Report of the Special Counsel on the Maryland Savings and Loan Crisis

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Report of the Special Counsel on the Maryland Savings and Loan Crisis

On Jan. 20, 1985, the CBS news show, "60 Minutes," ran a segment regarding the failure of the Commonwealth Bank, an industrial bank in Nebraska. The bank had been uninsured, and many depositors lost their savings.

Following the show, the Maryland Savings Share Insurance Corp. and the state's Division of Savings and Loan Associations were inundated with telephone calls and letters regarding the MSSIC insurance system.

In the opinion of economists, the savings and loan industry, and the regulators, the widely viewed show heightened public wariness regarding financial institutions in general and contributed to the likelihood of a panic.

On March 8, 1985, the Home State Savings Bank in Cincinnati closed its doors. Home State had borrowed heavily from E.S.M. Government Securities Inc., a government securities broker in Fort Lauderdale, Fla., which the Securities and Exchange Commission closed because of insolvency.

Home State had borrowed through reverse repurchase agreements using government securities as collateral, many of which E.S.M. sold to other parties. Depositors hastily withdrew $20 million from Home State, forcing it to close.

Although many federally insured banks and savings and loans had failed in the preceding five years, Home State was the first large failure for a private insurance fund. Its deposits were insured by the Ohio Deposit Guaranty Fund, which, like the MSSIC, was not a state agency and was not backed by the faith or the credit of the state government. The Ohio agency insured the deposits of 70 savings and loan associations in that state and had assets of $139 million.

The Home State loss was estimated at $150 million (reported March 15, 1985, in The Sun, Baltimore). Within a few days, depositors, who realized the insurance fund could be exhausted by the Home State loss, started a run on the other 70 privately insured institutions. To stop the run, all of the associations were closed by Ohio Gov. Richard F. Celeste on March 15, 1985, pending their qualification for federal insurance.

Deluged with Calls, Letters

As with the "60 Minutes" show, depositors reacted quickly to the Ohio crisis, barraging the Maryland S&L division and the MSSIC with telephone calls and letters. The phone systems at the two agencies went into gridlock, and hot lines had to be installed in both to maintain communications with the public.

Wellford Farmer, senior counsel for the Federal Reserve in Richmond, telephoned both Charles H. Brown Jr. [director of the Division of Savings and Loan Associations in Maryland] and Charles C. Hogg 3d [head of the MSSIC] on March 15, 1985, to tell them to have the MSSIC associations get borrowing resolutions in place with the Federal Reserve.

(Pursuant to the Depository Institution Deregulation and Monetary Control Act of 1980, the Federal Reserve was authorized to provide services to any depository institution, including state savings and loan associations. Immediately after the act was passed, Federal Reserve personnel had meetings with the MSSIC and with state S&L division representatives in an attempt to get borrowing mechanisms in place for the future. Very few MSSIC institutions had such mechanisms in place as of March 15, 1985.)

Mr. Hogg took steps to insure that MSSIC funds were as liquid as possible in the event of a run in Maryland, and on March 25, 1985, he sent a memorandum to the membership regarding the MSSIC's reaction to the Ohio crisis.

At about the time of the Ohio crisis, a meeting had been arranged by Frederick L. Dewberry [secretary of the Department of Licensing and Regulation] for Mr. Brown and Mr. Hogg to-consult with Ejner J. Johnson [staff director and chief assistant to Maryland Gov. Harry R. Hughes]. The purpose of the meeting was to give Mr. Hogg and Mr. …