Deregulation, banks, and the 2007-8 meltdown

[isobars]

[jp5]

[swchandler]

The final bill resolving the differences in Congress between the Republicans and Democrats was passed by the Senate 90–8, and by the House 362–57. Seems to me that President Clinton had little choice, since the bill was veto proof.

[jp5]

[swchandler]

The thing that I find a bit unsettling is the fact that the bill was the product of three Republicans, Senator Gramm, Rep. Jim Leach and Rep. Thomas J. Bliley, Jr. It was ultimately a bad idea created and promoted by Republicans. Makes you wonder whether any of the ideas created by modern Republicans can be viewed great legislation or leadership that has been proven over the test of time. The only one that immediately comes to mind is President Eisenhower's leadership and vision for a creating a national highway system.

[mac]

JP--thanks for staying on topic. Both parties are much too close to Wall Street, and only Bernie and Elizabeth are truly independent. Wellstone was fantastic. Clinton's selection of Rubin, and listening to Greenspan really sealed the deal on the repeal of Glass-Steagall. But it pays attention to look into the matter at some depth. I'm not convinced that a smart bill that modernized regulation of the financial sector was a bad idea--but that's not what passed. There are a number of different lessons here:

--neither Congressmen and women, nor their staff, read the bill closely enough to realize how many risky and unethical things this cleared the way for. There is a case that the Supreme Court has just accepted that could clear the way for insider trading even more. The three bills that Gramm had a hand in made it almost impossible to prosecute bank fraud and securities rating fraud as a criminal matter. That's the main reason no bankers have gone to jail.

--deregulation does make sense in some situations--but you absolutely must pay attention to details, and understand whether there are sufficient market forces to actually give you a more efficient system. The current crop of Republicans reflexively support deregulation, as a matter of ideology, and are too busy raising money to run for reelection to either pay attention to legislative details, or see where it has and hasn't worked.

--Democrats got religion, a little bit, largely because of the melt-down and Elizabeth Warren, and passed a modest reform for big banks (Dodd-Frank). The Republicans and the conservative Supreme Court have done everything they possibly could to undermine that legislation, and it is pretty clear that another, hopefully smaller, bubble has developed in stock and house prices.

--if/when there is another meltdown, the sitting president will be blamed rather than the policies that made it possible. If there is to be a meltdown in 2 years, it probably would be better to have a Republican at the helm.

[jp5]

If is a fascinating topic Mac and I hope Wall Street and our elected government have learned a lesson from it. If there is another meltdown I fear it will be much worse than 2008-2009 event. Having just watched the HBO movie "Too Big to Fail" it seems we narrowly avoided a full scale depression with this last one.

[mac]

Try the SHO show, Billionaire. I've read about three books and a dozen or more articles on the 2007-8 meltdown--I lost a big chunk of change, and I wanted to figure out why. But I see no signs that Wall Street has learned anything, and there are multiple signs of fraud and insider trading since 2008.

What amazes me is that ENRON failed to cool the ardor of any of the anti-regulation crew. Santayana said it best--if you fail to study history, you are doomed to repeat it. True in your personal life as well. Ask Iso.

[techno900]

Being a bit of a neophyte regarding the meltdown, I wonder............

How much of the problem was a result of a "lack of regulations" as compared to.......

How much of the problem was a result of sidestepping existing regulations as
well as a lack of enforcement?

If no regulations/laws were broken, then why are the banks paying the huge fines.

To the neophyte, it seems that the problem was a lack of enforcement, not a lack of regulations.

[jp5]

Avoidance of regulations or lack thereof?

In '04-'05 I worked for the Investment Accounting department of one of the major mortgage lenders. The company would make home loans to it's customers then bundle them into marketable securities and sell them on the open market. Much of these loans were subprime. BofA, Deutche and Wells Fargo were some of the investors in these securities. We're talking about a lot of money here.

Part of our job was to reconcile the portfolio which means that if a property is sold and the loan is paid off or the property goes into default this affects the balance of the security.

4 years go by and lots of subprime loans are made, as teaser rates ended and the real rate kicked in a lot of people could no longer afford their monthly payment so they walked away. Property values dropped causing people to be upside down on their loans and so they walked away. These events began to happen on a large scale and the securities began to lose value quickly. The investment banks took out insurance against loss on these securities with AIG to protect themselves. AIG could not cover the loss and it soon became a cataclysmic chain of events resulting in some of these investment banks going under almost overnight.

Much of the cause of the financial crisis was because of these subprime loans. People bought what they couldn't afford yet the banks told them they could.