Dr. Harold Hunt gave us a quick tour in time, from 1900 to our time, and here is an overview of what we have learned. Not for nothing did he open his presentation with this famous saying (and indeed, one of my favorites): "Those who cannot remember the past are condemned to repeat it".
In the early 1900's, the "Building & Loans" concept arose. Families from the working class without access to banks started making a pool of money, to eventually build a house for its members. These members would buy "shares" from this "cooperative" in a monthly basis in order to build up funds and eventually borrow money from these funds to build their own house. The key for this was trust. The deposit insurance as we know it today didn't exist by that time. So everything was based on the trust they had of its members.
To have a bigger picture, let's remember what had happening in the world: In 1914, an assassination attempt to an Archduke succeeded therefore triggering a diplomatic conflict which ended in what we know as World War I (On the bright side for the commerce, Panama Canal opened around this time too). A war brings nothing good ever, in this case though, unlike in World War II, U.S. played a safe role. U.S. joined the Alliance and brought not only military but more importantly, economic power staying almost at a distance and remained almost unharmed. I say almost not only because of the soldiers that were sent to this war and died in battle, but mostly because of what came after. The human toll was terrible with over 37 million deaths, but for these matters let's focus on the economic aftermath: At the end of the war, the allies spend all they had (and what they did not have) in the war. They were broke, and had a huge debt with U.S. who continued lending them money during the last years of war, despite there was nothing to support these loans (The British empire alone owed around 4.4 billion U.S. dollars which of course could not be payed). Yes, everything is about lending money, making a balloon, without the proper risk information. War ended, U.S. demanded the repayment of the debt and of course, how? If these countries were turned upside down nothing would drop from their pockets. It was almost foolish or rather inhuman to do so (Sorry guys). Here is when it gets as it always gets: The repayments were partially funded by German reparations, and these then were used to support these American loans to Germany. Circular system. Speculation. "Never ending" wealth period. Easy and Risky loans. Sound familiar?
This said, explains better the scenario of 1929: Wallstreet ka-BOOM. Around 20% of all banks went out of business. Guess who stayed almost unharmed? Building and Loans were only affected by 2%. By 1930, 3 to 5 year mortgages phased out and 20 year amortizing loans better known as "savings and lending" stepped in. The fear of not being able to take your money out because the bank lost it all was there, so the deposit insurance made its appearance. This created trust in banks again. Short note: 1933, a smart man with a true conviction that there is something wrong with Jews and therefore they shall be exterminated became chancellor of Germany.
Something was being cooked in the other side of the lake and in 1939 World War II starts. Despite this, during 1940-1950 period there were low inflation and stable interest rates. Financing long term loans with short term deposits worked.
Yet by 1956 U.S. took a direct role in the Vietnam War spending even more human and economic resources, thus increasing inflation by 1960. Short-term interest rates were no longer profitable and on contrary, lenders were loosing money. Now, Savings and Lendings provided about 45% of all single families mortgages. Then in 1966, Regulation Q capped interest rates payed by banks and S&L's to its depositors.
Now, we quickly move to 1970: Money market mutual fund with no interest rate caps arrive to compete and S&L's start loosing again. In 1980, the deposit insurance level was raised from 40k to 100k per account whereas the MMMF's were not protected. As a result: our clever depositors moved back to S&L's and continued not monitoring how the money was managed (let's face it, even today, who monitors how our banks invest the money?). "go-for-broke": win and make money or loose and let deposit insurance take care of the mess. Cool, Uh?
No, not cool. And here is when this gets even less cool: 1981 Economy Recovery Tax Act. What would happen if I tell YOU, random investor, that instead of paying taxes based on your gross income, you can now first take your loss from the building out of your gross income and then pay taxes based on the remainder? Want to invest right? Well yes, Real Estate supply boom is what happened. This tax shelter favored limited partnerships and the investors were massively investing in Real Estate. Guess who appeared again: Risky non-recourse loans were given in the assumption that the oil price would remain always high.
President's Reagan signing the Economy Recovery Tax Act from 1981: "And this represents 750 Billion dollars in tax cuts over the next five years and this is only the beginning..."
Long story short: S&L's were still in trouble. Congress in its infinite stupidity wisdom recognized the damage and then opted to bill the 1986 Reform Act which backtracked the tax shelter... but didn't trace back the damage: Commercial Real Estate market massively overbuilt, a huge amount of risky non-recourse loans turned into bad loans and who says the economy doesn't have timing? The oil priced collapsed too.
By the late of 1980's, more than 1000 Saving and Lending became insolvent due to lender misconduct and fraud. This story goes on but Lehman brothers and the depression of 2008 deserve an individual entry don't ya'll think? (yeah, let's get a bit texan)
Well now, about an interesting Freehold Estate issue. I will talking a bit about the dispute between our Peruvian Cardinal versus the Pontifical Catholic University of Peru (Better known as PUCP). Here is a link in English to have some information about it.
Cardinal Cipriani vs Pontifical Catholic University of Peru
This is already a mediatic dispute and has brought several theories and discussions in my country. In my case I am a bit divided here, but let's start with the technicalities: This is a Fee simple condition subsequent, meaning that this freehold estate is conditioned to the occurrence of a certain event or in this case, of the not occurrence. The land in which the PUCP was built in was once part of the patrimony of José de La Riva-Agüero y Osma, who was an Peruvian historian and a politician and who's last will was to leave this land for the University. Here is when this gets tricky: the board had to be formed by a representative of the catholic archbishop in Perú and the Dean and they would run the University. In the first testament, the board were to stay this way for 20 years; on the newer version of this testament, the board's structure had to remain this way to ensure that this school was always Catholic.
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