Politics and the rescue of insolvent savings and loans before 1989

The results presented in this paper are consistent with those predicted by public choice economists who believe that regulatory agencies represent the interests of their controlling congressional committees. Membership on committees is not random; congressmen seek committee assignments where they can represent the interests of their constituency. Congressmen from states where financial institutions are significant will seek membership on their respective banking committees. Once on those committees, congressmen will seek to protect and promote their own constituency. In the case of the savings and loan industry, insolvent savings and loans received benefits from staying in operation. These savings and loans gained another chance to gamble for resurrection. Being shut-down or placed in a management consignment program did not give this option. The results presented in our paper indicate that participation in one of the rescue programs is not random. Savings and loans in states with political power (representation on the Senate banking committee) are less likely to be resolved.A previous version of this paper was presented at the Southern Economic Association Meetings, November 18–21 1990, New Orleans, Louisiana. The authors thank James R. Barth, Henry N. Butler, Gordon Tullock, Lawrence J. White, and an anonymous referee, for helpful comments. Financial support from the Summer Research Program of the College of Business, Boise State University, is gratefully acknowledged. We accept responsibility for any remaining errors.