Essays on the economic effects of the Financial Institutions Reform, Recovery and Enforcement Act on savings and loans, with emphasis on intangible capital, capital structure, and asset volatility

An empirical analysis of a sample of publicly-traded thrifts demonstrates that there is little evidence that the supervisory goodwill "asset" conferred on thrifts in the late-1970s and 1980s possessed meaningful economic value in 1989 when, pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), Congress compelled thrifts to meat higher capital requirements. Specifically, FIRREA mandated broad changes in the regulatory environment for thrifts, one of which related to the regulatory treatment of intangible capital: While thrifts were previously allowed to count intangible capital toward their capital requirements, the passage of FIRREA required thrifts to exclude certain intangible capital immediately and phase out the remainder on an accelerated basis. Because this regulatory change constrained the quantity of deposits a thrift could accept (holding tangible capital constant), it provides a natural mechanism to examine whether and to what extent the Modigliani-Miller invariance proposition ("MM") applies to the thrift industry. In addition, this research addresses a long and contentious multi-billion dispute between the U.S. Government and over 120 thrifts that sued the U.S. for breach of contract. I find, in Chapter I, that the change in treatment of intangible capital, though it lowered thrifts' leverage, did not impose large costs on the thrifts in question. But one cannot reject the hypothesis that the costs imposed exceed the cost of replacing intangible capital with fresh money from external capital markets - the upper bound implied by MM.; In Chapter II, I show that thrifts engaged in sizable substitution from relatively uncorrelated asset returns to relatively highly correlated assets. In spite of this, because of their precarious financial position (that is, being out of the money) meant that thrifts did not redirect a substantial amount of wealth from the government insurer to equity holders. The data show that the book value of liabilities (principally deposits) exceeded the economic value of assets - that is, thrifts were "under water." On average, thrifts had 95 cents worth of assets for each dollar of deposits and other liabilities.