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«Volume Title: Politics and Economics in the Eighties Volume Author/Editor: Alberto Alesina and Geoffrey Carliner, editors Volume Publisher: ...»

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8. Our discussion is based on a large and growing literature on this topic: Fiorina (1981), Fiorina and No11 (1978), Ferejohn and Shipan (1989), McCubbins and Schwartz (1984), Kiewiet and McCubbins (1991), McCubbins, Noll, and Weingast (1989), Moe (1985a, 1989), Weingast (1984), and Weingast and Moran (1983). For a survey of some of this work, see Romer and Rosenthal(l987).

9. On recognition, see Jacobson (1987).

10. This line of work has provided insights into equilibrium and comparative statics, applied in a variety of settings. See, e.g., Romer and Rosenthal(1978), Weingast and Moran (1983), Ferejohn (1986), Ferejohn and Shipan (1989), and Kiewiet and McCubbins (1991).

11. This is emphasized in Gilligan, Marshall, and Weingast (1989).

Political Foundations of the Thrift Debacle

12. On the role of the House leadership in the 1980s, see Sinclair (1989).

13. This argument is based on McCubbins and Schwartz (1984) and Weingast (1984). On oversight, see also Aberbach (1990) and Ogul and Rockman (1990).

14. See Kiewiet and McCubbins’s (1991) discussion of delegation and Ferejohn and Shipan (1989) on the legislative threats of intervention in agency decisions.

15. See Weingast (1984) for a review of the literature and evidence for this claim.

16. Other examples abound. See esp. Ferejohn and Shipan’s (1989) study of Federal Communications Commission policies after the AT&T divestiture and Weingast and Moran’s (1983) study of the rise and fall of consumer activism by the Federal Trade Commission.

17. Thrifts had objected to the federal mortgage insurance provisions of the Housing Act, fearing that they would increase the ability of commercial banks and insurance companies to compete in the mortgage market. On this, and for other details of the history of the thrift industry, see Woerheide (1984).

18. This arrangement differed from the case of the FDIC, which was made an agency independent of the Federal Reserve Board.

19. The economic argument for subsidies to mortgage lenders as a way to encourage demand for housing is a weak one and had been frequently challenged-by economists, if not by developers and thrift institutions; see e.g., Meltzer (1981) and Weicher (1988).

20. Robert Litan’s comments (in this volume) provide some details on regulatory developments before 1982.

21. Since the early days of deposit insurance, economists had pointed to the perverse incentives for bank risk taking that it created. Barth and Bradley (1988) quote observers from 1931 and 1936 on this point. By the early 1980s, some FHLBB economists were warning about the riskiness of allowing zombie thrifts to operate, and those outside the industry were calling attention to this problem as well; see Kane (1985, 1989b).

22. In the 1986 Economic Report o the President, for example, the president’s f report itself (as distinct from that of the CEA) carried the message that continued deregulation of financial institutions should proceed apace. The thrifts were not mentioned.

23. This quote is taken from an Associated Press dispatch filed by Martin Crutsinger, 26 July 1985; see the analysis in Barth et al. (1985a, 1985b) and Brumbaugh and Hemmel(l984).

24. Figs. 6.1 and 6.2 are based on year-end data, using GAAP definitions.

25. Their position, as described by banking consultant Bert Ely, was, “After all, Ford and GM didn’t bail out Chrysler. Boeing didn’t bail out Lockheed (Wull Street Journal, 22 July 1987).

26. Given the economic status of the thrifts, even a $15 billion recapitalization would have required assessments of over $1 billion per year and would have cut severely into the income of the segment of the industry that was healthy in 1986. By 1987, tangible net worth (GAAP net worth minus certain items such as goodwill) of the industry had shrunk to $9 billion. Thrifts with GAAP capital-to-asset ratio above 3% had tangible net worth of $34 billion. Tangible net worth of the rest of the industry was negative $25 billion (Barth et al. 1990, table 1).

27. Congressional deadlocks of this sort can sometimes be broken by presidential intervention. This did not occur, as the administration was willing to acquiesce in the existing policy of forbearance.

28. Kane (1989b) provides a good discussion of the extent to which accounting numbers systematically provided rosy pictures of the thrift situation.

29. The lobbying and campaign financing activities of thrift industry groups and individual thrifts on this issue have been well documented; see, e.g., Jackson (1988).

Thomas Romer and Barry R. Weingast

30. Although we refer to FSLIC borrowing, under all of the plans discussed here the actual borrowing was to be done by a newly created financing corporation (FICO).

The principal on the borrowed amounts would be secured by zero-coupon bonds issued by the Treasury. Interest on FICO borrowing would be paid by FSLIC-insured thrifts.

31. The day before Wright’s announcement of his support for the $15 billion limit, the FHLBB “filed a $350 million lawsuit against seven former officers of the Vernon Savings and Loan Association of Dallas charging them with looting the organization of hundreds of millions of dollars. Vernon was one of the thrift institutions for which Mr. Wright had sought leniency” (New York Times, 29 April 1987).





32. The St Germain amendment is CQ Roll Call 83. Democrats voted 81 yea and 160 nay; Republicans voted 72 yea and 98 nay.

33. The categories are: (GAAP net worth/GAAP assets) less than 0; between 0 and 1.5%,between 1.5%and 3%;between 3% and 6%;and over 6%.

34. Using year-end 1987 data instead did not af€ect our qualitative results, nor did defining WEAK as thrifts with GAAP net worth less than 1.5% of GAAP assets or STRONG as those with GAAP net worth above 6%.

35. The PACs are those affiliated with the U.S. Savings League and with the National Council of Savings Institutions (Thriftpac). These were the only two thrift PACs among the 500 largest (in terms of campaign contributions) PACs in 1985-86. The totals do not include “soft money” or honoraria received by congressmen from thrift industry groups.

36. We thank Keith Poole for the data. The IDEOL variable for each congressman equals the coordinate of the first dimension estimated from running two-dimensional NOMINATE on the 100th House. The IDEOL variable correlates highly (over.9) with the more familiar ADA score, but is based on a much wider set of roll calls. For details, see Poole and Rosenthal(l991).

37. This could be more directly tested with a variable that measured the number of depositors with accounts at insolvent thrifts in the district. We did not have such a variable at our disposal.

38. That this may have involved strategic voting by at least some committee members has not escaped our attention. All members who, in committee, had voted to keep the borrowing limit at $15 billion, voted for the St Germain amendment on the floor.

Five members (including St Germain) who had voted to reduce the limit from $15 billion to $5 billion in committee, switched their position and voted for the St Germain amendment on the floor.

39. It should be recalled that PACMONEY is an imprecise and almost certainly understated measure of actual contributions (see n. 35 above). It is not clear how the “true” measure and our measure would be correlated.

40. Column 1 of table 6.4 is the specification that follows directly from our discussion. Likelihood-ratio tests of comparisons with the results of the other columns also argue in favor of the col. 1 specification.

41. In 1986 there was one roll call vote in the House dealing with thrifts; there were none in the Senate. In 1987, aside from final passage, there were two roll call votes on HR 27 in the House and two on S 790 in the Senate.

42. At first, the U.S. Savings League announced that it would oppose the compromise, saying that the borrowing limit was excessive. Given the GAO report, however, it was unlikely that many congressmen would have been willing to reopen the issue for a major floor fight. Final passage of the bill in the House did require a parliamentary manoeuvre. “Because the conference report broke new ground, beyond the scope of either the House or Senate’s original bills, it was vulnerable to a point of order on the House floor. St Germain appealed to the Rules Committee for a waiver of this and other procedural points that might have deterred final passage. In the end, the Rules Committee granted the waivers on a voice vote” (Congressional Quarterly 1988,636).

207 Political Foundations of the Thrift Debacle

43. Some observers have noted that FIRREA does not address many of the fundamental problems facing the industry (see, e.g., Barth and Brumbaugh 1990; Scott 1989b).

44. Commercial banks are the most directly related concern. See Starobin (1989) and Brumbaugh, Carron, and Litan (1989).

45. As of this writing, congressmen from New England have called bank regulators to task for being too vigorous in dealing with commercial banks with weak balance sheets (Wall Street Journal, 12 April 1990). While gratifyingly consistent with our thesis, such a development hardly bodes well for taxpayers in the 1990s.

References Adams, James Ring. 1989. The Big Fir: Inside the S&L Scandal. New York: Wiley.

Aberbach, Joel D. 1990. Keeping a Watchful Eye: The Politics of Congressional Oversight. Washington, D.C.: Brookings.

Barth, James R., Philip F. Bartholomew, and Michael G.Bradley. 1989. The Determinants of Thrift Institution Resolution Costs. Research Paper no. 89-03. Washington, D.C.: Office of Thrift Supervision, Department of the Treasury.

Barth, James R., Philip F. Bartholomew, and Carol J. Labich. 1990. Moral Hazard and the Thrift Crisis: An Empirical Analysis. Consumer Finance Law Quarterly Report 4 (1):22-34.

Barth, James R., and Michael G.Bradley. 1988. Thrift Deregulation and Federal Deposit Insurance. Research Paper no. 150. Washington, D.C.: Office of Policy and Economic Research, Federal Home Loan Bank Board.

Barth, James R., and R. Dan Brumbaugh. 1990. The Rough Road from FIRREA to Deposit Insurance Reform. Stanford Law & Policy Review 2 (Spring), 58-67.

Barth, James R., R. Dan Brumbaugh, Daniel Sauerhaft, and George H. K. Wang.

1985a. Insolvency and Risk-Taking in the Thrift Industry: Implications for the Future. Contemporary Policy Issues (Fall): 1-32.

. 1985b. Thrift Institution Failures: Causes and Policy Issues. In Proceedings of a Conference on Bank Structure and Competition, 184-216. Chicago: Federal Reserve Bank.

Brumbaugh, R. Dan. 1988. Thrzfts under Siege: Restoring Order to American Banking. Cambridge, Mass.: Ballinger.

Brumbaugh, R. Dan, and Andrew S. Carron. 1987. The Thrift Industry Crisis: Causes and Solutions. Brookings Papers on Economic Activity, no. 2, 349-88.

Brumbaugh, R. Dan, Andrew S. Carron, and Robert E. Litan. 1989. Cleaning Up the Depository Institutions Mess. Brookings Papers on Economic Activity, no. 1, 243Brumbaugh, R. Dan, and Eric I. Hemmel. 1984. Federal Deposit Insurance as a Call Option: Implications for Depository Institutions. Washington, D.C.: Office of Policy and Economic Research, Federal Home Loan Bank Board (October).

Congressional Quarterly. 1988. 1987 CQ Almanac. Washington: CQ Press.

Denzau, Arthur T., and Michael C. Munger. 1986. Legislators and Interest Groups:

How Unorganized Interests Get Represented. American Political Science Review 80:89-106.

Fenno, Richard. 1978. Home Style: House Members in Their Districts. Boston: Little, Brown.

Ferejohn, John A. 1986. Logrolling in an Institutional Context: A Case Study of Food Thomas Romer and Barry R. Weingast Stamp Legislation. In Congress and Policy Change, edited by G. C. Wright, L. N.

Rieselbach, and L. C. Dodd, 223-53. New York: Agathon Press.

Ferejohn, John A., and Charles R. Shipan. 1989. Congressional Influence on Administrative Agencies: A Case Study of Telecommunications Policy. In Congress Reconsidered, 4th ed. Edited by Lawrence C. Dodd and Bruce I. Oppenheimer. Washington, D.C.: Congressional Quarterly Press.

Fiorina, Moms P. 1981. Congressional Control of the Bureaucracy: A Mismatch of Incentives and Capabilities. In Congress Reconsidered, 2d ed. Edited by Lawrence C. Dodd and Bruce I. Oppenheimer. Washington, D.C.: Congressional Quarterly Press.

. 1989. Congress: Keystone of the Washington Establishment, 2d ed. New Haven, Conn.: Yale University Press.

Fiorina, Morris P., and Roger G. Noll. 1978. Voters, Bureaucrats and Legislators: A Rational Choice Perspective on the Growth of Bureaucracy. Journal of Public Economics 9:239-54.

Gilligan, Thomas W., William J. Marshall, and Barry R. Weingast. 1989. Regulation and the Theory of Legislative Choice: The Interstate Commerce Act of 1887. Journal o Law and Economics 3235-62.

f Jackson, Brooks. 1988. Honest Grqfr. New York: Knopf.

Jacobson, Gary C. 1987. Running Scared: Elections and Congressional Politics in the 1980s. In Congress: Structure and Policy, edited by Mathew D. McCubbins and Terry Sullivan. Cambridge: Cambridge University Press.

Kane, Edward J. 1985. The Gathering Crisis in Federal Deposit Insurance. Cambridge, Mass: MIT Press.

. 1989a. The High Cost of Incompletely Funding the FSLIC’s Shortage of Explicit Capital. Journal o Economic Perspectives 3:3 1-47.

f. 1989b.

The S&L Insurance Mess: How Did It Happen? Washington, D.C.:

Urban Institute Press.

. 1989c. The Unending Deposit Insurance Mess. Science 27:451-56.

Kiewiet, D. Roderick, and Mathew D. McCubbins. 1991. The Logic o Delegation:

f Congressional Parties and the Appropriations Process. Chicago: University of Chicago Press.

McCubbins, Mathew D., Roger G. Noll, and Barry R. Weingast. 1989. Structure and Process, Politics and Policy: Administrative Arrangements and the Political Control of Agencies. Virginia Law Review 7 5 4 3 1-82.

McCubbins, Mathew D., and Thomas Schwartz. 1984. Congressional Oversight Overlooked: Police Patrols vs. Fire Alarms. American Journal o Political Science f 28: 165-79.

Mayhew, David. 1974. Congress: The Electoral Connection. New Haven, Conn.: Yale University Press.



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