Final answer:
The failure of many savings and loan institutions in the 1980s and 1990s was largely due to deregulation that allowed for riskier investments and an economic downturn affecting the real estate market. This led to a significant number of bankruptcies and a costly federal bailout. Lack of oversight and rampant industry fraud further contributed to the crisis.
Step-by-step explanation:
Many savings and loan institutions (S&Ls) failed in the 1980s and 1990s primarily due to deregulation and subsequent bad investments in high-risk ventures, exacerbated by a downturn in the real estate market. During the early 1980s, interest rates were at record highs and the Reagan administration eased restrictions, enabling S&Ls to make riskier loans. This deregulation was a double-edged sword, allowing for more aggressive investment strategies that ultimately led to an extensive number of S&L failures when those investments soured.
As S&Ls were part of the banking system, the federal government had to intervene with a costly bailout, spending over $150 billion to protect depositors' insured accounts. This event, known as the Savings and Loan Bailout, highlighted the risks involved with deregulation and its implications for financial stability and federal economic policies. Furthermore, a decline in public trust arose from revelations of widespread fraud and embezzlement within the industry.
Another contributing factor was the lack of sufficient oversight, as the federal government later recognized the need for greater transparency and swifter action from banking regulators. This admission was seen in the laws passed in the 1990s requiring regulator findings to be made open and public. However, these measures proved to be too little too late for the crisis-stricken S&Ls of the previous decade.