Abstract Building and loan associations (B&Ls) in Newark, New Jersey collectively suffered a set of severe balance sheet shocks to their mortgage lending businesses during the Great Depression. Resolution was postponed as regulators were unwilling to take large-scale action, and as laws were revised to allow for indefinite withdrawal restrictions. Many associations were frozen for nearly a decade, suffering from illiquidity but reluctant to raise cash by selling assets at a loss. In the medium run, a market-based resolution mechanism developed in the form of a secondary market for B&L equity share liabilities. Shareholders barred from withdrawal incurred large losses on this market. At the same time, B&Ls used the market to avoid realizing some losses by exchanging foreclosed real estate for their second-hand share liabilities. More formal resolution ultimately took place from 1938 to 1943, first consisting heavily of closures, and then of reorganizations in 1942 and 1943. Reorganizations were spurred by a large scale federal intervention arranging for liquidity injection and liability insurance, and by higher real estate prices during the run up to World War II. * pschaefer@example.org, Federal Reserve Board of Governors. The views presented are solely those of the author and do not necessarily represent those of the Federal Reserve Board or its staff. Introduction Building and loan associations (B&Ls) were the dominant institutional residential real estate lenders of the interwar period. This paper studies how one group of particularly troubled B&Ls, in Newark, New Jersey, responded to a set of shocks during the Great Depression, including damaged balance sheets, outdated institutional structures, and ultimately the loss of public confidence. The focus on B&Ls in the mid-Atlantic region is deliberate, as B&Ls were unusually numerous prior to the Depression in this region, with roughly 500 based in Newark alone, and the 1930s recovery of these institutions was remarkably prolonged compared to the national pattern (see Ewalt (1962) and Snowden (2001 Snowden ( , 2003 ). These resolution strategies were made necessary by tragically poor credit quality and fragile contractual structures. Foreclosed real estate (all in New Jersey, by law) peaked at 56 percent of the Newark B&L assets in 1938, while northern New Jersey real estate prices suffered particularly large declines between 1930 and 1940. Nevertheless, New Jersey state regulators had neither the resources nor the desire to exercise anything but a fairly light hand throughout the 1930s. There is little evidence that the state ever considered large scale capital or liquidity injections, bad asset purchases, or some other form of systematic 1 resolution. Indeed, no Newark B&L was considered systemically important. Until the strong federal intervention in the very late 1930s, Newark B&Ls in many senses exemplified the populist ideal of financial firms left to recover on their own, without state directed resolution or bail-outs. However, legal changes did short circuit some actions by B&L liability holders. Introduction New Jersey legislators and jurists shielded B&Ls from forced closure via liquidity problems, through the revision of state law and legal interpretations to allow B&Ls to more or less indefinitely restrict withdrawals. Introduction Unsatisfied demands for withdrawals were a major headache for Newark B&Ls during the 1930s. These institutions' core liabilities were equity shares that involved commitments to invest additional funds over several years as a form of systemized thrift. Though this funding source ostensibly reduced maturity mismatch, the Depression prompted widespread moves by Newark's shareholders to access their savings by converting their shares into more liquid and safe assets. Many associations simply "froze," as managers were persistently unwilling to pay withdrawals by liquidating their real estate in a depressed market. Correspondingly, associations were unable to attract what would have been highly dubious new investments. Introduction Their illiquidity shackled them even as it protected their solvency, at least according to book value. Newark B&Ls lost public confidence as delayed withdrawals stretching into the late 1930s and early 1940s. Introduction The frozen nature of some Depression B&Ls may be partly attributable to shortcomings in their underlying contractual framework, which emphasized mutuality but made no clear provision for resolution in the case of protracted disagreement. In particular, it appears that the liquidity of share investments had widely varying worth across different members. State law usually allowed majority rule, but lawsuits regarding reorganization and asset disposition nevertheless caused two or three year delays in some prominent cases, even though minority bloc shareholders rarely won those suits. As a result, the apparent reluctance of part-time, unpaid managers to realize losses may reflect an underlying paralysis brought on by de facto unanimous rule. Introduction Such was the despair of Newark B&L shareholders that some resorted to selling their shares for 25-50 cents on the dollar of book value via a fairly well-organized secondary market. The endogenous development of this market is notable inasmuch as it was a market-based resolution mechanism, although ultimately an imperfect substitute for more formal resolutory actions. With data on these secondary market prices in 1939 and 1940 for about two-thirds of Newark's active B&Ls, I find the median trading price of a share to be about 40 percent of book value. Introduction At these prices, when shareholders sold shares on the secondary market, they realized losses that associations were reluctant to realize. Buyers of discounted shares subsequently used those shares to purchase real estate from B&Ls at the nominal (much higher) par value of the shares. To a B&L, exchanging real estate for discounted shares at par value was equivalent to selling real estate for cash at a lower price, except that the cash sale resulted in losses for all shareholders, whereas the exchange for second-hand shares resulted in a loss only to the shareholder who had sold shares on the open market, and that loss occurred off book. The ability to effectively transfer some losses to the exiting shareholders appears to have been important to clearing the real estate market, as B&Ls were not generally otherwise willing to transact their real estate at prices necessary to clear the market. Broadly speaking, the major structural events came in two waves. The first wave, roughly [1938] [1939] [1940] , consisted most heavily of voluntary liquidations, bulk sales (more similar to liquidations than mergers), and state seizures. The associations exiting were largely the ones with the weakest balance sheets; they tended to have larger holdings of foreclosed real estate, to be less profitable, and to have relatively heavier discounts of their shares on the secondary market. These were hopeless cases that had delayed reckoning as long as they could. Introduction Reorganizations were the most important development during the second wave of resolutions primarily in 1942 and 1943. After years of experimentation, Newark B&L managers were aided by Federal Home Loan Bank officials in coalescing around a reorganization strategy, ironed out sometime during 1939 and implemented on a wide scale soon thereafter. Introduction The strategy involved spinning off bad assets (foreclosed real estate, delinquent loans) into separate entities, receiving a liquidity infusion from the Reconstruction Finance Corporation (secured by the bad assets) to satisfy immediate pent-up withdrawals upon reorganization, and qualifying for coverage by the Federal Savings and Loan Insurance Corporation. Federally insured associations formed the core of the post-war savings and loan industry in New Jersey, following the national thrift association pattern but at a lag. This reorganization strategy was able to provide the intangible asset of public confidence that Newark B&Ls had lost during the 1930s. The RFC money was critical to addressing the persistent maturity mismatch, and the war-time economic expansion also contributed to the liquidation. Introduction The next section gives background on the real estate market in the 1930s and the experience of B&Ls, with particular focus on Newark. The paper then proceeds chronologically, focusing first on the secondary share market in Section 3, and then turning to the waves of liquidations and reorganization in Section 4. Section 5 concludes. Background General B&L background Building and loan associations, the predecessors of savings and loan associations, were mutually owned thrift organizations that invested almost wholly in real estate assets. General B&L background 2 Here I focus largely on the industry as it existed in New Jersey. There was a certain amount of diversity in B&L practices across the country, and so readers interested in a more thorough and geographically generalized discussion would find useful the information in Snowden (1997, 2001, 2003) , Bodfish (1931 Bodfish ( , 1935 , Bodfish and Theobald (1938) , Clark and Chase (1925) , and Ewalt (1962 Newark B&Ls assets were heavily concentrated in residential real estate loans, but it should be noted that some also invested in commercial properties in the 1920s, particularly apart-3 Along these lines, Piquet (1930) tabulates the occupations of New Jersey B&L presidents and secretaries, and finds they were most commonly builders, realtors, and insurance brokers, as well as merchants, clerks, and accountants. In this sense, the growth of the B&L industry was a development endogenous to the relative immaturity of institutional mortgage markets in late 1800s and early 1900s. Snowden rejects an alternate hypothesis that the small size of most B&Ls was chosen in order to ease peer monitoring. Historically, during the late 19th century there was the so-called "National" movement of B&Ls consisting of larger and more geographically diverse associations. As Snowden (2003) demonstrates, this movement imploded in a large wave during the 1890s, and in the areas where they were located the growth of B&Ls was retarded into the 1920s. General B&L background 4 Entry was even more free in Maryland, which had no state regulation of B&Ls whatsoever until the 1940s. General B&L background 5 I use data from 1930 in this example because 1930 is the first year in which reserves and unapportioned profits are reported separately from apportioned profits. 5 ment buildings and some small business properties such as store-fronts or parking garages. General B&L background This expansion into non owner occupied lending was criticized, at least in retrospect, but its extent is difficult to quantify as the published balance sheets do not separate out different types of mortgage collateral. 6 The liability structure of Newark B&Ls is probably quite foreign to modern readers. Some states had introduced deposits or other deposit-like liabilities as legal funding mechanisms for B&Ls, but many states, including New Jersey, maintained the traditional equity dominated liability structure shown in Table 1 . The resulting ownership structure was quite diffuse, motivated by mutual ideals. In the same spirit, management usually served part time and were often unpaid. The Northern New Jersey Real Estate Market in the 1930s The nation as a whole experienced a severe housing crisis in the early and mid 1930s. Unemployment reached catastrophic highs and contributed to the delinquency of large numbers of mortgage borrowers. For example, a study of 22 cities by the Department of Commerce found that, as of January 1, 1934, nearly 45 percent of mortgaged, urban, owner-occupied homes were in default. The Northern New Jersey Real Estate Market in the 1930s 7 Unemployment in Newark was still about 16 percent in 1940 according to the census, with another 4 percent of the labor force in emergency relief programs. The Northern New Jersey Real Estate Market in the 1930s Property values plummeted along with prices in general, causing borrowers to lose large amounts of equity. The best available national price index for single family housing declined 24% between 1929 and 1933. 8 Alternatively, the decennial census shows that the median value of an owner-occupied house fell, by 1940, to 61 percent of its 1930 level, though this could reflect compositional changes. Newark's price declines were even more severe, with the 6 Some measure is available in RFC loan files which are careful to characterize the collateral available. For example, at the West End B&L, the largest association in Newark, the majority of owned real estate parcels were traditional 1-4 family residential properties, but by value apartment buildings constituted about two-thirds of the available collateral. From a small sample of RFC loan files, apartment building loans and real estate appear to be more common at the larger associations, while the non-residential properties held by smaller associations were mixed use properties such as a store combined with a dwelling. At the Enterprise B&L which is discussed later in this paper, 15 of 18 real estate parcels were 1-4 family residences, and the other 3 were mixed-use properties. The Northern New Jersey Real Estate Market in the 1930s 7 Via Wheelock (2008) . The definition of default is not clearly articulated but likely it refers to some stage of delinquency. 12 Those profits vested usually at 20 percent per year, so by 5 years there was no penalty for withdrawal. 13 As an interesting historical note, Piquet (1930) states that the 1929 stock market crash led to a small crisis of confidence in New Jersey B&Ls, sparking withdrawals and freezing up some institutions. This episode would be in line with the idea that the stock market crash was important for the uncertainty it created. The Northern New Jersey Real Estate Market in the 1930s 8 repeatedly extended until September 1940, and though the original law and its extensions were challenged many times on constitutional grounds, the law was never struck down. Eventually this was modified to stipulated that, if in each month an association used one-third of its net receipts to pay maturities or add to maturity reserves and another one-third to pay withdrawals, then shareholders were categorically barred from suing that association to seek a withdrawal. The Northern New Jersey Real Estate Market in the 1930s 15 Report titled "Comparison of HOLC activities and the building and loan situation with economic, real estate, and mortgage finance conditions in northern New Jersey," p. Foreclosed real estate was ultimately at the source of these issues. Newark B&Ls entered the Depression with loan loss reserves constituting less than 1 percent of liabilities. Augmenting their loss reserves naturally impacted shareholders' investments: the reserves were first taken from unapportioned profits, then by reclassifying previously apportioned profits (kept on books until shares matured), then from earnings. The Northern New Jersey Real Estate Market in the 1930s 20 Any reclassification of apportioned profits was subject to return to shareholders if reserves ultimately exceeded losses, which contributed to the unwillingness of B&L managers to actually tap the loss reserves by liquidating real estate at a loss. As an example, Table 7 , discussed below, itemizes the loss reserves held by the Enterprise B&L in 1941; 40 percent of the loss reserves had been established by recapture of apportioned profits. The Northern New Jersey Real Estate Market in the 1930s The reclassification of apportioned profits was a serious blow to borrowers as well. In the traditional "pledged share" B&L loan, a borrower accumulated shares just as an investor did; when the shares matured they would be used to extinguish the full principal debts. The Northern New Jersey Real Estate Market in the 1930s Admittedly, the mixing of a share contract on the liability side with a mortgage on the asset side is confusing. One way to think about this is to imagine a fully amortized mortgage in which a bank, rather than using the non-interest portion of the monthly payment to extinguish part of the principal debt, instead invested it in equity shares of the bank. The term of such a loan would not fixed but rather would depend on the profitability of the institution itself; highly profitable institutions would return greater profits, allowing shares to mature faster. The opposite can happen as well, though. When apportioned profits were taken back and new profits were limited if they existed at all, borrowers were forced to make payments for longer periods than they had anticipated. Some frustrated borrowers defaulted or moved their loans to other institutions, further depriving B&Ls of needed income. The Northern New Jersey Real Estate Market in the 1930s By 1937 real estate constituted an incredible 54 percent of Newark B&L assets. It is important to note, though, that real estate was kept on books at the cost of acquisition. In the mid-1930s, while still building loss reserves, most B&Ls would likely have been immediately insolvent if their real estate had been marked to market. Newark B&Ls faced the classic problem of disposing large amounts of foreclosed real estate in a severely depressed market. The Northern New Jersey Real Estate Market in the 1930s Without the discipline of meeting withdrawal demands, modern accounting standards, or an effective regulatory resolution regime, real estate liquidation and loss realization was repeatedly put off. As late as 1940, the President of the Federal Home Loan Bank of New The Northern New Jersey Real Estate Market in the 1930s York described Newark's B&L managers as hoping for a miracle: The Northern New Jersey Real Estate Market in the 1930s In far too many cases, the directorates of financial institutions substantially burdened with foreclosed real estate, rather than facing the facts and marketing their steadily depreciating properties at current values (writing off whatever loss may be necessary in the process) are, unconsciously perhaps, engaging in one of the biggest real estate speculations of all time. For in such cases managements are refusing to sell at current levels solely in the hope that at some future and undeterminable date they will be able to get higher prices." 21 One B&L manager described some colleagues as "apparently waiting for the millennium to come before selling their properties. They have their eyes only on the cost." 22 Of course, in the new millennium, we have our own foreclosed real estate problems. 21 These delays in loss realizations helped lead to the creation of the secondary share market, in which shareholders realized losses that associations as a whole refused to. This market is examined in the next section. Secondary market The secondary market in B&L shares is significant as it allowed shareholders to realize losses that associations were themselves reluctant to realize. This in turn actually created an opportunity for B&Ls to sell their real estate in exchange for shares. B&Ls recorded their real estate assets at book value rather than market value. In that context, selling the real estate for shares was often more attractive than selling it for cash, since sales for shares had higher nominal prices (which mattered to the B&L), but lower effective prices (which mattered to the purchaser). The result was that B&Ls avoided taking some losses on their real estate, as the shareholders selling their shares were realizing those losses. Secondary market To understand these mechanics better, in this section I first detail the market participants and the development of this market, and then turn to an analysis of the secondary market and its impacts. Market Participants By the late 1930s, it became common practice for B&L associations to sell their real estate in exchange for their own share liabilities. 23 Correspondingly, the demand side of the second-hand share market largely consisted of people purchasing shares in order to use them as a means of payment for real estate. Some demand for shares also came from mortgage borrowers who were able to pay some of their outstanding debts with shares in the association from which they had borrowed, but this type of exchange appears to have been clearly secondary in importance to the real estate transactions. 24 The supply side participants were, naturally, those shareholders that wished to liquidate their shares immediately, at a loss. 25 Presumably, these shareholders were restricted from withdrawing their funds, as described in Section 2. 24 Two other sets of actors also operated in this market. Development of the market The earliest hints of the B&L share market start in 1933, when the first advertisements for broker services appeared, such as in Figure 1 . It was not until 1938 that the market appears 23 Real estate sales were reported as "one of the most important factors" for the "increased activity" during 1939 in this share market. Development of the market 24 The Sunday Call describe these transactions as "not nearly as frequent as real estate sales" but nevertheless there was "little doubt that they have been a contributing factor in creating a market for shares of many associations" (9 July 9 1939, part III p. 6). Development of the market 25 For a contemporary description, see, for example, Sunday Call 5 January 1941, part V p. 3. 26 The Sunday Call described speculators as key to maintaining liquidity for some shares with infrequent real estate sales (9 July 1939, part III p. 6). Development of the market to have really matured. In 1938, managers were still uncertain how their shareholders would react to the maturing market, and whether they would have even more difficulty recruiting additional shareholders if such prospective shareholders saw their shares trading for twenty five or fifty cents on the dollar. Development of the market 27 Meanwhile, state regulators and leaders of the B&L movement saw the share market as an opportunity to liquidate the industry's real estate, and so consistently exhorted associations to exchange real estate for shares. These efforts succeeded. Over 1939, trading activity spread to the shares of more and more associations. Development of the market By the end of 1939, most shareholders had become familiar with the market, how it worked, and why it existed. Analysis of the market In January 1939, the median bid quote for the shares of active Newark B&Ls was 39 cents. Such a price would represent a large loss for any shareholder selling at the time. The source of the data is noted in the appendix and the data itself will be analyzed in greater detail below. For now, the median price is noted in order to gauge the scale of losses being realized by shareholders who sold their shares. Analysis of the market By realizing a loss via the secondary share market, a shareholder essentially created a surplus that was available to two parties: the other shareholders of their B&L, and the real estate purchasers. To appreciate the surplus created, imagine for demonstration's sake that a B&L had paid $400 to purchase, on the secondary market, its own shares with book value of $1,000. No B&L did this, but suppose that one did. Analysis of the market 30 Liabilities would have decreased $600 more than assets, leaving a surplus of $600 to be distributed to the other shareholders. Analysis of the market Suppose, for example, that the B&L had a paper loss of $600 on some piece of real estate that had not yet been realized. The B&L could use this transaction to increase loss reserves by that amount, as the loss was essentially covered by the exiting shareholder. The B&L itself therefore would avoid ever formally realizing the loss, something we know they were eager to avoid. Analysis of the market In reality, instead of B&Ls purchasing shares directly from shareholders, the real estate purchasers acted as intermediaries. Both the B&L and the real estate purchaser had some bargaining power, and so in any given sale of real estate sale in exchange for shares, they appear to have split the available surplus. The benefit to the real estate purchaser was via the price: while the nominal prices of the transactions did not go down (and actually appear to have been higher than in conventional sales), the effective prices did decline since shares were cheaply obtained. The benefit to the B&L was that by selling its property at a higher nominal price, it was able to retire more liabilities than it could have with a conventional sale. This is an interesting situation in which both the supply and demand sides to the real estate transactions benefitted by the use of shares; the key is that these benefits originated in the loss taken by the shareholder who sold shares. Analysis of the market As an example, suppose an association was willing to sell a piece of real estate for $1,000 in cash and a $5,200 mortgage, but a second offer was made for $800 in cash and $6,700 in shares. The second offer is attractive to the demand side participant, since the shares were more than likely obtained for half price or less-about $3,350. The second offer is also attractive to the B&L on the supply side, since, with a nominal price of $1,300 more than the first offer, fewer losses would have to be realized by the B&L's remaining shareholders. Analysis of the market The above example is an actual case study discussed at length in at a conference of B&L managers in mid-1938. To this particular B&L, the managers of which were still learning about the share market, neither offer clearly dominated the other, even though the second offer had a much higher nominal price. As the market matured, though, the value of these share transactions became more apparent. The historical record generally supports a pattern in which B&Ls sold their real estate for higher nominal prices when shares were part of the payment. Analysis of the market An even more lopsided example fits the same pattern. A B&L manager described how his association had acquired a property valued at $10,000, expected a loss on the property, and had two offers for its sale. The first was for $8,500 in cash and a mortgage, the second for $6,000 in cash and $5,000 in shares. The second offer actually gave the association the rare opportunity to record a gain on a piece of foreclosed real estate, and still involved a smaller outlay to the purchaser than the conventional offer. 31 As in the preceding examples, payment for real estate typically consisted of some combination of a cash down payment combined with a mortgage or with shares. 31 32 If the shares were part of the transaction, they would be applied to the nominal transaction price at book value, and subsequently cancelled as liabilities. Associations considered both types of offers. 31 Since shares were cheaply obtained and could be used at face value in real estate transac- 32 Some sources from the period note that these transactions were subject to the approval of the state regulator. However, the reality was that every real estate transaction required the approval of the state regulator -with one major caveat. The caveat is that if associations adopted a real estate classification plan which gave each parcel a grade from A to D, they were able to unload the "C"s and "D"s without seeking regulatory approval. It appears that regulatory approval was either easily obtained or that associations made use of this classification scheme, since the market for shares was so widespread. to entice such conventional offers. As a result, the share market was credited for "creating" real estate transactions. 34 Consistent with this interpretation, some observers criticized B&Ls for these sales' negative effect on market prices: 34 Building and loan associations as a whole are being charged with 'dumping' of acquired properties due to their acceptance of shares at par toward purchase price of real estate, when such shares could be purchased at substantial discounts.... 34 It is open to question whether it is really dumping or whether it is not merely finding levels at which business can be done. 35 Other HOLC documents note that the HOLC was at a competitive disadvantage against B&Ls because of the low effective prices via the use of shares. The HOLC was very much in a position to know this, since it had large amounts of its owned foreclosed real estate awaiting liquidation. 35 The key takeaway here is what these sales tell us about the B&L liquidation process. We know that Newark B&Ls were very reluctant to sell their real estate at a loss compared to book value, and yet this quote describes them as gaining competitive advantage by selling for very low prices. This apparent contradiction is resolved by the fact that the nominal prices were not necessarily low, it was only the effective prices that were low, once the cheapness of shares was taken into account. 35 34 As a side note, the discussion highlights the difficulty of defining a singularly meaningful market price of real estate in a depressed market. Given two offers with the same nominal prices, B&Ls valued the offer with shares differently than the offer without shares. Likewise, given the same two offers, the actual cost to the purchaser changed when shares were involved. After all, if a majority or more of a B&L's shareholders were very interested in liquidating the association's real estate, no special share market was really necessary. A simple vote could have been held and the B&L would have entered liquidation. If we can assume that a majority of shareholders did not think near-term liquidation was the best option-driving the minority to sell their shares on the secondary share market-the B&L still didn't have to sell its real estate in exchange for shares. The incentive to participate was based on the higher nominal prices available to it via share sales, and the incentive was apparently quite strong in practice. 35 In some sense, B&Ls' remaining shareholders gained at the expense of the shareholders that sold their shares. While the second-hand share sales were voluntary and presumably Pareto improving, by selling the shares, the shareholders were realizing losses that their B&Ls refused to realize. B&Ls therefore used the share market to push an extra portion of their real estate losses onto the set of shareholders who had sold their shares, rather than distributing those losses equally across all shareholders. This could be interpreted as compensating the rest of the association for the cost of early withdrawals, but this is less compelling considering that withdrawal restrictions were often still in place in 1939 or 1940. In that interpretation, though, the share market would be establishing a price of liquidity, which many years of history have shown can be mispriced during financial crises. 35 Alternatively, B&L managers may have just preferred that their paper losses be realized not by the association but by shareholders on the open market. 35 As a final note, there is some further evidence that the secondary market was, to a degree, a substitute for more formal resolution. After associations exited, trading in their shares reportedly fell, but was not eliminated. Trading was noted as sometimes occurring in the shares both of associations in liquidation and of the various "bad bank" entities that held defaulted mortgages and real estate loans spun off during reorganizations. The short term ability of B&Ls to pay maturities and withdrawals appears to be quite important for share prices. Ideally, this ability would be measured by the size of a B&L's withdrawal list or the expected duration of a withdrawal request, but no such data are extant on a comprehensive basis. The best proxy is the extent of apportioned profits, measured as apportioned profits per share. By 1938, higher levels of apportioned profits characterized associations that were more able to return profits to shareholders and honor maturities and withdrawals, rather than continue building more loss reserves. 37 Recall that apportioned profits are dividends applied to installment shares but not distributed until those shares reach maturity value. Such apportionment was constrained during the mid 1930s as associations were forced to build loss reserves, and some apportionments were also rescinded. 35 Other variables demonstrate pairwise correlation with the share prices, but the predictive ability of apportioned profits tends to dominate that of most other variables. To demonstrate this a bit more formally, Table 3 reports the results of a simple OLS regression of the share price on several characteristics of each B&L. These variables essentially exhaust all available balance sheet information. Liability side characteristics include apportioned profits for share, a dummy indicating if apportioned profits were zero, the extent reliance on pre-paid income shares (a "hot" funding source), the extent of borrowed money, and the extent of reserves. 35 Asset side characteristics include the portions of assets held in each of real estate, arrears, and liquid assets, the log of total assets, and the share of mortgages that are unpledged, a measure of transition away from the old B&L mortgage with pledged shares. Lagged values of some of these liability and asset characteristics, from 1930, are also included. Finally, the year of establishment is included, as are dummy variables for whether the B&L received an RFC loan before 1935, whether it was a member of the FHLB, and whether it operated on the optional or non-serial plans (with the serial plan associations as the excluded group). 38 Summary statistics for these variables are given in Table 2 . 38 The apportioned profits variables dominate the results, as noted above. The magnitude is about a 3 cent change in the share price for a once standard deviation changed in apportioned profits, along with an additional 3 cent drop in the presence of zero apportioned profits. 38 The simple regression of share prices on the two apportioned profits variables itself has an R-squared of 33 percent. When all of the characteristics are included, few beyond the apportioned profits variables have much predictive power. In particular, asset liquidity shows little predictive power in Table 3 , even though this would seem naturally related to the ability to pay withdrawals. However, when the quadratic of the asset liquidity term is included (not shown), a pattern does emerge, in which B&Ls with near zero liquid assets had lower share prices on the order of about 1 to 2 cents, while the relationship fades for moderate and higher levels of liquidity. 38 In terms of asset quality, it is worth noting that large amounts of arrears were associated with lower share prices, although the magnitude is a moderate 1.5 cent change in the share price for a one standard deviation change in arrears over assets. The importance of arrears likely relates to its forecasting ability over future deterioration of the association. B&Ls with large arrears would be required to continue building reserves as the delinquent loans are converted into foreclosed real estate, representing continued strains on an association's balance sheet. 38 The fact that current real estate holdings (as opposed to future holdings as represented by arrears) do not have any conditional statistical relationship with share prices is notable. 38 Foreclosed real estate was fundamentally at the root of B&L problems, and could be correlated with the probability of insolvency which could conceivably affect share prices, but in practice the apportioned profits variables tend to wipe out any independent predictive power of the real estate variable. The result is not dependent on the linearity imposed in Table 3 , as more flexible quadratic and cubic specifications also have little predictive power (not shown). To understand this, consider three B&Ls that experimented with real estate segregation in 1933 (discussed more in the next section regarding reorganization). Each had zero real estate in 1938 and very small amounts of arrears since those assets had been placed in a separate trust account with shareholder receiving certificates of participation in that trust. The real estate segregation by itself did little to solve liquidity issues, as the share prices of these associations were still trading between 37 and 53 cents on the dollar in 1939. 38 This anticipates one of the key features of most of the successful reorganizations, cash loans secured by real estate which were then used to pay withdrawals that had been restricted since 1933. Formal resolution in the late 1930s and early 1940s At the end of 1930, 499 associations were operating in Newark. By the end of 1944, 55 associations were still active in the city; 37 associations avoided any major structural action, and the other 18 associations were all that were left of the 462 that had undergone some major structural event, including liquidation, state action, reorganization, and merger. The marginal effects and standard errors are reported in columns report results using the subset of associations with share prices, first including share prices as an explanatory variable, and second not including it. Formal resolution in the late 1930s and early 1940s The results are generally unsurprising insofar as they indicate that important measures of balance sheet distress predict closures in this period. These results will contrast, though, Second wave of exit: reorganizations In the second wave of structural events at Newark B&Ls, primarily during 1942 and 1943, reorganizations became a much more dominant trend. Of the 201 associations still active at the beginning of 1941, 145 either closed or reorganized during the subsequent two years. Second wave of exit: reorganizations As a result, generally speaking, the choice for these associations was not whether to have a major structural event, but whether that event would be a complete exit or some form of reorganization. Second wave of exit: reorganizations By about 1940, the strategy for reorganization coalesced into a set of procedures with three main features: Second wave of exit: reorganizations 1. An association's assets were split in two, with the good assets placed in a new association and the bad assets placed into an association whose only purpose was liquidation, Second wave of exit: reorganizations i.e. a "bad bank" in modern vernacular. This usually involved some form of consolidation of multiple associations in order to ensure the new association was large enough to be viable. Shareholders would be issued participation certificates in the liquidating corporation and shares in the new association which together would have face value equal to the old shares. The core of the post-war savings and loan industry in Newark belonged to 14 consolidated associations that emerged from this reorganization process. All but 2 were formed by associations that were approved for loans by the RFC. After resisting this outcome for nearly a decade, the core of Newark's thrift industry now offered accounts that were insured by the Federal Savings and Loan Insurance Corporation, were free of the burden of foreclosed real estate, and were relatively large, professionally managed, with permanent offices. In 1950, when the troubles of the 1930s were finally just memories, the 14 reorganized associations held 92 percent of Newark B&L assets. In comparison, the 103 associations that, through reorganizations and asset transfers, were consolidated into these 14 had controlled only 42 percent of Newark B&L assets in 1930. Second wave of exit: reorganizations Asset segregation and liquidity infusions were both critical. Table 7 helps to elucidate this, by showing the reorganization plan of the Enterprise B&L. According to RFC loan files, 42 The FSLIC also insisted on having the ability to be a joint receiver with the state regulator in case of an insured association's failure, and the FHLB insisted on having a law allowing for easier conversion into federal charters. Both of these required legislative fixes, and those actions are actually somewhat remarkable given the extreme resistance to the federal program demonstrated in New Jersey during the 1930s. Second wave of exit: reorganizations 43 These programs were partly done for the sake of the industry itself. Federal officials, however, emphasized their necessity so that the reorganized and insured institutions would not be put at risk by the continued presence of frozen institutions. See the annual reports of the Federal Home Loan Bank Board in 1938-9 (p. 107), 1939-40 (also p. 107), and 1940-41 (p. 120) . "What of these liabilities which are our real headaches, our unpaid maturity list? Second wave of exit: reorganizations 45 Building and Loan Guide and Bulletin, Februrary 1940, p. 15. 46 Authority for asset segregation was always implicitly available, and was made explicit in two pieces of state legislation in the early 1930s, and then in a 1937 reorganization act, and again modified in 1939 and later. The method of segregation used in 1933 was slightly more cumbersome, as these associations were required to set up trust entities, which were liquidated by special trustees under the supervision of the state regulator. Nevertheless the mechanics were essentially identical and it is difficult to believe that the distinction between trust accounts and liquidating corporations can alone explain the long delay in asset segregation. Second wave of exit: reorganizations ... Where do we get the money to pay off the withdrawals and the maturities? Second wave of exit: reorganizations How can we continue as a going concern, simply by the bookkeeping operation of transferring some bad assets from one association to another, or from one account to another in the same association?" 47 Asset segregation was not a panacea, but it did accomplished at least two things. First, it clarified to existing shareholders the extent of their maximum potential exposure to losses on the bad assets. Second, and probably more importantly, it allowed new investors to have their capital invested wholly in good assets. It had been difficult to attract new capital into a B&L that had, say, 50 percent real estate on its books, since that capital's return would be lower than the return on the new mortgage investments it allowed. 47 To conclude this section, it is informative to repeat the type of analysis used in the previous section with a probit framework in which the dependent variable is a dummy for reorganization after 1941. The set of right hand side variables is the same. The results are reported in Table 6 . The estimation reported in the first column includes all associations active at the end of 1941, while the second includes just those that closed or reorganized, setting aside those that survived. Naturally, associations reorganizing had large amounts of real estate, but it is interesting that they had even larger amounts than associations that liquidated during the same time period. One way to think about this is that, by the end of 1941, the associations with large amounts of real estate that had not yet liquidated were clearly looking for some way to avoid that fate. After all, the large majority of associations either closed or reorganized after 1941, so the decision for most was not whether to take some major action but the form of that action. 47 Larger associations were more likely to reorganize. As troubled as some of the larger associations were, their size ensured that they still had enough "good" assets to form the core of a new association. Smaller associations that reorganized tended to do so while merging their good assets with many other associations. Reorganizing associations also had converted almost all of their mortgages away from pledge mortgages into direct reduction mortgages, a sign that they were taking steps to embrace the modern mortgage industry. 47 47 Building and Loan Guide and Bulletin, August 1937, p. 15. 28 Lessons and Conclusions Today, we are again learning over time that mortgage crises can have legacies that live with lenders and the housing market for years after the peak of the crisis. For example, the resolution of representation and warranty issues related to securitization transactions continue to weigh on mortgage lenders today. This is a very different type of unresolved pressure than the pressure affecting Newark B&Ls in the 1930s, but both problems arguably stem from contractual agreements made during boom times that proved difficult to work through during post-crisis macroeconomic environments. B&Ls effectively made representations during the 1920s that no institution would have made with perfect foresight: they promised that shareholders would be able to withdraw their funds virtually on demand, and suggested that mortgage borrowers would be able to repay their loans in 11-12 years with a share installment contract. Similarly, modern mortgage lenders made representations and More to the point of the previous paragraph, in a world without federal share insurance, shareholders would still have not received any of their funds unless the state was prepared to cut a very large check (at a time when finances were quite strained and writing a check for recapitalization had already been rejected) or to immediately liquidate real estate and mortgages. If the latter, the state would have been responsible for dumping an enormous quantity of real estate on a deeply dysfunctional real estate market. If instead the state had slowly liquidated the real estate, while also only slowly paying shareholders, this would have mimicked several aspects of the actual course of history. Lessons and Conclusions Resolution was postponed as B&Ls exploited the gray area between illiquidity and insolvency. After a large balance sheet shock, insolvency was given a temporal dimension, as the persistent reality of lower real estate prices was downplayed. The time horizon of a B&L as a whole did not always reflect the short-term needs of some shareholders to access their savings during the Depression. The secondary share market reflects this most starkly; illiquidity only protected the solvency of those with long time horizons, while those shareholders who sold their shares realized the steep losses others would not. From this perspective, the RFC intervention is notable by finally matching a patient funding source to the real estate assets and by creating a substantial amount of new liquidity for the first time in a decade. Lessons and Conclusions The slow resolution of these institutions relates to a literature, traditionally in the context of commercial banks, regarding depositors' access to funds during downturns (Anari, Kolari, and Mason (2005) , Rockoff (1993) , Kaugman and Seelig (2002) ). Of course, B&L liabilities have not historically been considered part of the core money aggregates, though the inability to access B&L investments would seem to have macroeconomic effects in the same direction. The exchange of real estate for second-hand shares may be difficult to replicate in the commercial banking world, as commercial banks must necessarily pay deposits at par, except when in receivership. Lessons and Conclusions The federal government's role stands out as particularly helpful in resolving Newark B&Ls' issues. In fact, this paper adds a new dimension to the set of federal programs described by Snowden (2001) Not all federal programs had equally lasting impacts. This paper has not discussed much the discount facilities of the Federal Home Loan Bank System or the troubled asset relief available through the Home Owner's Loan Corporation. Not many Newark associations were able to qualify for FHLB membership, and FHLB collateral requirements were stricter than those of the RFC program as those two institutions had very different structures. The Home Owners' Loan Corporation was likely more helpful with its purchases of distressed mortgage loans. However, the HOLC did not purchase the most distressed mortgages possible; rather, it purchased those that were creditworthy given restructuring. Lessons and Conclusions 48 In a previous study I have suggested that the HOLC was in many ways a lenders' program, purchasing mortgages from lenders at generous terms, and I have no reason not to believe that was the case in Newark. Lessons and Conclusions In fact, it is sobering that, even as ambitious, large, and generous as the HOLC was, it was still insufficient to deal with problems on the scale of those at Newark B&Ls. Appendix: Data and textual sources New Jersey B&L balance sheet data were published each year in the Annual Report of the Commissioner of Banking and Insurance. Until 1939, these data record the condition as of the fiscal-year end of each association. Starting in 1939, the reports recorded the condition of each B&L on December 31st of each year. The post-1938 vintage data are preferred whenever possible for the purposes of comparability, even though most balance sheets did not change much over the course of a year as many of these associations were quite frozen. Appendix: Data and textual sources Prices for shares on the secondary share market were published in a weekly Newark newspaper, the Sunday Call, as early as January 1939, and continue to be published until December 1940. Quotes may have been published in 1937 or 1938 as well, but I have not yet been able to view the newspaper in those years. Appendix: Data and textual sources Throughout the text I make references to loans from the Reconstruction Finance Corporation to Newark B&Ls. All of this information is from the Records of the Reconstruction Finance Corporation, Record Group 234, stored at the National Archives in College Park, Maryland. Basic information on the number and size of loans approved to Newark B&Ls was gathered from the "Index to Loans Made to Banks and Railroads," boxes 1-27, which is alphabetically ordered. I also make references to some loan files with more detailed information. The archives have many thousands of boxes of loan files to various types of entities, and so in practice, I have had time to view only a limited number of files. Loan files for the West End and Warranty B&L associations are stored in Box 42 of the "Records of Declined and Cancelled Loans, 1932-1946 " as both loans were eventually cancelled; Warranty ultimately executed a bulk transfer, whereas the West End arranged for a liquidity infusion from a source other than the RFC. Altogether, these are two of the four RFC loans to Newark B&Ls that were cancelled, out of the 59 that were approved. The loan files for the Enterprise, Outlook, and Woodside B&L associations are stored, respectively, in boxes 57, 139, and 193 of the "Paid Loan Case Files, compiled 1932 Files, compiled -1942 ."
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