Resolution Funding Corporation - REFCORP
Categories: Banking
If you were a struggling Savings and Loan in the 1980s, you'd have a poster of REFCORP on your bedroom wall. Right next to JTT.
Okay, so REFCORP is slangy shorthand for the Resolution Funding Corporation. It's an asset management company set up by Congress during the 1980s savings and loan financial crisis, with the intent to bail out the sinking/floundering savings and loan industry. The need for REFCORP was sort of the precursor to the big one. That is, the massive mortgage crisis of 08-09, which almost bankrupted the entire western world.
But back to 1980. There were problems. The hair was bad. The music was worse. And the practice of loaning money was way too aggressive. So...why did S&L’s need bailing out? Well…risk. The government allowed the S&Ls to take too much of it. They ended up with way too many risky loans outstanding, just as the economy...tanked. And if this sounds like deja vu, it should. Because the mortgage crisis of 08-09 came from more or less the same financial place.
So where was the government in all of this? Like, don’t we have regulations that put rails on either side of banks, metering their greed and/or fear?
Well, we do. But the more rails that are put up against banks and savings and loans, the less earnings the banks have. And then the less money is made available to the people who really need the loans, i.e. the poor people, the desperate, the not-Bill-Gates. So there is a delicate line the government walks in setting up “bank liquidity.” That is, a bank has, say, $100M in equity, i.e. cash money they own as collateral, which they pledge to then loan out 3 or 4 or 5 or 8 times that equity foundation. As long as things go well, and everyone pays their bills on time, the bank makes...bank. But if there is a sudden shock to the economic system, and, say, 5% of the people to whom the banks have loaned money default, or go deadbeat, or just vanish...then the bank potentially runs out of their own collateral, or equity, to make good on those loans.
And, more or less, this is the dynamic that forced the creation of REFCORP in the 1980s. Savings and Loans either didn’t follow government mandates for loan restrictions or covenants or risk. Or they just loaned money to too many deadbeats who handed the keys back to the bank when they were fired from their jobs and couldn’t find another. In reality, the lion’s share of the loans that were made ended up being repaid. They just took several years to finally be fully collected. And that’s where REFCORP came in. It was essentially a short-ish term line of credit, which came with teeth and baseball bats. That is, because the government had to step in and babysit the naughty and/or stupid savings and loans who didn’t take smart risks, the government then had a say in the operations of the process of loaning money.
How bad was it? Well, roughly 1 out of every 3 savings and loan institutions that had existed in the mid-'80s no longer did by the late '80s. Over the next few years, REFCORP swooped in, rescued, and wiped the butts of over 700 S&L’s that had become insolvent or had only enough cash left in the vault to pay their next heating bill.
Of course, since REFCORP was a government-sponsored company, it demanded the collateral from taxpayers of some $500 bil to pull these S&Ls up off the pavement. But, in fact, it wasn’t a full $500B lost. Rather, it was the opportunity cost of making good investments with that money, which actually paid a fair return that was, in fact, lost. The problem was that it took the economy a while to recover and then wash over all the bad stuff it had left behind in the go-go Madonna-loving “Material Girl” '80s.
Then everyone closed their eyes, put their hands together, and hoped we’d never have another crisis like that again. It was, uh…like a prayer.
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Finance: What is REFCORP?0 Views
Finance Allah Shmoop What is Ref Corp Well if you
were a struggling savings and loan in the nineteen eighties
here's what ref Corp looked like Okay So Ref Court
is slinging shorthand for the Resolution Funding Corporation an asset
management company set up by Congress during the nineteen eighties
savings and loan financial crisis with the intent of well
bailing out the sinking slash floundering savings and loan industry
Well the need for ref Corp was sort of the
precursor to the big one That is the massive mortgage
crisis of two thousand eight nine which well almost bankrupted
the entire Western world But back to nineteen eighty there
were problems The hair was bad the music was worse
and the practice of loaning money was way too aggressive
So why did s and l's need bailing out Well
risk the government allowed the s and l's to take
too much of it And they ended up with way
too many risky loans outstanding just as the economy tanked
And if all this sounds like a deja vu well
it should because the mortgage crisis of oh wait Oh
nine came from ILM or less the same financial place
So where was the government in all this Like don't
we have regulations that put rails on either side of
banks meet Oring their greed and or fear Well we
dio But the more rails that air put up against
banks and savings and loans loaning money well the less
earnings the banks have and that's on one side But
well then also the less money is made available to
the people who really need the loans I e The
poor people the desperate thee not Bill Gates Like we
have lots of rails against banks loaning risky money Well
poor people don't get their loans So there's a delicate
line the government walks and setting up Quote bank liquidity
unquote that is a bank has say one hundred million
dollars in equity I eat cash money they own as
well essentially collateral which they pledge to then loan out
well Three four five eight times that equity foundation Well
as long as things go well and everyone pays their
bills on time I either interest on the loans they
have and all their payments Well then the bank makes
a bank But if there's a sudden shock to the
economic system and safe five percent of the people to
whom the banks have loaned money default or they just
go deadbeat or just vanish in an X Files episode
Wealth and the bank potentially runs out of their own
collateral or equity to make good on those loans and
Maura Less This is the dynamic that forced the creation
of Ref Corp in the nineteen eighties Savings and loans
either didn't follow government mandates for loan restrictions for covenants
or risk or they just loaned money to too many
deadbeats who handed them back the keys you know back
to the bank their savings and loan when they were
fired from their jobs and they couldn't find another job
and they couldn't make the mortgage payment Well in reality
the lion's share of the loans that were made actually
ended up in fact being repaid Theyjust took several years
or well half a decade or more to finally be
fully collected And that's where Ref Corp came in It
was essentially a short ish term line of credit which
came with teeth and baseball bats That is because the
government had to step in and baby sit the naughty
and or stupid savings and loans Companies who didn't take
smart risks Well the government then had a say in
the operations of the process of loaning money So how
bad was it Well roughly one out of every three
savings and loan institutions that had existed in the mid
eighties well no longer did By the late nineteen eighties
right Like everyone fully bankrupt and lost all their collateral
Or they were bought by the savings and loans who'd
been more conservative and then had a lot of cash
available just when everyone needed it so they could buy
them all out for real Cheap Well over the next
few years Ref Corp Part of the US government's financial
institutions Reform recovery and Enforcement Act swoop get in rescued
on well wipe the butts of over seven hundred SNL
that had become insolvent or well had on ly enough
cash left in the vaults to pay their next heating
bill Of course since Ref Corp was a government sponsored
company it demanded the collateral from taxpayers of some five
hundred billion dollars to pull these s and l's up
off the pavement But in fact it wasn't like it
tax of five hundred billion dollars loss Rather it was
the opportunity cost of making good investments with that money
which actually paid a fair return That was in fact
lost So it wasn't like we lost five hundred billion
dollars in just suddenly vanished The problem was that it
took the economy a while to recover and then wash
over all the bad stuff it had left behind in
the Gogo Madonna loving me cereal girl eighties Then everyone
close their eyes put their hands together and hope we've
never ever ever have another financial crisis like that again 00:04:54.433 --> [endTime] It was you know like a prayer