The High Cost of Incompletely Funding the FSLIC Shortage of Explicit Capital

Abstract

A useful parallel can be drawn between the Alaskan oil spill of 1989 and the flood of red ink spilled in recent years by U.S. thrift institutions (savings and loan associations and savings banks). In each case, initial damage from the spill was severely compounded by delaying and mishandling the clean-up required. For more than a decade, federal officials refused to acknowledge that the thrift ink spill had compromised the integrity of the supporting depositinsurance fund. Instead of promptly shoring up the finances of this fund, officials used accounting smoke and mirrors to cover up the fund's secularly increasing capital shortage. This prolonged refusal to face up to the magnitude of the underfunding imposed enormous costs on society as a whole.