The Regulators-Watchdog Agencies

By the early 1990s there were more than 100 federal regulatory agencies to which Congress had delegated power. All of these agencies have one thing in common -- they are designed to protect the public interest. They regulate activity in a wide range of fields, from trade to communications, from nuclear energy to product safety to employment opportunity.

The operations of regulatory agencies are influenced by the executive, legislative and judicial branches of government. The agencies are directed by commissioners or boards with the proviso that the two major political parties be equally represented. Commissioners are appointed by the president and confirmed by the Senate for a fixed term, usually five to seven years. Congress oversees the way funds appropriated to the agencies are spent, and the courts review any disputed decisions. Each agency has a staff, often more than 1,000 persons.

To the outsider it may appear that the agencies perform the function of courts. Agencies hold hearings that resemble court trials when officers of corporations or others are accused of violating federal laws or regulations. As in courts, the defendants are represented by legal counsel. Whatever ruling the agency makes is subject to review (and possibly reversal) by federal courts. Each year the agencies collectively issue more than 100,000 rulings, far more than all federal courts. The great majority of these rulings are not disputed by the parties involved.

The agencies are isolated by law from the president and, in theory, from partisan politics. However, critics of regulatory agencies have charged that commissioners are sometimes pressured by members of Congress on behalf of their constituents, or influenced by the business interests they are supposed to regulate. In addition, agency officials acquire intimate knowledge of the businesses they regulate, and some officials are offered high-paying jobs in those industries once their tenure at an agency is ended. Also, some complain that government regulations dealing with business often become obsolete after they are written since business conditions frequently change.

Some of these factors appear to have been present in a series of events that crippled and almost destroyed America's savings and loan (S&L) business, an integral element of America's "thrift" industry, during the 1980s and early 1990s. Traditionally, S&Ls collected small savers' deposits and invested them in long-term home mortgages. They were ubiquitous; at one time or another, almost all Americans got S&L financing for buying their homes. For many years interest rates paid on deposits at S&Ls were kept low, but millions of Americans put their money in S&Ls because they were considered to be an extremely safe place to invest: deposits of up to $40,000 guaranteed by the Federal Savings & Loan Investment Corporation (FSLIC), an agency of the U.S. government; and the kinds of investments S&Ls were permitted to make were tightly controlled to avoid excessive risk.

Starting in the 1960s, however, general interest rate levels began rising, and by the 1980s were so high that most S&Ls could not compete for deposits. This put them in a dire financial squeeze. Responding to their problems, the government in the 1980s began a gradual phasing out of interest rate ceilings on interest paid by S&Ls (as well as by banks) while raising the insured deposit ceiling to $100,000. This action produced large and widespread losses on S&Ls' mortgage portfolios, which were for the most part collecting lower interest rates than S&Ls were paying depositors. Again responding to complaints, Congress relaxed restrictions, allowing S&Ls to engage in consumer, business and commercial real estate lending. Some regulatory procedures governing S&Ls' capital requirements were also liberalized. Fearful of becoming obsolete, S&Ls expanded into such highly risky activities as investing depositors' money in speculative real estate ventures, many of which proved to be unprofitable when economic conditions turned unfavorable, particularly in the West. But budgetary stringency and political pressure to deemphasize regulation had combined to shrink the regulatory staff and apparatus to the point where it was helpless to keep pace with the unfolding crisis. In this anything-goes atmosphere, some S&Ls were taken over by unsavory people who plundered them for themselves and their friends.

By the end of the decade, large numbers of S&Ls had tumbled into insolvency; about half of the S&Ls that had been in business in 1970 no longer existed in 1989. The FSLIC, which insured depositors' money, itself became insolvent. The S&L crisis had in a few years mushroomed into the biggest national financial scandal in American history. In 1989, Congress and the president agreed on a taxpayer-financed bailout measure known as the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). This act provided $50 thousand-million to close failed S&Ls, totally changed the regulatory apparatus for savings institutions, and legislated new portfolio constraints. A new government agency called the Resolution Trust Corporation (RTC) was set up to liquidate insolvent institutions. In March 1990 another $78 thousand-million was pumped into the RTC. But estimates of the total cost of the S&L cleanup continued to mount, topping the $200 thousand-million mark in 1991.

The S&L debacle was intertwined with the problems that high interest rates brought to other financial institutions, including banks and insurance companies (some of which also went out of business or were threatened with insolvency). Although the causes of the S&L crisis were numerous, deregulation, and more specifically excessive political pressure to keep regulators from doing their jobs at a time when tough enforcement of the rules was clearly in the public interest, played a major role. It was hardly surprising that many Americans were concluding that, while heavy-handed government regulation was bad, excessive laxness in enforcement of important regulations was equally bad, if not worse.