The Flawed System

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• Originally, savings and loan companies (savings banks) were a special kind of bank with restrictions on withdrawal and loans.
  • Only mortgage (home) loans.
• Regulation was done by states, relatively weak.
• Accounts are insured; if the bank fails, the depositor doesn't lose.
• Corporate structure and bankruptcy means managers are rewarded richly for big profit, but don't lose much from failure -- incentive to take risky bets.
• Insurance means no supervision from depositors, who aren't at risk.
• Regulation was relaxed, allowing the managers to follow their instincts.

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