By Marilyn Barnewall

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What’s the old saying about having to repeat history if we do not learn from it? Let’s remember, for just a moment, the Good Old 1980s and what happened to savings and loans.

Once upon a time a group of financial institutions were started to help consumers in this country realize the American Dream… a home with an attached garage for the family car.

In the old days, the job of commercial banks was to make loans to companies so business growth could occur and new jobs could be created. Savings and loans were to make home mortgages available so Americans could become a stable, taxpaying society.

For savings and loans to make mortgages available to the public, the public first had to be enticed into keeping its savings dollars in these institutions. After all, S&Ls and banks lend not only their own capital. They loan customers’ deposit dollars.

The motivation to keep savings accounts at savings and loans waned as high deposit rates of interest became available at non-bank banks. In the late 1970s, brokerage houses (non-banks) began offering cash management accounts with deposit rates of interest that in 1981 went as high as 21 percent.

Disintermediation almost occurred. In this instance, “disintermediation” meant so many deposit dollars were taken from banks and savings and loans and placed in cash management accounts with stock brokerage companies, banks and savings and loans almost did not have any money available to loan.

In the 1980s, literally, billions and billions of consumer deposit dollars were withdrawn from savings and loans and commercial banks and placed into new, high interest bearing cash management accounts at Merrill Lynch and other brokerage houses. At that time, bank regulations prevented banks from paying in excess of (or, less than) 5.25 percent on deposits. Savings and loans could not offer more than 5.50 percent.

Since brokerage houses do not make mortgage loans available so Americans can buy homes, nor do they make loans to businesses so they can grow and employ people, this was a serious occurrence.

How did we get from “Once upon a time” to “And they did not live happily ever after?”

The primary problem was Congress, which passed laws over an industry it did not understand. It then blamed the industry for failing when it could not function under the business environment created for it by the Congress.

Upon viewing the threat to savings and loans and commercial banks resulting from the billions of deposit dollars lost to brokerage house cash management accounts, Congress rightly determined something needed to be done.

One solution that would have solved the problem nicely: When non-banks offer bank deposit products like cash management deposit accounts, require them to comply with bank regulations. Make them pay the same rate of deposit interest, make them insure the deposits, etc.

It only made sense to hold non-bank banks (brokerage houses that offered cash management deposit accounts) to the same safety precautions with which other depository institutions had to comply. It was the best means of protecting the public from potential loss. It would have been the sensible course of action and could have saved the savings and loan industry from failure.

Instead, the Congress decided to deregulate banks and savings and loans, letting them pay whatever rate of deposit interest they wanted. In short, they did away with Regulation O… which is why we get so little return on savings deposits, today.

Upon deregulation, savings and loans had few employees capable of competing with commercial banks and brokerage houses. This was an industry that had traditionally and proudly made homeowners of most Americans who would otherwise have been unable to gain that status on their own. The savings and loan industry helped create middle-class America.

Savings and loan employees had not been trained to make even basic credit evaluations that were bread and butter business to commercial banks…credit cards and car loans.

Computer systems were not in place at savings and loans so they could comply with federal regulations… to track consumer loans and provide reports required by the federal government, for example.

Congress, however, decreed savings and loans deregulated and told them to compete with commercial banks and brokerage houses.

Enter the secondary cause: The naive __ and sometimes greedy __ American public.

If the average American went to a surgeon who offered to take out the consumer’s tonsils at the same cost charged by other surgeons, but offered to give back to the consumer any profit received from the surgery, American consumers would quietly seek another surgeon. If a physician has to work for nothing to get patients, something must be wrong, right?

In essence, the way American consumers interacted with savings and loans was like doing business with the surgeon. Because it was money, not their tonsils, at risk, the greed factor came into play.

A year ago, legislation called “Check 21” was passed and signed by President Bush. If you have not heard about Check 21, I urge you to go to Consumer Union Web site at Find out about it.

Your bank will undoubtedly tell you Check 21 is the greatest thing since sliced bread. After all, it is estimated to increase bank profits by over $2 billion a year.

That’s what savings and loans told people about high rates of deposit interest… just before they failed and a lot of people either lost money or could only gain access to very limited amounts of their money.

Remember, there were a lot of savings and loan clients who could not get more than $900 a month from their checking or savings accounts in failed savings and loans. In Ohio, for example, people could not gain access to their money for a long time. Sure, the Federal Savings and Loan Insurance Corporation (FSLIC) insured the deposits. But just because your money is insured does not mean you can walk in and get what you want when you want it.

The FSLIC failed… and the Federal Deposit Insurance Corporation (FDIC), the insurer of commercial bank depositors, now insures all banks and savings and loans.

I understand my deposits in any bank are insured up to $100,000. Guess what? I have numerous banks. I have no more than $10,000 in any one of them. As a bank consultant, I watched what happened to savings and loan clients. I want no part of it. Would I tell you what to do? I never advise anyone about money matters.

Check 21 is sweeping legislation that makes very basic changes in the way you do business with banks. Take a few minutes and go find out what’s in store for you.

Check 21 becomes law on October 28, 2004.


Marilyn Barnewall, in 1978, was the first female to be named vice president in charge of a major loan and deposit portfolio at Denver’s largest bank. She started the nation’s first private bank, resigned to start her own firm and consulted for banks of all sizes in America and other countries. In June 1992, Forbes dubbed Barnewall “the dean of American private banking.” Author of several banking texts, she has written extensively for the American Banker, Bank Marketing Magazine, and was U.S. consulting editor for Private Banker International (Lafferty Publications, London/Dublin). Article originally appeared in the Grand Junction Free Press. Marilyn can be reached at

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