D is correct. S&Ls learned to manage their exposure to interest rate risk (as well as credit risk) from their mortgage portfolios by issuing mortgage-backed securities. These products, first issued in 1969 and backed by government agencies, did not eliminate the problem of borrowing short and lending long. However, they did provide liquidity for S&L mortgage portfolios.

A is incorrect. The mortgage design at the time was a fixed-rate mortgage. For example, an S&L would originate a 30-year fixed rate mortgage and retain it in its investment portfolio while borrowing funds on a short-term basis (i.e., a classic example of lending long and borrowing short). In the banking industry's vocabulary, S&Ls were simply "riding the yield curve" and earning a positive spread between their lending and borrowing rates. However, rising inflation in the late 1970s prompted the Fed to implement a restrictive monetary policy, which led to a significant increase in short-term interest rates. In this case, S&L incurred a loss on fixed-rate mortgages they issued when the short-term interest rate increased. But a general conclusion cannot be drawn on whether banks will be at a disadvantage issuing mortgages at either rate from this case.

B is incorrect. In the banking industry's vocabulary, S&Ls were simply "riding the yield curve" and earning a positive spread between their lending and borrowing rates. Keeping a negative interest rate spread between their lending and borrowing rates will cause a loss for the bank.

C is incorrect. This is not a lesson learned for this case. There was a $160 billion bailout of the S&Ls using taxpayer funds, not funds from other institutions. However, there is no discussion in the text of whether this type of bailout should be avoided in the future and whether or not such bailouts are [text cut off].