls.; In Orange County, 25 institutions failed--11 banks and 14 thrifts.
“I don’t see 1989 as being the end of this,” said Catherine England, a scholar at the Cato Institute, a conservative research group in Washington. “I think failures are going to continue to increase into the 1990s.”
To close the decade, the government seized thrifts in Texas and New Mexico on Dec. 21, bringing the tally of failed S&Ls; to 328, far above the previous high of 277 in 1938.
In Orange County, three thrifts failed last year. Among them was Lincoln Savings & Loan Assn. in Irvine. The government ultimately will spend a record $2 billion to liquidate that S&L;, which had $5.3 billion in assets but was several hundred million in the red.
The Lincoln collapse has generated a massive civil fraud suit by the government against S&L; owner Charles H. Keating Jr. and prompted a Senate Ethics Committee inquiry into the financial dealings that Keating had with five U.S. senators, including California’s Alan Cranston.
The Resolution Trust Corp., the agency created Aug. 9 to carry out President Bush’s S&L; bailout, seized 318 failed institutions last year, disposing of 37 of them. An additional 10 bankrupt S&Ls; were handled by the old Federal Savings and Loan Insurance Corp.
Meanwhile, a commercial bank failure in California and another in New York on Dec. 20 pushed the total to 207 for the year, down from a post-Depression record of 221 in 1988, according to the Federal Deposit Insurance Corp.
The decline, although small, was the first since 1977 when six banks failed, a drop from 17 the previous year.
The problems in commercial banking, while severe, pale in comparison to the 1930s, when 9,508 banks of more than 23,000 in existence at the start of the period closed. There were 4,004 failures in 1933 alone.
However, for S&Ls;, the 1980s represent a crisis more severe than the Depression, even though the total failures in the 1930s--1,706--was more than double the 1980s total.
That is because the latest failures represent a far larger proportion of the savings industry. There were nearly 12,000 thrifts as the 1930s began, only 4,000 in 1980 and little more than 2,600 now.
“The failure rate and the cost of dealing with troubled S&Ls; in the 1980s swamps any other time period in U.S. history,” said James R. Barth, Auburn University finance professor.
Financial institution failures in the 1930s are readily explainable by the most wrenching economic contraction in the nation’s history.
However, the most recent bust in banking occurred during a boom for the economy as a whole, which marked the completion of its seventh consecutive year of expansion in November, a period of prosperity unprecedented in peacetime.
A few private analysts fear that the true analogy for the 1980s is not the 1930s, but the 1920s, when hundreds of banks failed each year despite general prosperity. That was followed by even more collapses and general economic ruin.
Academic experts and analysts point to a number of factors behind the soaring failure rate in the 1980s.
As the decade began, farm banks were the focus of attention. The Federal Reserve System used high interest rates to kill double-digit inflation. But in the process, the Central Bank depressed commodity prices and drove the value of the dollar sky high, squelching farm export sales.
Farming’s crisis became the crisis of rural banks.
Then, with the 1986 collapse of oil prices, concern shifted to Texas and other oil-producing states whose growing economies were fueled by the expectation of endlessly increasing oil prices. The fallout of the oil bust was still being felt as late as 1989, when 134 bank failures and 90 S&L; insolvencies occurred in Texas.
Now, shaky real estate markets in Arizona and in some states of the Northeast are prompting concerns that as Texas recovers, institutions in other states will start to topple.
Savings institutions suffered from some of the same regional problems, but added at least three other causes: weak regulation, the effect of volatile interest rates on home mortgage portfolios and the inability of the government to close bankrupt institutions because the S&L; deposit insurance fund had run out of money.
FDIC Chairman L. William Seidman is predicting that 1990 will bring another decline, perhaps modest, in the bank-failure rate. However, Seidman and private analysts say failures won’t go away.
Times staff writer John O’Dell contributed to this report.
A DECADE OF FAILURES
Nearly 2,000 commercial banks and S&Ls; collapsed in the 1980s, the worst period for financialinstitutions since the Great Depression. In Orange County, 25 institutions failed, including some of the most costly.
NATIONWIDE ORANGE COUNTY Year Banks S&Ls; Total Banks S&Ls; Total 1989 207 328 535 0 3 3 1988 221 223 444 0 0 0 1987 184 47 231 1 6 7 1986 138 46 184 * 3 3 6 1985 120 31 151 2 2 2 1984 79 22 101 3 0 3 1983 48 36 84 1 0 1 1982 42 63 105 1 0 1 1981 10 28 38 0 0 0 1980 10 11 21 0 0 0 Total 1,059 835 1,894 11 14 25
* Includes a thrift and loan.
A CHRONOLOGY OF FINANCIAL COLLAPSE
Year O.C. Institution Location 1982 Western National Bank Santa Ana 1983 Newport Harbour National Bank Newport Beach 1984 Heritage Bank Anaheim Bank of Irvine Irvine Garden Grove Community Bank Garden Grove 1985 Capistrano National Bank San Juan Capistrano South Coast Bank Costa Mesa Beverly Hills S&L; Mission Viejo Butterfield S&L; Santa Ana 1986 American Diversified Savings Bank Costa Mesa Valencia Bank Santa Ana Consolidated Savings Bank Irvine Saddleback National Bank Laguna Hills Ramona S&L; Orange Orange Coast Thrift & Loan Los Alamitos 1987 North America S&L; Santa Ana South Bay S&L; Newport Beach Perpetual Savings Bank Santa Ana Equitable S&L; Irvine Pacific Savings Bank Costa Mesa First Calif. Savings Bank Orange New City Bank Orange 1989 Lincoln S&L; Irvine American Interstate S&L; Newport Beach Security Federal S&L; Garden Grove
Source: Federal Deposit Insurance Corp., Office of Thrift Supervision and the Resolution Trust Corp.
