The system worked extremely well until the 1980s when traditional territories began to erode.

S&Ls were allowed to offer "negotiable orders of withdrawal." So-called "NOW" accounts meant, in effect, that you could have your checking account with an S&L.

In 1982 the interest-rate differential between banks and S&Ls was ended under the Garn-St. Germain Depository Institutions Act -- a law which also allowed S&Ls to make more commercial loans.

Meanwhile, investors became increasingly interested in mutual funds offered through stockbrokers. Money that once would have gone into S&L savings accounts instead flowed into mutual funds through IRAs and Keoghs.

Not wanting to be left behind, banks reasoned that if stockbrokers could compete for deposits, bankers should compete for investors. The result is that today many banks sell shares through brokerage subsidiaries.

Buried in the changes above were a few twists that now haunt us all.

Remember that S&Ls used to make lots of home mortgages? Under the 1982 rules, many S&Ls began to make big commercial loans. Alas, the economics and risks of commercial loans are vastly different than home mortgages for nearby neighborhoods. Historically-conservative S&Ls began making more and more commercial loans to maximize shareholder benefits, one reason many office markets were over-built.

Soon the S&L industry was a mess and federal promises to protect insured borrower deposits would have to be honored -- unless a way could be found to unload troubled S&Ls.

The solution was to re-define financial solvency. Under government rules, something called "supervisory goodwill" was seen an asset, meaning that S&Ls could make loans with less cash on hand than might otherwise be necessary.

In 1989, however, the "Financial Institutions Reform, Recovery and Enforcement Act" changed the rules. "Supervisory goodwill" was no longer an asset. With "fewer" assets, many S&Ls were instantly and unfairly defined into bankruptcy, taken over by government regulators because they did not meet capital standards, and then sold at fire-sale prices. The cost to taxpayers: $165 billion.

But not so fast. The government had allowed the use of "supervisory goodwill" in the first place. By changing the rules the government took solvent S&Ls and made them appear bankrupt -- thus robbing shareholders of the value they had created. In 1996, in the Winstar case, the Supreme Court ruled that shareholders had been wronged and the feds were now obligated to pay up.

"The Government," said the Supreme Court, "had express contractual obligations to permit respondents to use goodwill and capital credits in computing their regulatory capital reserves. When the law as to capital requirements changed, the Government was unable to perform its promises and became liable for breach under ordinary contract principles."

Now we have the Golden State ruling, the first settlement to emerge since the Winstar case. The feds, a court has said, must pay Golden State investors $909 million.

There's another $30 - $35 billion in S&L claims to be settled and undoubtedly you will now hear how such settlements are "unfair." They aren't. The money involved was taken from investors through regulatory chicanery of the worst sort. Given the size and scope of the damages, we're lucky that the tab isn't higher.

With all the changes, greed, and turmoil described here, it's worth noting that many local S&Ls stuck with their traditional roles. You can find such institutions today in virtually every community -- healthy, profitable, and ever-friendly. Many with roots as S&Ls have now become "banks" to qualify for less restrictive regulation, but -- at heart -- they're really community lenders from the S&L mold.

Indeed, if you want an interesting financial experience, check out the small banks and S&Ls in your area. They may not be useful if you need a quick $850 million to erect a steel mill, but for most consumers they work very well.

Question Of The Week

Q We bought a home several years ago and now wish to re-sell. Our neighbor has told us in the past week that the home had been used by drug dealers and that one had been shot in the basement. We did not know this when we bought, must we now tell buyers?

A You have what is known as a "stigmatized" property -- the property is fine in terms of bricks and mortar, but it was also the scene of events which might be distressing to some people.

A number of states, but not all, have enacted rules regarding what is or is not a stigmatized property and what must or must not be disclosed, if anything. These rules vary widely and what is true in one area may be entirely untrue elsewhere. For example, disclosure may be required within a certain timeframe, but not later.

Before going further, check with local police to see if the neighbor's statement is correct. If yes, contact a real estate attorney for specific requirements in your community.

Weekly Resource