Martin Mayer uses a couple of the worst cases to illustrate the nature of the problem of savings and loan industry after the Garn-St. Germain Act significantly reduced the public regulation of savings and loan associations (S&L's) while maintaining public insurance of their depositors' accounts.

In the early 1980's the amount of capital S&L were required to contribute was dropped from 6% of assets to 3%. Also the form of the capital contribution was changed from money-only to allow capital contributions in the form of property.

A former Air India pilot named Ranbir Sahni had about $500,000 of inner-city property that he got appraisals on that set its value at $3 million. This was enough for him to takeover the operation of an S&L in California which he renamed American Diversified Savings Bank. His nominal $3 million of capital contribution would allow American Diversified to own $100 million in assets. To acquire to funds for that level of assets he would have to get deposits. In the past S&L's had to gain deposits by competing in the financial market through advertising, attractive interest rates, convenient services and so forth. But the situation had changed as a result of the emergence of account brokering.

Deposits in federally insured S&L's were insured up to a maximum of $100,000. This maximum had just been recently increased to $100,000. There were some depositors that had total funds in excess of this maximum. Such depositors would have to split their deposits among several S&L's. Also some depositors were conscious that higher interest rates might be availbable elsewhere in the country compared to their neighborhood S&L. In New York brokers began to offer there services in placing deposits in the S&L's paying the highest interest rates. Depositors did not have to worry about the trustworthiness of the S&L's their funds got deposited in because the federal deposit insurance covered not only the principal but also the interest. If some S&L offered a higher interest rate than it could pay the depositors would still be guaranteed the interest would be paid by the federal deposit insurance.

Ranbir Sahni opened a office of American Diversified Savings on the ninth floor of a building where there was another S&L with offices on the ground floor. This American Diversified office did not have tellers and did not advertise yet got a flood of new deposits. The new deposits came from brokered accounts. All Sahni had to do to get these deposits was to offer an interest rate slightly higher than was being offered by any other S&L in the nation.

The funds that came to American Diversified were mostly invested in two subsidiaries, American Diversified Capital and American Diversified Investment. These two subsidiaries created tax-sheltered partnerships which were involved in such things as windmill farms and solar cell installations. Sahni also invested in shopping centers and condominium housing developments. He also had American Diversified or its subsidiaries buy about $300 million of "junk bonds."

The size of the holdings of American Diversified went far beyond the amount that could be justified by his supposed capital contribution of $3 million.

The accounts of American Diversified were showing it as one of the most profitable in the country. This profit was largely an illusion. When American Diversified made a loan it would get a large loan origination fee. These fees were paid out of the loan amount so the profit came not from the success of the projects the loan financed but from the financing itself. For example, suppose American Diversified loaned $1 million for a project. A loan fee of $50,000 would be charged and deducted from the loan amount. Even it the project failed completely and $950,000 was lost American Diversified counted the $50,000 as profit. With this sort of logic the only thing that was important for American Diversified was the amount of money it loaned.

Before it was closed down American Diversified had acquired $1.1 billion in deposits, of which $800 million was lost and had to covered by the American taxpayers.

The widespread collapse of the savings and loans associations was a serious shock to the American financial system but it did deter the growth of the economy. In particular, it did not produce a recession.