The S&L scandal has come up recently as a possible precedent for a government bailout -- but I got to wondering if there might be a closer relationship. So I googled around a bit and came up with a long but interesting 1998 article on the S&L scandal. After explaining that the S&L industry was originally created during the New Deal to provide affordable mortgages to homebuyers, fell under strain during the financial dislocations of the late 70's and early 80's, and was then subverted by Reagan administration deregulation, the article gets into the case of Silverado Bank as its prime example of everything that went wrong:
http://findarticles.com/p/articles/mi_m0254/is_4_57/ai_53449306/pg_8Silverado banking, savings and loan association (hereafter referred to as Silverado Bank) began in 1956 as Mile High Savings and Loan Association, a bank chartered by the State of Colorado. It was a typically unnoteworthy savings and loan, solid but unimpressive in its growth as a home mortgage lender until the mid-1980s, when it became Silverado Bank and began showing explosive growth in assets and investments. Yet, only two years after posting significant growth, Silverado collapsed, and by the end of 1988 Federal regulators closed the bank. How did such an impressive success story turn so quickly into a disaster? ...
Colorado's economy was booming, primarily due to the oil industry, and real estate development projects grew rapidly. Deregulation now allowed S&L institutions like Silverado to enter real estate speculation and commercial development projects that were previously inaccessible to them. ...
Coupled with Silverado's aggressive venture into real estate development projects was Silverado's foray into a new and complex investment tool: residual interests in real estate mortgage investment conduits (REMICs). REMICs are pooled mortgages that are sold to investors. The pool contains a hierarchy of tranches, with each tranch containing its own risk level and relative yield: high-risk tranches offered high yields. Silverado invested in the "residual" tranches - those that remained when all other tranches had been sold. These residual tranches were the highest-risk tranches in the pool, offering the highest return on investment - often as high as 18 percent return when Silverado purchased them. Like junk bonds, these high-risk tranches offered an attractive potential to earn vast amounts of money to help close the gap between high interest deposit payouts and low interest mortgage receipts. But, like junk bonds, the risk was great for a huge loss. ...
In addition to the questionable practice of pooling loans, Silverado Bank approved several loans that raised questions of conflicts of interest, particularly between board member Neil Bush and two borrowers who also happened to be his business partners ... Federal regulators rejected Bush's characterization, citing his relationship with Good and Walters as a conflict of interest. But they imposed the mildest possible penalty against Bush in what amounted to a "cease and desist" order that he not engage in such activities in the future ... Bush refused to agree to the order, threatening a long, expensive, and protracted set of law suits (U.S. Congress: House, 1990b, p. 5). The U.S. government backed away from the threatened struggle, and instead imposed the mildest of sanctions against the son of the President of the United States.