Not So Wonderful for Taxpayers

by Ellen Brown

In early May, BlackRock quietly froze redemptions in several of its private-credit funds, limiting withdrawals in vehicles that had been marketed as offering easy liquidity.

The move was legally valid, but investors felt that the contractual fine print had been weaponized against them. It was the most visible stress fracture to date in a $3 trillion shadow-banking market that has grown almost entirely outside federal oversight.

The financial press treated it as an isolated liquidity issue, but it is the same structural weakness that brought down the Savings and Loan industry – only scaled up, securitized, and deeply embedded inside today’s financial system.

The S&L collapse of the late 1980s established the template that has governed every major crisis since: deregulate, speculate, collapse, bail out, consolidate, repeat. That bailout cost taxpayers an estimated $124 billion to $160 billion, much of it still carried on the federal debt today.

The public was told the industry would repay the cost over forty years, but it never did. The bill was simply pushed into the future, and that future is now.

The BlackRock freeze is the latest chapter in this never-ending bailout saga. The same regulatory forbearance that enabled junk-bond speculation in the 1980s has allowed today’s shadow-banking giants to grow without meaningful oversight.

And when the bets turn sour, the risks will again migrate toward the public balance sheet. To understand why the system keeps breaking in the same way, we need to return to the moment when the old community-based banking model was dismantled and replaced with a crisis-driven, bailout-dependent regime.

The S&L bailout normalized the idea that the public would absorb the losses while private actors captured the gains. It set in motion a forty-year transformation of American banking that has continued through the 2008 derivatives crisis to the collapse of Silicon Valley Bank to the current private equity crisis to the quadrillion dollar derivatives time bomb.

To understand how this transformation evolved, we need to return to the moment when the old community-based banking model was dismantled and replaced with a crisis-driven, bailout-dependent regime.

The World George Bailey Built and How It Was Destroyed

For most of the 20th century, America’s savings-and-loan industry operated like the Bailey Building & Loan in It’s a Wonderful Life. Federally chartered thrifts took in local deposits and made long-term home mortgages.

Ceilings on deposit interest rates kept things stable, while the Federal Savings and Loan Insurance Corporation (FSLIC) backstopped depositors. It was a form of banking that was boring, local, and safe. Thrifts financed the postwar housing boom that created the American middle class.

That system began to crack in the late 1970s, when doubledigit consumer price inflation driven by the 1973 OPEC oil embargo prompted Federal Reserve Chairman Paul Volcker to aggressively raise interest rates.

By 1981, the prime interest rate had reached 20%. Thrifts were stuck with low-yield, longterm mortgages generating lower interest than they would have to pay to keep depositors from fleeing to higher-yielding money-market funds.

Where to find the money to fill this gap? Congress’ response was the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Garn-St. Germain Depository Institutions Act of 1982. These laws demolished the interest- rate caps and dramatically broadened the investment powers of the thrifts, allowing them to chase risky but lucrative deals in commercial real estate, junk bonds, and other speculative ventures.

The grift was detailed by Michael Waldman in his 1990 book Who Robbed America? A Citizen’s Guide to the Savings and Loan Scandal. Waldman documents how the new rules turned sleepy community institutions into high-stakes casinos almost overnight. S&Ls could now pay whatever rates they wanted to attract “brokered” deposits – “hot money” from anywhere.

They could invest in anything from shopping centers to Michael Milken’s junk-bond machine at Drexel Burnham Lambert. Regulatory forbearance and political pressure from a handful of senators called the Keating Five fanned the flames. By the mid-1980s, roughly one-third of the nation’s 3,800 thrifts were in serious trouble.

Waldman viewed the S&L crisis not as a market failure but as a deliberate heist enabled by deregulation, greed, and political capture. Hundreds of thrifts were looted, billions of dollars vanished into junk bonds, and real-estate speculation and outright fraud ran rampant, leaving ordinary depositors and taxpayers holding the bag. In his introduction to Waldman’s book, Ralph Nader called it “an unprecedented frenzy of speculation and business criminality.”

Through his decades of advocacy, Nader repeatedly exposed the pattern – financial deregulation that turns community institutions into casinos, bailouts that socialize losses while privatizing gains, and the rise of a derivatives-fueled shadow banking system that dwarfs the real economy.

Charles Keating and the junk-bond leveraged buyout boom

Charles Keating embodied the new “greed is good” mentality. In 1984, he used Drexel junk bonds – high-interest, high-risk debt securities issued by the investment firm Drexel Burnham Lambert – to acquire Lincoln Savings & Loan of Irvine, California.

Within years, he had leveraged $51 million into a $454 million junk-bond portfolio. Much of this was Drexel paper – junk bonds issued by his associates at Drexel – creating a circular, self-sustaining market for risky investments.

This expansion was made possible by federal deregulation, which allowed S&Ls to gamble with federally insured deposits. Keating took Lincoln’s assets and pivoted away from safe mortgages, ballooning the balance sheet with speculative real estate and risky development loans. When these high-stakes bets failed, Lincoln’s collapse alone cost taxpayers more than $2 billion.

Keating ultimately served prison time for securities fraud, but many others followed his playbook. Blackstone Group, founded in 1985, jumped into distressed thrifts early. That same year, Larry Fink incubated BlackRock inside Blackstone to manage fixed-income and mortgage-backed securities.

Dozens of thrifts loaded up on the high-yield junk bonds that Michael Milken’s machine at Drexel churned out. These bonds were the fuel for leveraged buyouts (LBOs) – hostile takeovers by Wall Street banks and the new private-equity shops – firms that specialize in buying companies to restructure them.

They would acquire a target company using massive amounts of borrowed money, then place the debt used to buy the company on the targeted company’s own books, forcing it to pay for its own takeover.

Waldman’s book catalogs the human cost: small businesses crushed by predatory lending, retirees wiped out when thrifts sold them worthless debt disguised as “safe” investments, and entire communities hollowed out when real-estate bubbles popped.

The bailout that protected the wrong people

When the music stopped, the government moved fast. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 created the Resolution Trust Corporation (RTC) to deal with the insolvent thrifts. The RTC ultimately resolved 747 of them, holding more than $400 billion in assets.

Depositors were made whole through FSLIC/FDIC insurance – about $123.8 billion in taxpayer funds by the end of the decade, plus another $29 billion borne by the thrift industry itself. The ultimate net cost to taxpayers has been estimated at around $124 to 160 billion.

To calm public anger, Congress and the regulators insisted that the bailout would not be a permanent burden. The banking industry, they said, would repay the cost over forty years through assessments and fees. The problem was that there was no enforcement mechanism – no dedicated trust fund, no transparent accounting, no requirement that the money actually be tracked or reported. As the years passed, the promise faded.

The RTC was dissolved. The accounting was folded into general government operations. The public’s memory dimmed. And the banking industry, far from repaying the cost, emerged from the crisis larger, more concentrated, and more politically powerful than before.

The S&L crisis was the turning point when the United States shifted from a system of community-based finance to one dominated by megabanks, speculative capital, and a regulatory apparatus that treats crises as opportunities for consolidation.

The “forty-year repayment” plan was less a financial plan than a political talking point — a way to defuse outrage and move the crisis off the front pages and far into the future. But that future is now, and the bill has come due.

The forty year payoff that never happened

The RTC was supposed to sell off the seized assets and recoup as much as possible to offset the FSLIC/FDIC insurance payouts. Instead, it dumped distressed real estate, loans, and junk-bond portfolios at firesale prices – often pennies on the dollar in the weakest markets – to quickly get the needed cash. Private investors, including early private-equity players like Blackstone, scooped up the bargains.

As markets eventually recovered, those buyers turned the assets into windfalls, while taxpayers ate the permanent loss on the difference between market value and what was actually recovered. Official numbers show the RTC ultimately recovered roughly 85 percent of the “appraised value” of the assets it handled.

That sounds respectable, but it is misleading. When compared to the original “book value” – what those assets were worth before the crisis – the recovery was closer to 50 percent. The buyers were sophisticated Wall Street operators who could wait out the real estate cycle.

The government socialized the losses to protect depositors (a worthy goal), but privatized the upside to the very firms that had helped fuel the speculation, so that the losses fell on the taxpayers rather than on the perpetrators of the fraud.

The S&Ls themselves were liquidated, while their executives and owners often walked away with “golden parachutes” or light penalties. But the real winners were the Wall Street firms that had supplied the junk bonds, advised on the deals, and now bought the distressed assets cheaply.

The balloon payments are due now

Lawmakers assured the public that the bailout would not become a permanent burden. The cost, they said, would be repaid “over time,” largely by the financial industry itself.

To make that promise credible, Congress created two special financing vehicles – the Financing Corporation (FICO) in 1987 and the Resolution Funding Corporation (REFCorp) in 1989 – which issued thirty and fortyyear bonds to cover the losses.

The thrift industry would pay the interest, and the long maturities would give regulators time to recover assets and rebuild the insurance fund. In practice, the repayment never happened. Banks did pay the interest on the FICO bonds through mandatory assessments on deposits, in fees that continued until 2019.

But the fees were imposed on all banks, not just the wrongdoers. So it was a hidden tax on the people, since to balance their books banks had to reduce the interest paid to depositors – and the principal on those bonds was always scheduled to be paid by the Treasury.

The REFCorp bonds – the largest portion of the bailout financing – were zero coupon instruments, meaning no interest was paid annually. Instead, the entire principal plus the imputed interest would come due at maturity.

Those maturities fall between 2026 and 2030. As the Peter G. Peterson Foundation notes, “payments for the S&L crisis will cease in 2030, when all REFCorp bonds will have matured.”

The thrift industry never repaid the bailout. The cost was simply pushed forty years into the future, buried in the federal debt, and forgotten. Now, as the final balloon payments come due, the Treasury – already overextended – will almost certainly roll the remaining obligations into long term government debt, where they will accrue interest indefinitely. The bill for the S&L crisis was not eliminated. It was deferred. And the public is paying it now.

The pattern repeats — 2008, 2023 and now

The S&L crisis established a template that has repeated ever since. In 2008, deregulation, securitization, speculative excess, and outright fraud produced a housing market collapse that dwarfed the S&L disaster.

The public was told that a bailout was necessary to prevent economic catastrophe. The assets of failed institutions were sold at steep discounts to larger, better connected firms. The result was further consolidation and even greater concentration of financial power.

In 2023, the failures of Silicon Valley Bank, Signature Bank, and First Republic were symptoms of the same structural fragility: interstate mismatches, concentrated depositor bases, and a regulatory rollback that exempted midsized banks from enhanced oversight.

When these banks failed, the response followed the familiar pattern. Regulators guaranteed deposits, arranged emergency acquisitions, and assured the public that the system was sound. JPMorgan Chase – already the largest bank in the country – absorbed First Republic with government assistance.

The private equity crisis and the shadow banking reckoning

The predatory leveraged buyout culture born in the Savings & Loan era has metastasized into a private equity industry that now dictates the stability of the U.S. financial system. Today, firms like Blackstone and BlackRock represent the logical endpoint of a decades-long regulatory retreat: a system designed to socialize massive losses while privatizing the gains for a handful of billionaire fund managers.

Congress and federal regulators are currently sleepwalking into a slow-motion banking crisis. At its center is a collapsing commercial real estate (CRE) market, where over one trillion dollars in debt is set to mature by the end of 2027. These office towers and retail centers, hollowed out by a shifting economy and high interest rates, no longer support the massive debt loads placed on them by private equity landlords.

The danger is not just to the buildings, but to the regional and midsize banks that hold the bulk of these loans. These banks are the primary lenders to our local communities, and their balance sheets are being poisoned by the aggressive, high-leverage gambles of firms like Blackstone, which has already begun defaulting on high profile office bonds.

The derivatives casino – the S&L playbook on steroids

The same mechanism that fueled the S&L collapse is now supercharged in the derivatives market. Unlike traditional hedging, modern derivatives allow institutions to bet on the price of oil, stocks, mortgages, or interest rates without owning the underlying asset. These synthetic bets can be created in unlimited volume.

The result is a global derivatives book whose notional value is now estimated by some analysts to exceed a quadrillion dollars – many times larger than the real economy. Collateral posted to back these bets can be rehypothecated – pledged, repledged, and repledged – multiplying leverage exponentially.

One market shock, margin call, or geopolitical upset can cascade through the chain, turning phantom assets into very real losses. This is not hedging in the traditional sense – farmers hedging against bad weather at harvest time. It is speculation layered on speculation, built on the assumption that the public will always be there to absorb the losses.

What we lost and what could have been built

A little-discussed consequence of the S&L collapse is the erosion of community banking. Before the crisis, local lenders played a central role in financing small businesses, affordable housing, and local development.

They knew their communities, understood local conditions, and were accountable to their depositors. The S&L crisis wiped out thousands of these institutions. The survivors were absorbed by larger banks with no local ties.

The result was a decline in relationship based lending and a rise in standardized, algorithm driven credit decisions. Small businesses face greater barriers to credit. Rural and low income communities struggle to attract investment.

Local economies have become more vulnerable to national and global financial trends. There was another path available – a public interest banking model that would have preserved the strengths of the S&Ls while eliminating the vulnerabilities that made them easy targets for speculation and fraud.

The state-owned Bank of North Dakota offers a century long example of how public banking can stabilize a financial system, support community banks, and keep credit flowing during crises.

North Dakota has six times the national average of community banks per capita, largely due to the BND’s partnership loans with community banks, credit unions, and CDFIs, strengthening rather than competing with local lenders.

The BND acts as a “miniFed” for the state’s banks, providing liquidity, loan participations, and support during downturns. At the federal level, postal banking once provided safe, low cost services to millions of Americans. Globally, public infrastructure banks have shown that public lending can be efficient and fiscally responsible.

The forty year reckoning

The S&L crisis was the beginning of a new era in American finance – an era defined by deregulation, moral hazard, and the steady erosion of democratic control over the financial system.

The failures of 2008 and 2023 were the predictable outcomes of a system designed to privatize gains and socialize losses. The question for 2026 is whether we will continue to accept a financial structure that treats the public as a perpetual guarantor of private risk, or whether we will finally build a system that serves the public interest. The forty year window is closing, the bill is still due, and the public deserves an accounting.

Ellen Brown is an attorney, author of 13 books, and founder of the Public Banking Institute. Her website is EllenBrown.com.

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https://capitolhillcitizen.substack.com/p/the-bailout-that-never-ended