In 1962, after a series of savings and loan scandals, the state of Maryland set up a new insurance plan with an allegedly stronger regulatory system. And yet, 23 years later, Maryland finds itself dealing once again with failed S&Ls. What went wrong? The melancholy story has been laid out in a detailed series of articles in this newspaper by three of its reporters, R. H. Melton, John Mintz and Tom Kenworthy.
Clearly, in Maryland, the regulators were not up to the job. Some were drawn from the S&L industry itself and tried earnestly to protect it. More important, the industry changed radically over those years. Running an S&L used to be a very staid business. In the middle 1960s the prevailing rate for a mortgage was around 6 percent. S&Ls made mortgages at those rates and attracted deposits by offering to pay rates that were a little lower -- held there by regulation to keep the S&Ls in business to serve homebuilders and homebuyers. It was modestly profitable but not very exciting. Then suddenly interest rates began to soar.
Loaded with old mortgages paying low rates, the S&Ls began suffering enormous losses as their depositors began to pull their money out to pursue higher returns elsewhere. To keep the S&Ls from being totally drained, both federal and state governments began to peel off the limits on the interest that they could offer their depositors.
Well-run S&Ls, of which there are many, gritted their teeth and absorbed large losses. But others followed a much riskier course, and that is where most of the trouble has arisen. Some began making dangerous loans in a desperate effort to recoup their losses.
In both the state and federal systems, the relaxation of regulation opened these S&Ls to very sophisticated manipulation. If you wonder why the state regulators didn't catch it, you might note that the state's beginning pay for a field examiner is $12,900. In the federal system at midyear the average salary for examiners -- not the beginning wage, but the average -- was $24,800 before the job of examination was turned over to the autonomous regional banks partly to get the staff a raise.
Especially in the case of Maryland, middle-level state officials tried desperately to suppress the warning signals of trouble ahead, in the Micawberish hope that something would turn up. But the strain on Maryland's state S&L system is no different fundamentally from the strains on the federal system. According to one recent study by a group of economists using federal data, out of some 3,200 federally insured institutions, 646 lost money in the first half of this year and 456 were insolvent. From the public point of view, the chief difference between the state and federal systems is that it will be much more expensive to restore the federal S&Ls to balance.