As noted in Chapter 6, however, some of the apparent profits were accounting devices that allowed thrifts to bolster short-run profits at the expense of longer-run asset values.
The losses could have been avoided only if the FSLIC had liquidated the thrifts and quickly sold the assets to private investors at their inflated prices, so that the private investors would have borne the eventual losses. This was not a likely scenario.
A modest limitation on the use of brokered deposits -- no more than 5 percent of deposits by thrifts that were below their minimum net worth requirement -- remained.
This attitude found its way into the FIRREA, which forbids any bank or thrift that is not meeting its net worth requirements from accepting brokered deposits. In defense of this provision, it does focus attention on the thinly capitalized thrifts, where the risks are highest; and it does give the FDIC flexibility to override the prohibition. Still, it continues to focus too much attention on the wrong side of the balance sheet.
Depositors usually leave in their accounts the interest that accrues on their deposits. This source of deposit expansion does not imply any aggressive growth behavior.
At least part of the reason for gearing the increase in required net worth to profit levels was to give mutual thrifts, who could not raise capital by selling shares of stock (unless they were prepared to convert from their mutual status), time to increase their net worth through retained earnings. The shrinking of mutual (and other) thrifts by letting
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Publication Information: Book Title: The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation. Contributors: Lawrence J. White - author. Publisher: Oxford University Press. Place of Publication: New York. Publication Year: 1991. Page Number: 142.
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