The recession which started in the late 1980's effected the economy at all of its levels. Five of New Hampshire's eight largest banks failed costing taxpayers $1 million. By 1991, over 13 banks had been taken over in Massachusetts. Robert Dawley, my father, was president of a bank that was taken over by the government two months after he resigned.
Jeff Dawley
The banking crises was a great accelerator of the recession. One of the main reasons it started was when they passed the Garn-St. Germain Act, which in retrospect gave the powers of commercial banking to the Savings & Loan institutions on a nationwide basis. This allowed the S&L's to lend money in areas where they had no experience and they got themselves in a lot of trouble.
The tax reform act of 1986 eliminated a lot of the benefits, tax benefits used by many small real estate investors throughout the country. This produced a lack of incentive to invest in real estate for income producing purposes. This caused a flee of investors' money into these properties thus causing a decline in real estate values. That coupled with the banking crisis, accelerated the recession to a point where some people considered it a depression.
I was president of the bank for 13 years. It was those two principle reasons which led us down the wrong road into economic disaster.
People were borrowing money so the interest rates dropped. On a typical saving account at 5.5%, it drove it down to about 2.5 or 3%. This had a tremendous effect on the elderly people because many of them were living on the interest from their investments like certificates of deposit. Many of them found their income cut in half and in some cases so much they had less money to spend.
There were houses for sale, and too many houses for sale because the banks were taking them over and forcing individuals who had lost their jobs out into the street. They would foreclose on these properties and put them on the market so they sold them for very low prices, thus driving the real estate market down even further. If there's a glut of houses, they don't need builders, they don't need electricians, plumbers, or any other contractors. You don't need appliances and furnishing for the house, and therefore you had a ripple effect and everything just came tumbling down.
I lost my job because we had a few loans that were going bad and when the loan went bad we were to set up reserves for the potential losses...The losses got to the point where we didn't have enough reserves to set up for them. Therefore the government declared us basically insolvent and when the government declares you insolvent, they take over the bank.
There are other ways in which they could have handled the situation that would have been a lot less expensive for the taxpayers. However, they chose to take over the banks and sell them for pennies on the dollar to other banks. Had the government come in and worked with the local institutions, they could have lent money to get them through this tough period. Many small communities will suffer in the long run because there are fewer, or in the case of Plymouth, there are no local banks, just branch offices left.
Robert Dawley
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