Agreed. This wasn't something that was soley an internet rumor either, and there were people on the internet (yes, thank god for the internet) who had predicted a crash in the summer of 2008. Hell, even my grandfather told me to sell all my mutual fund shares right before summer 2008.
I don't know why you feel like you need to have a temper tantrum here. As you can see, you and I are largely in agreement. We need more regulation, especially in the mortgage banking and investment banking sectors. And I am pretty confident it is on the way. What's more, I am not aware of anyone who disagrees with that line of thinking. So, unless the Democrats try to overreach on this, as they did with healthcare, I expect financial industry reform to have broad bipartisan support. This is going to be a topic that we as a nation are going to need to continue revisiting about every 10-15 years going forward. The idea that this is a one time fix that "should have been gotten right the first time" comes from a misunderstanding of what has occurred here. From a regulatory perspective, the financial industry in the US and in the world has evolved beyond the capacities of the previous regulatory mechanisms, which were last given a substantial updating with FIRREA, a bill that was passed in 1989. It has been too long since these outdated laws were updated, and proposed additions and changes to the regulatory structure are being debated in various congressional committees at the current time. As I posted earlier in the thread, there was an attempt to address the problems with Fannie Mae and Freddie Mac back in 2004-2005, but that effort was blocked by certain Congressional Democrats who valued the anticipated short term political benefits that they hoped to receive from being the benefactors of programs that used government funds to guarantee and lend money to people for mortgages that they really could not afford. I appreciate your enthusiasm about this issue, but what we need is the right amount of regulation in the financial sector. Not too much, and not too little. What we especially do not need is a punitive approach that seeks to use the regulations to punish the financial industry. This approach might seem attractive to certain short-sited politicians whose top priority is winning some cheap, political points in response to populist anger in the aftermath of the financial meltdown last year. It is important that the final reforms are designed so as not to disincentivize the providing of capital to individuals, businesses, state and local governments, and other entities that need financing to survive and thrive. Saddling the financial industry with unnecessarily excessive costs and regulatory burdens will directly result in higher costs of capital, and a reduction in the availability of capital throughout the economy. This could have dire consequences to the long term economic prospects of our country. So it is important that we work through these issues and strike the right balance here. All that being said, the financial crisis was attributable first and foremost to two government interventions that promoted loose lending through an overly loose monetary policy (The Federal Reserve) and overly loose credit underwriting criteria (Fannie Mae and Freddie Mac). It was only belatedly that the issue of insufficient regulations came into play. And "deregulation" was not a material contributing cause to the current financial crisis. Inadequate regulation, yes, deregulation, no.
My opinion > your opinion I have had far more training in this area than you have, you are talking out of your a$$, which isn't surprising given where your head is most of the time.
You have no idea what kind of training or experience I have in this area, so were are you talking out of? We are over 20 posts into this thread, and no one has even attempted to address the fundamental question: How did deregulation substantially contribute to the occurrence of the financial crisis? If the answer is truly as compelling and obvious as you and others seem to believe, then surely someone around here would at least be able to offer some sort of an answer. But it has not happened. Now maybe there is an answer to the question, but the posters on this board are just too dim-witted to be able to present it by themselves. However, while I am certainly not inclined to overestimate the intelligence of the average poster here in the D&D, I do not believe that is the reason why the question has not been answered.
This post is addressed to the individual posting as clutchfans.net user "MojoMan" The fit you have pitched in this thread after you allowed it to get derailed has been amusing. Much like how your "FOX News ratings" thread was quickly brought off message with a few strategic posts, much to your chagrin. I extend you my gratitude. Speaking of gratitude....why don't you extend some to the BBS and donate, in order to gain access to the search function? Is there a reason for this miserly behavior?
I don't have to know your background, I know mine and based on your surface level opinion, you don't have any training or experience in this field. Until you say what your training and experience are, we will all just continue to believe that you are talking out of your a$$. No, I answered it already, posted articles and studies as background information and evidence, then summed it up, but since you are apparently unable to comprehend what I have already written, I will say it once again... Deregulation, starting in 1980 and continuing through 2004, is what fueled the current crisis by slowly but surely breaking down the protections that Glass-Steagall installed after the Great Depression. Countless economists and other financial experts agree with the above statement, as detailed in the articles I posted, so if you are more qualified than they to comment on the causes of this crisis, please post your credentials. Just because you ignore the answer doesn't mean the question hasn't been answered. If the question has not been answered to your satisfaction, it is due to your lack of ability to comprehend the written word, your lack of willingness to read anything describing how the crisis happened, and your lack of training and experience in this area. You are correct that the reason the question has not been answered to your satisfaction has nothing to do with the relative intelligence of the people doing the answering, it has everything to do with the wits of the person who asked the question in the first place.
Yeah, he's a washed up, unemployed Rice graduate who at one time worked in financial services. If MM truly is TJ, then my training beats his hands down with regards to international finance, international economics, and business in general.
I always loved this article: http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html
In your opinion, how did the repeal of this Glass Steagall materially exacerbate the financial crisis? You said in your previous post that Glass Steagall was at fault in some way. But how was it at fault? If someone were to ask you how man-made CO2 emissions are harmful to the Earth, you would probably respond by explaining how CO2 is a greenhouse gas that causes global warming, or climate change, or whatever. So, let's use your suggestion that the repeal of Glass Steagall contributed materially to the financial crisis as the basis for a similar question: How did the repeal of Glass Steagall materially contribute to the current financial crisis? Because I do not believe that it did. Feel free to offer a substantive answer, if you have one. You might think that the answer "because I said so" is a very persuasive answer. But really, it is not.
Again, asked and answered. Read some information about how the repeal of GS caused the crisis. The article is the first link that I provided and goes into excruciating detail beginning with actions taken by the Carter administration and goes through actions taken by Bush the lesser. If you are simply unwilling to read the information that I have provided, you are a lazy troll who isn't interested in debate and discussion. When you have read the information that I provided to you YESTERDAY, I will be happy to debate the contents. Until then, I will continue to treat you as the troll that your actions portray you.
It is a good article and definitely portrays one of the reasons for the housing collapse, but the housing collapse was not the entirety of the recent crisis.
The Repulsion of Glass-Steagal was done with both sides of the isle holding hands. Phil Gramm (Repub) and Bob Rubin (Democ) were the architects and subsequently joined UBS and Citi on their boards. When Citigroup was first formed it was actually illegal, until the laws later passed. I think Glass-Steagal is a red herring of sorts. Most of the significant lack of risk management, risk taking and leverage were in the stand-alone investment banks and shadow banking sector as opposed to the conventional sector. Merrill/Goldman/Bear/Lehman were perfectly legal before Glass Steagal was repealed. A deregulatory act that probably has more merit is when in 2004, they allowed institutions of over 5 billion (too big to fail!) to increase leverage ratios beyond 12 to 1 to compete internationally. The only caveat was that they had to have Insurance! (Which AIG cheerfully provided with the CDS market). This allowed leverage to shoot through the roof which ultimately lead to the failure of these institutions.
Agreed. Both sides got their hands dirty, both sides took huge amounts of money from financial industry lobbyists, and neither side did the right thing for the average American. The piece that I posted includes the 2004 act as the "last straw" of sorts that allowed the perfect storm to occur in the financial sector. It wasn't any one act, but the cumulative rollback of protections that had been in place since the Great Depression that caused the Great Recession.
Now that is what I am talking about! Great answer. Repped. Your first two paragraphs regarding Glass Steagall are exactly right. The repeal of Glass Steagall was not the enabler of the risky behaviors that the investment banks engaged in. Also, Merrill Lynch and Bear Stearns were not taken over by Bank of America and Chase until after the financial meltdown was well underway. These two takeovers were conducted at the request of the US Treasury department in the interest of forestalling our entire economy falling of into the economic abyss. If Glass Steagall had been in effect at that time, the US Treasury would probably not have had the legal flexibility to orchestrate those transactions, and who knows where our economy might be as a result. There is currently a lot of talk in Washington about reimposing the restrictions between banks and investment banks contained in Glass Steagall. Honestly, I do not believe that it would do too much harm to reimpose those restrictions. But it will not do too much good either. The reimposition of Glass Steagall is a window-dressing proposal designed to resonate with the masses of people who do not understand how the financial system works. These masses have heard from the MSM that the repeal of Glass Steagall somehow contributed to this mess in a big way, but they have never actually heard how its repeal actually contributed to this debacle. Nor can they explain it when asked, as we have seen in this thread. Because it is not really one of the culprits here. As we saw during the takeover of Merrill Lynch by Bank of America, and Bear Stearns by JP Morgan Chase, the government was ready and willing to bail out investment banks that were not formally insured or guaranteed by the government when their failure posed a macro level threat to the economy. Reimposing Glass Stegall will not change that one iota. But perhaps it will allow certain politicians to posture as if they are making a bold move on this issue, when in fact they are not. Your observation about increasing the leverage ratios was outstanding. Thank you for being the first person to offer a substantive and insightful post in this thread, other than myself. It is disappointing that we actually made it over 30 posts into this thread before someone other then the original poster was able to make a material contribution to this discussion. I would be interested to see an analysis of how much of an effect the additional leverage allowance had on the scope and scale of the financial crisis. Upon first thought, it sounds like this would probably be a reasonably complex and difficult analysis to perform, and the conclusions might be a bit technical. While the total impact of increasing the leverage ratios for the big banks may not have been a huge contributing cause, it is difficult to imagine how this change might have resulted in any diminishment of the scope and scale of the crisis. So this was an excellent and very relevant observation.
You still haven't made a material contribution to this discussion. You literally refused to read the evidence I presented and then acted as if I hadn't posted it in the first place. You're a troll. If you want to contribute to this discussion, read the articles I posted and respond to them or you will forever be known in this forum as my b!tch.
Its hard to pin blame on any one entity, group or idealism. As republicans gave free reign to institutions, democrats launched and fueled initiatives that pulled the secondary mortgage market (Fannie/Freddie) through the beginnings of Special Affordable mandates by HUD ( > 60% median income or predominantly sub-prime)...though Bush kept these going. If two things were to blame to me it would be leverage and the moral hazard issue that comes with all insurance. When anything is 'insured' or when the risk is 'socalized amongst many' each individual acts in a more aggressive manner. If a dinner tab is being split evenly 20 ways and you only felt like having a salad and everyone else is ordering lobster, you will then try to get the most for yourself. This drives up risk and costs for all. The belief that MBS and CDO's were insured allowed them to take 'no doc', Ninja (no income/job/assets) loans etc because they felt like they were covered and insured so they acted recklessly. Insureres felt it was based on the stable housing market and on AAA instruments. Ratings agencies saw MBS as insured and based on assets (homes) which reinforced their ratings. Everyone was using everyone else's justification for their own risk taking. This lead to the deterioration of lending standards and the leverage on these instruments shooting through the roof. Bear was leveraged 40 to 1 when it failed, and Lehman was levered 33 to 1. In layman's terms that means if their assets (MBS for example) fell 2.5% in market value ( when marked to market ) then the entire firm is insolvent in Bear's case. Thats a thin line to be walking on.
Exactly. What we need is to put in place regulations that will protect the system from this kind of risk taking and keep firms from being "too big to fail." Any firm that is so big that its collapse endangers the entire system needs to be pruned.
Once again, great observations. I would rep you again, if I could. However, as an item of note, none of the factors discussed in the post quoted above were attributable to deregulation.
Timeline of deregulation and the repeal of GS, along with the "modernization" of financial regulations, which directly caused the current crisis. 1980 The Depository Institutions Deregulation and Monetary Control Act of 1980 , signed into law by President Jimmy Carter , was the first major reform of the U.S. banking system since the Great Depression. While touted as a boon to consumers, the law was actually a gold mine for bankers. Among other requirements and banker “gifts” the 1980 Act's provisions: Lowered the mandatory reserve requirements banks keep in non-interest bearing accounts at U.S. Federal Reserve banks. Established a five-member committee, the Depository Institutions Deregulation Committee , to phase out federal interest rate ceilings on deposit accounts over a six-year period. Increased Federal Deposit Insurance Corp . (FDIC) coverage from $40,000 to $100,000. Allowed depository institutions, including savings and loans and other thrift institutions, access to the Federal Reserve Discount Window for credit advances. And pre-empted state usury laws that limited the rates lenders could charge on residential mortgage loans. 1982 In a burst of deregulatory bravado in 1982, Treasury Secretary Regan ushered through the Garn-St. Germain Depository Institutions Act . Key provisions of the Act ultimately coalesced with Treasury Secretary Regan's protection of the lucrative “ brokered deposits ” business, in which Merrill was a major player, and paved the way for the future collapse of the savings and loan industry. Some of the provisions in that 1982 Act would later be blamed for thousands of bank failures. The provisions permitted the following: Allowed savings and loans to make commercial, corporate, business or agricultural loans of up to 10% of their assets. Authorized a capital assistance program - the “Net Worth Certificate Program” - for dangerously undercapitalized banks, under which the Federal Savings and Loan Insurance Corp . (FSLIC) and the FDIC would purchase capital instruments called “Net Worth Certificates” from savings institutions with net worth/asset ratios of less than 3.0%, and would theoretically later redeem the certificates as these shaky banks regained financial health. And, most frighteningly, raised the allowable ceiling on direct investments by savings institutions in nonresidential real estate from 20% to 40% of assets. 1987 The ultimate prize was to be the undoing of the Glass-Steagall Act of 1933 . Glass-Steagall, officially known as the Banking Act of 1933, mandated the separation of banks according to the types of business they conducted. Investment banks, whose securities related activities resulted in relatively large risks, were to be separate from commercial banks, whose depositors needed greater protection. The Act created deposit insurance and the government wasn't about to allow taxpayer-backed insurance of commercial bank deposits to be exposed to securities related risks. It was a prudent and sensible separation. Bankers tried for years to undermine and overturn Glass-Steagall, but it took time. In 1987, Alan Greenspan replaced Paul A. Volcker - the stalwart Federal Reserve Board chairman, national inflation-fighting hero and active proponent of Glass-Steagall (and now economic confidant of President-elect Obama). 1988 A year later - in 1988 - two very quiet revolutions sprouted that would ultimately hand bankers twin throttles to rain terror on us all. That year, the Basel Accord established international risk-based capital requirements for deposit-taking commercial banks. In a byproduct of the calculations of what constituted mortgage-related risk (by nature of the loans' long maturities and illiquidity) lenders should be expected to set aside substantial reserves; however, marketable securities that could theoretically be sold easily would not require significant reserves. To obviate the need for such reserves, and to free up the money for more-productive pursuits, banks made a wholesale shift from originating and holding mortgages to packaging them and holding mortgage assets in a now-securitized form. Not inconsequentially, this would lead to a disconnect between asset-quality considerations and asset-liquidity considerations. Meanwhile, over at the U.S. Commodities Futures Trading Commission (CFTC), the appointment of free-market disciple Wendy Gramm, wife of U.S. Sen. Phil Gramm , R-Tex., as chairperson, would result in her successful 1989 and 1993 exemption of swaps and derivatives from all regulation. These actions would not be inconsequential in the aforementioned reign of terror that was still to come. 1993 In 1993, with her agenda accomplished, Wendy Gramm resigned from her CFTC post to take a seat on the Enron Corp. board as a member of its audit committee. We all know what happened there. Enron's fraud and implosion became the poster child for deregulation run amok and ultimately helped spawn Sarbanes-Oxley legislation, which has its own issues . The constant flow of money to lobbyists and into legislators' campaign coffers was paying off for the banking interests. The Fed, under Chairman Greenspan, was methodically deconstructing the foundation of Glass-Steagall. The final breaching of the wall occurred in 1998, when Citibank was bought by Travelers. The deal married Citibank, a commercial bank, with Travelers' Solomon, Smith Barney investment bank and the Travelers insurance business. There was only one problem: The deal was clearly illegal in light of Glass-Steagall and the Bank Holding Company Act of 1956 . However, a legal loophole in the 1956 BHC Act gave the new Citicorp a five-year window to change the landscape, or the deal would have to be unwound. If aggressively flouting existing laws to pursue a personal agenda isn't a perfect example of bankers' hubris and greed, then maybe I've just got it all wrong. Phil Gramm - the fire breathing free-marketer, Texas senator, and chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs - rode to the rescue, propelled by a sea of more than $300 million in lobbying and campaign contributions. In 1999, in the ultimate proof that money is power, U.S. President Bill Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act , at once doing away with Glass-Steagall and the 1956 BHC Act, and crowning Citigroup Inc. ( C ) as the new “King of the Hill.” 2004 On April 28, 2004, in a fitting and perhaps flagrant final act of eviscerating prudent regulation, the SEC ruled that investment banks may essentially determine their own net capital. The insanity of that allowance is only surpassed by the fact that the SEC allowed the change because it was simultaneously demanding greater scrutiny of the books and records of what were the holding companies of investment banks and all their affiliates. The tragedy is that the SEC never used its new powers to examine the banks. The idea was that Consolidated Supervised Entities (CSEs) could use internal models to determine risk and compliance with net capital requirements. In reality, what the investment banks did was essentially re-cast hybrid capital instruments, subordinated debt, deferred tax returns and securities with no ready market into “healthy” capital assets against which they reduced reserve requirements for net capital calculations and increased their leverage to as much as 30:1. [Click here to read "How Wall Street Manufactures Financial Services Products," an insider's look at how greed on Wall Street results in unscrupulous investment instruments] When the meltdown came the leverage and concentration of bad assets quickly resulted in the shotgun marriage of insolvent Bear Stearns Cos. to JP Morgan Chase & Co. ( JPM ), the bankruptcy of Lehman Brothers Holding ( LEHMQ ), the sale of Merrill Lynch to Bank of America Corp . ( BAC ), and the rushed acceptance of applications by Goldman and Morgan Stanley ( MS ) to convert to Bank Holding Companies so they could feed at the taxpayer bailout trough and feast on the Fed's new Smörgåsbord of liquidity handouts. There are no more CSEs (the SEC announced an end to that program in September). The old investment bank model is dead. The motivation for bankers to undermine and inhibit prudent regulation is inherent in banker compensation incentives. The September 1993 Journal of Financial Research sums up the problem on compensation by concluding: “Firm characteristics that influence managerial compensation include leverage (as a measure of observable risk) market-to-book ratio of assets, size and shareholder return. Evidence suggests that Bank Holding Companies may be exploiting the deposit insurance mechanism because leverage is a significant factor in our results for incentive-based components of compensation. Our results strongly support the view that fundamental shifts in business activities of Bank Holding Companies have influenced their compensation strategies”.
