S&L Crisis Lessons Documented But Ignored: Stage Set for 2008 Repeat

As the S&L crisis concludes with over 1,000 failed institutions, 1,000+ banker prosecutions, and $160 billion taxpayer cost, government reports and academic studies document clear lessons: deregulation without corresponding risk management enables fraud, moral hazard from deposit insurance requires strong oversight, regulatory capture allows systematic looting, and aggressive prosecution deters financial crime. Congressional investigations, GAO reports, and regulatory post-mortems all identify the same pattern: eliminating prudential standards while maintaining government guarantees creates incentive structure for fraud and reckless risk-taking that inevitably produces catastrophic losses requiring taxpayer bailouts.

However, the documented lessons are systematically ignored as financial industry lobbying promotes renewed deregulation throughout the 1990s. The Gramm-Leach-Bliley Act of 1999 repeals Glass-Steagall, allowing the same combination of commercial banking, investment banking, and insurance that contributed to both the 1929 crash and S&L crisis. Federal Reserve Chairman Alan Greenspan opposes regulation of derivatives despite warnings from Brooksley Born and others who cite S&L lessons. Rating agencies receive payment from issuers they rate, creating the same conflicts of interest documented in S&L crisis. Banks package and sell risky mortgages to investors while maintaining government backing, recreating the exact moral hazard that destroyed the S&L industry.

The willful amnesia regarding S&L lessons demonstrates how financial industry capture of policymaking operates: crises produce brief windows of reform, but sustained lobbying and campaign contributions ensure regulations are weakened once immediate crisis passes. By 2008, commercial banking replicates the S&L crisis at 70 times the scale: deregulation enabling fraud, moral hazard from government guarantees, regulatory capture, risk concentration, and eventual catastrophic failure requiring massive taxpayer bailout. The key difference: after S&L crisis, over 1,000 bankers went to prison; after 2008, zero Wall Street executives faced prosecution. The S&L crisis proved financial fraud could be prosecuted, but political will to hold powerful bankers accountable had evaporated by 2008.