But it still allowed them only very limited entry into commercial
and consumer lending and trust services. Thus, these institutions
were heavily exposed to the vicissitudes of the residential real
estate markets in their respective regions. Every normal cyclical
slump in property values or regional economic shock - e.g., a plunge
in commodity prices - affected them disproportionately.
Interest rate volatility created a mismatch between the assets of
these associations and their liabilities. The negative spread
between their cost of funds and the yield of their assets - eroded
their operating margins. The 1982 Garn-St. Germain Depository
Institutions Act encouraged thrifts to convert from mutual - i.e.,
depositor-owned - associations to stock companies, allowing them to
tap the capital markets in order to enhance their faltering net
worth.
But this was too little and too late. The S&L's were rendered unable
to further support the price of real estate by rolling over old
credits, refinancing residential equity, and underwriting
development projects. Endemic corruption and mismanagement
exacerbated the ruin. The bubble burst.
Hundreds of thousands of depositors scrambled to withdraw their
funds and hundreds of savings and loans association (out of a total
of more than 3,000) became insolvent instantly, unable to pay their
depositors.
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