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Edited by James R. Barth, Chen Lin and Clas Wihlborg
Chapter 6: Lessons Learned from Recent Financial Crises
Benton E. Gup 6.1 FORESIGHT FROM THE 1980S S&L CRISIS William Seidman, former Chairman of both the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC), wrote a chapter in History of the Eighties: Lessons for the Future that was published by the FDIC in 1997.1 More than 1600 banks failed during the 1980–1993 period that is associated with the savings and loan (S&L) crisis. He said that: ‘The critical catalyst causing the institutional disruption around the world can be almost uniformly described by three words: real estate loans.’ Most of the failures were attributed to construction and development (C&D) loans associated with commercial real estate.2 Seidman went on to say that: ‘the biggest danger for financial institutions is lending based on excessive optimism generated about certain kinds of lending that are the fashion of the day’. Ten years after History of the Eighties was published, the United States experienced the worst financial and economic crisis since the Great Depression of the 1930s. Seidman’s insights about ‘real estate loans’ and ‘excessive optimism’ were on target in explaining the economic and financial crisis that began in the United States in 2007. The US crisis also affected other countries. This chapter asks what lessons we can learn from the crises in the US and other countries about real estate lending. To answer that question, the chapter is divided into three main sections. Section 6.2 examines four key factors that contributed to the recent crisis in the...
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