The model for the rescue package being drawn up this weekend by Hank Paulson, the Treasury Secretary, is a bailout of the US banking system in the 1980s.

The savings and loans (S&L) crisis amounted to what was the first collapse of American financial institutions since the Great Depression.

It involved the failure of more than 1,000 such associations with total assets in excess of $500 billion.

The cost of clearing up the aftermath eventually spiralled to about $160 billion, nearly $125 billion of which was funded directly by taxpayers.

The bailout compounded the large US budget deficits of the early 1990s and contributed to the 1990-91 recession.

Savings and loans associations had existed in the United States since the 1800s as local community groups offering deposit accounts and home loans.

The savings and loans crisis had its roots in the deregulation of the industry, which until the late 1970s had been tightly controlled, with strict limits on the rates of interest that could be offered to depositors. But high rates of inflation during the 1970s encouraged many depositors in America to shift their funds out of low-interest savings and loans accounts and into the higher-interest accounts then being offered by so-called money-market accounts, which were invested in government and corporate bonds.

This undermined the financial strength of many associations that were also offering customers long-term mortgages at fixed rates of interest.

New laws introduced in 1980 encouraged them to become increasingly cavalier in their approach to lending just as their deposit bases were crumbling.

The new laws allowed savings and loans associations to offer many of the same services as banks without insisting that they operated under the same regulatory framework. It was a disastrous combination.

The crisis rumbled on for years, with hundreds of S&Ls toppling into bankruptcy as they became increasingly overstretched – including the 1988 collapse of Silverado Savings, where Neil Bush, the present President’s brother, was a director.

The crisis led to the failure in 1986 of the Federal Savings and Loan Insurance Corporation, an institution formed during the Great Depression that was charged with providing deposit insurance for S&Ls.

The Government finally sought to draw a line under the crisis in 1989 by forming the Resolution Trust Corporation to help to liquidate “toxic” assets that it inherited from insolvent S&Ls.

This was achieved by the formation of “equity partnerships” between Resolution and private sector companies that would buy a partial interest in a pool of such assets, which it would then help to manage and sell.

A number of other structures were also pioneered by Resolution, which helped to gradually clear up the aftermath of the failure of the associations. Nevertheless, taxpayers were continuing to fund the clean-up of the industry until 1996.

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