The Savings and Loan Crisis and Double Dipping
This paper will discuss federal tax policy as it affected the savings and loan crisis during the late 1980s and early 1990s. Specifically, the paper will examine the problem of "double dipping," whereby savings and loan institutions were allowed to deduct losses which were reimbursed, tax free, by the Federal Savings and Loan Insurance Corporation ("FSLIC"). The first part of the paper will discuss the origins of the crisis and provide an overview of the tax treatment of the losses. The second part of the paper will examine in more detail the special provisions of the Economic Recovery Tax Act of 1981. The third part of the paper will discuss some of the legislative responses to double dipping since the 1981 Act. The fourth part of the paper will examine the issue of the retroactivity of the subsequent legislative actions in the area.
The crisis in the savings and loan industry had its origins during the inflationary economy of the 1970s. Up through that period, thrifts acquired most of their income from fixed rate, long-term home mortgages which had been set at relatively low interest rates; these institutions were required by law to invest most of their assets in low-yield home mortgages. As the inflation rate remained high over a long period of time, however, thrifts began paying more in interest on their deposit liabilities than they could earn from their investments in fixed rate home mortgages. While these institutions were prevented by law from raising the amount of interest they could pay, depositors began moving their money from low-yield thrift deposit accounts to more lucrative money market accounts in non-thrift institutions. As a result, many thrift institutions edged towards collapse.
Recognizing a serious problem, the government first lifted the interest rate ceilings in 1980 in an attempt to make the thrifts more competitive. But the vast majority of ...