For many, the memory of it is still fresh. Less widely known is the savings and loan crisis of the 1980s and 1990s, a financial catastrophe that led to the collapse of over 1,000 S&L institutions. Yet Ben Miller, CEO of Fundrise, America’s largest direct-to-investor alternative asset manager, sees the S&L crisis as “the big bang of finance.”

The S&L crisis marked the point at which the modern banking landscape began to take its current shape, Miller said. And like the Big Bang, its ripple effects are still measurable today.

In a recent wide-ranging podcast interview, Miller delved into the S&L crisis, including the regulatory missteps made before and in response to the crisis, as well as the lessons it holds for today's financial markets. 

“I think there's three epochs of finance in American history. There's pre-[Great] Depression, there's the Depression to the 1980s, and there's the 1980s to now, and the S&L crisis is the turning point,” said Miller. 

“It's the origin. It birthed modern real estate, and I think it birthed modern banking.”

What Is a Savings and Loan?

To understand the S&L crisis, it’s key to understand its history as a centrepiece of American finance in the mid-20th century. On Fundrise’s “Onward podcast, Miller and co-host Cardiff Garcia dove deep into the history of the concept. 

They explained that S&Ls, also known as thrifts, were created as financial institutions primarily focused on taking deposits and providing home mortgages. Unlike banks, they were not diversified and did not offer other types of loans. They were mutual organizations, meaning they were owned by the depositors, not shareholders. This made them inherently conservative and focused on serving local communities. 

Fans of actor Jimmy Stewart will recognize the concept of an S&L from his character’s Bailey Bros. Building & Loan in It’s a Wonderful Life.

“The important thing to note is that they were very simple,” said Garcia. “You put your money into this thing like a deposit. It was lent out to somebody to finance a home and then it would get paid back.” 

While a simple idea, the S&L was a revolutionary step in finance in that it enabled average Americans to realize the goal of home ownership.

The Anatomy of a Crisis

However, S&Ls were ripe for crisis, particularly in an environment of rising interest rates and regulatory missteps. 

Regulation Q, established by Congress in 1933 to prohibit banks from paying interest on checking accounts, was amended in 1966 to cap the interest rates that S&Ls could pay to their depositors. It still allowed a high enough rate to be a preferable option to traditional banks. This was designed to protect S&Ls and make them more attractive for savers. 

Miller explained that S&Ls were able to give depositors a savings rate that was 50 basis points, or about 0.5%, higher than those given by banks. “So, essentially you're going to put your money with the S&Ls because you're going to get paid more to do that," he said. 

But this change to Regulation Q, initially intended to protect S&Ls, became a double-edged sword. It capped the interest rates S&Ls could offer depositors, so when inflation and interest rates soared in the 1970s, S&Ls found themselves in a precarious position. They were receiving lower interest on the long-term mortgages they had issued, and they were no longer an attractive option for depositors because the rates they could offer were capped. 

This interest rate mismatch meant the S&Ls were taking in fewer deposits, while the value of their previously issued mortgages, locked in at lower rates, plummeted. 

Moreover, S&Ls began to engage in riskier investments, including speculative real estate ventures, to compensate for their dwindling profits. As these risky investments began to fail, public confidence in S&Ls waned, leading to runs on deposits and setting the stage for the crisis that would unfold in the 1980s. 

While S&Ls still exist, the crisis toppled them from their standing as the primary source of home loans in America, leaving a gap in the real estate market out of which would emerge first larger, diversified lenders and now startup fintech companies like Fundrise. 

Fundrise and the Evolution of Real Estate Investment 

Miller described the S&L crisis as the "birth of the modern banking sector," with the emergence of national banks and diversified lending portfolios. It also created the modern real estate market landscape. 

"Out of this period is a rebirth, this phoenix, and everything we take for granted as normal in real estate.”

The crisis led to a vacuum in the real estate financing sector. Traditional sources of funding were either insolvent or too cautious to lend, paving the way for the rise of real estate private equity. These firms stepped in to provide much-needed capital, often targeting distressed assets that could be acquired at a discount. The private equity model allowed for more flexible and strategic investment, often involving the renovation and repositioning of assets to generate higher returns.

More importantly for Miller and Fundrise, the crisis led to the emergence of public real estate investment trusts. Before the crisis, real estate investment was largely the domain of wealthy individuals and institutional investors. The emergence of public REITs helped democratize access to real estate investment by allowing individuals to buy shares in large real estate portfolios, much like buying stocks. This opened up new avenues for investors to participate in the real estate market.

With Fundrise, Miller initially sought to build on the REIT model by combining it with fintech software to improve accessibility. The company has since branched into using its technology for other investments, including private credit. Miller believes regulatory mistakes facilitated and exacerbated the S&L crisis and other financial crises, and this is a reason to pursue a more direct-access model of finance facilitated by fintech. 

“It's the government backstop that's the problem, and 10 years from now when people forget about how bank deregulation is a problem and we have another blowup, which has pretty much always happened in the history of finance, you might see that technology has made intermediation of finance better than using an old fashioned bank.”