When the problem became apparent, Congress acted to permit thrifts to engage in new lending activities with the hope that they would diversify and become more profitable.

Lower capital requirements and permissive accounting standards also allowed weaker thrifts to continue operating even though under the old rules or US GAAP they would have been insolvent.

Failures continued to mount through 1988 and by February 1989, congressional legislation – the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 – was brought to establish the Resolution Trust Corporation to wind down all remaining insolvent thrifts.

Thrift institutions originated in the 19th century with the goal of pooling resources among members to make loans with which to purchase residential properties.

[4] Conflict of interest concerns also existed in the privately-owned home loan banks, leading to poor working relationships between federal employee examiners and the private supervisors.

In response to these outflows, Congress passed the Depository Institutions Deregulation and Monetary Control Act of 1980 which phased out Regulation Q interest rate caps and expanded thrift lending powers to include construction loans.

The high and volatile interest rates in the early 1980s meant that even thrifts with diversified residential mortgage portfolios, constrained by existing price caps, became unable to meet their obligations.

[22] These issues were compounded by the relative inexperience of thrift staff in evaluating risks of commercial lending and equity investments.

[25] However, Gray's position reversed after the fraud-induced failure of Texas-based Empire Savings and Loan: he spent the next two years increasing examination resources and tightening financial regulations.

[18] FHLBB also chose to adopt regulatory accounting principles which allowed institutions to defer reporting of losses and treat more instruments as capital.

Since this substituted for the normal cash injections from FSLIC due to the insurer's limited financial resources, this utilised such goodwill as essentially an accounting fiction.

Such lenient accounting rules, however, also had the effect of preventing the FHLBB from intervening against thinly-capitalised institutions whose balance sheets were supported by intangibles.

Along with political demands not to alarm the public by closing institutions, these constraints forced FHLBB into a policy of "hiding the poor condition of [thrifts] behind accounting gimmicks".

[53] Losses reported by thrifts through to 1985 were mostly deferred due to the lax accounting rules in place and covered by positive real estate values in the southwestern United States.

That March, Home State Savings Bank of Cincinnati, Ohio collapsed after a depositor run triggered by news that it had lost $540 million in a securities scam.

The governor, Harry R. Hughes, capped deposit withdrawals; by June, the Maryland legislature ordered all state-insured thrifts either to become FSLIC members or liquidate in six months.

Thrifts in those states, highly exposed to local commercial real estate prices through their heavy aggressive lending activities, quickly became insolvent.

[58] Pressure compounded on banks due to follow-on real estate effects and an 1980s farm crisisagricultural recession in Great Plains states.

Compounding this, the size of the thrift industry had expanded considerably, meaning that the money in that reserve fund was spread thin.

The thrift industry group, supported by House Speaker Jim Wright, insisted on less than $7.5 billion and compulsory regulatory forbearance.

The resulting Competitive Equality Banking Act was signed on August 11, 1987, giving FSLIC $10.8 billion through sale of bonds via an off-balance sheet government entity.

The effect of assistance also engendered moral hazard, where owners could accrue profits from risky loans but place losses at the feet of taxpayers.

[53] Faced with so man institutions, FHLBB, under its new chairman M. Danny Wall, attempted to sell off hundreds of insolvent thrifts in receivership.

These sales could only be accomplished with substantial government support and although it allowed FSLIC to dispose of almost 200 thrifts by the end of 1988, some 250 insolvent institutions with $81 billion in assets remained.

[78] The plan included three major elements: a temporary agency would be created with 50 billion dollars in funding to liquidate the insolvent thrift institutions with that money being raised via another off-balance sheet vehicle paid for by higher insurance premia on the thrift industry; the FHLBB and FSLIC would be dissolved, with supervisory powers devolving to the incipient Office of Thrift Supervision within the Treasury Department and the FDIC; regulations would be tightened as well, with regulatory capital no longer including intangibles such as goodwill and doubled to six percent within two years.

[79] On August 9, 1989, the proposals brought by Bush were passed essentially unchanged as the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 into law.

[82] The closure of FSLIC and the creation of RTC only to sell or liquidate insolvent institutions also forced thrift owners to take fewer risks since they knew that assistance would no longer be forthcoming.

Notable institutions included: Especially publicized was the insolvency of Lincoln Savings and Loan Association, led by influential Republican donor and political figure Charles Keating.

Eventually, the matter was dropped by the new FHLBB chairman, Danny Wall, who later resigned in December 1989 for failure to take action against Lincoln, which failed that year at a cost of $2.6 billion.

Moreover, the federal commercial bank regulators were more proactive in their approaches to limit growth and enforce capital requirements;[93] the FDIC's financial solvency meant, unlike FSLIC, a policy of regulatory forbearance was not forced on it by circumstance.