Borrow Short, Lend Long, Baby

You remember the S&L crisis, I suppose? That's when the Reagan White House deregulated the savings and loan industry – with the blessing of all the Democrats on Capitol Hill – and allowed the not-so-little thrift industry to finance just about anything that moved. (And they did.) But the Garn-St Germain bill was preceded by a crisis caused by "lending long and borrowing short" which means thrifts were financing 30-year fixed rate loans with short-term deposits, and holding these assets on their books (as opposed to selling them to Fannie Mae and Freddie Mac which at the time weren't quite MBS Gods). When rates moved the wrong way in the 1970s and early 1980s the S&L industry was toast. And what do we have now, in the modern era? Try this on for size, courtesy of our sister publication, American Banker: Some large banks sold fewer mortgages to Fannie Mae and Freddie Mac during the third quarter, using them to manage interest rate risk and to slow the contraction of loans. M&T Bank Corp., SunTrust Banks, and Fifth Third Bancorp said they saw new value in keeping quality home loans on the books given the anemic lending environment and falling rates on securities.