Resolution Funding Corporation - REFCORP
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.