PkrBum wrote:There hasn't been an "unregulated" financial market... except for quickly closed loopholes in this country for over 100 years. If you don't think the system is being overloaded... I don't think you're looking at the financial shape of the multiple layers of govt... from straight operating debt to unfunded liabilities.
Finally... commondreams is a soros 501... those dreaded nonprofit political tools. Perhaps you should know who it is that you endorse.
http://www.forbes.com/sites/stevedenning/2011/11/22/5086/
Lest We Forget: Why We Had A Financial CrisisWhen a true genius appears in the world you may know him by this infallible sign, that the dunces are all in confederacy against him.
Jonathan Swift
"
It is clear to anyone who has studied the financial crisis of 2008 that the private sector’s drive for short-term profit was behind it. More than 84 percent of the sub-prime mortgages in 2006 were issued by private lending. These private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
Out of the top 25 subprime lenders in 2006, only one was subject to the usual mortgage laws and regulations. The nonbank underwriters made more than 12 million subprime mortgages with a value of nearly $2 trillion. The lenders who made these were exempt from federal regulations...
"...The story of the 2008 financial crisis
So let’s recap the basic facts: why did we have a financial crisis in 2008? Barry Ritholtz fills us in on the history with an excellent series of articles in the Washington Post:
In 1998, banks got the green light to gamble: The
Glass-Steagall legislation, which separated regular banks and investment banks was
repealed in 1998. This allowed banks, whose deposits were guaranteed by the FDIC, i.e. the government, to engage in highly risky business.
Low interest rates fueled an apparent boom: Following the dot-com bust in 2000, the Federal Reserve dropped rates to 1 percent and kept them there for an extended period. This caused a spiral in anything priced in dollars (i.e., oil, gold) or credit (i.e., housing) or liquidity driven (i.e., stocks).
Asset managers sought new ways to make money: Low rates meant asset managers could no longer get decent yields from municipal bonds or Treasurys. Instead, they turned to
high-yield mortgage-backed securities.
The credit rating agencies gave their blessing: The credit ratings agencies —
Moody’s, S&P and Fitch had placed an AAA rating on these junk securities, claiming they were as safe as U.S. Treasurys.
Fund managers didn’t do their homework: Fund managers relied on the ratings of the credit rating agencies and failed to do adequate
due diligence before buying them and did not understand these instruments or the risk involved.
Derivatives were unregulated: Derivatives had become a uniquely unregulated financial instrument.
They are exempt from all oversight, counter-party disclosure, exchange listing requirements, state insurance supervision and, most important, reserve requirements. This allowed AIG to write $3 trillion in derivatives while reserving precisely zero dollars against future claims.The SEC loosened capital requirements: In 2004, the Securities and Exchange Commission changed the leverage rules for just five Wall Street banks. This exemption replaced the 1977 net capitalization rule’s 12-to-1 leverage limit. This allowed
unlimited leverage for Goldman Sachs [GS], Morgan Stanley, Merrill Lynch (now part of Bank of America [BAC]), Lehman Brothers (now defunct) and Bear Stearns (now part of JPMorganChase–[JPM]).
These banks ramped leverage to 20-, 30-, even 40-to-1. Extreme leverage left little room for error. By 2008, only two of the five banks had survived, and those two did so with the help of the bailout.
The federal government overrode anti-predatory state laws. In 2004, the Office of the Comptroller of the Currency federally preempted state laws regulating mortgage credit and national banks, including anti-predatory lending laws on their books (along with lower defaults and foreclosure rates). Following this change, national lenders sold increasingly risky loan products in those states. Shortly after, their default and foreclosure rates increased markedly.
Compensation schemes encouraged gambling: Wall Street’s compensation system was—and still is—based on short-term performance, all upside and no downside. This creates incentives to take excessive risks. The bonuses are extraordinarily large and they continue–$135 billion in 2010 for the 25 largest institutions and that is after the meltdown.
Wall Street became “creative”: The demand for higher-yielding paper led Wall Street to begin
bundling mortgages. The highest yielding were subprime mortgages.
This market was dominated by non-bank originators exempt from most regulations.Private sector lenders fed the demand: These mortgage originators’ lend-to-sell-to-securitizers model had them holding mortgages for a very short period. This allowed them to
relax underwriting standards, abdicating traditional lending metrics such as income, credit rating, debt-service history and loan-to-value.Financial gadgets milked the market: “Innovative” mortgage products were developed to reach more subprime borrowers. These include
2/28 adjustable-rate mortgages, interest-only loans, piggy-bank mortgages (simultaneous underlying mortgage and home-equity lines) and the notorious negative amortization loans (borrower’s indebtedness goes up each month). These mortgages defaulted in vastly disproportionate numbers to traditional 30-year fixed mortgages.Commercial banks jumped in: To keep up with these newfangled originators, traditional banks jumped into the game. Employees were compensated on the basis loan volume, not quality.
Derivatives exploded uncontrollably: CDOs provided the first “infinite market”;
at height of crash, derivatives accounted for 3 times global economy.The boom and bust went global. Proponents of the Big Lie ignore the worldwide nature of the housing boom and bust. A McKinsey Global Institute report noted “from 2000 through 2007, a remarkable run-up in global home prices occurred.”
Fannie and Freddie jumped in the game late to protect their profits: Nonbank mortgage underwriting exploded from 2001 to 2007, along with the private label securitization market, which eclipsed Fannie and Freddie during the boom.
The vast majority of subprime mortgages — the loans at the heart of the global crisis — were underwritten by unregulated private firms. These were lenders who sold the bulk of their mortgages to Wall Street, not to Fannie or Freddie. Indeed, these firms had no deposits, so they were not under the jurisdiction of the Federal Deposit Insurance Corp or the Office of Thrift Supervision.Fannie Mae and Freddie Mac market share declined. The relative market share of Fannie Mae and Freddie Mac dropped from a high of 57 percent of all new mortgage originations in 2003, down to 37 percent as the bubble was developing in 2005-06. More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. The government-sponsored enterprises were concerned with the loss of market share to these private lenders — Fannie and Freddie were chasing profits, not trying to meet low-income lending goals.
It was primarily private lenders who relaxed standards: Private lenders
not subject to congressional regulations collapsed lending standards. the GSEs. Conforming mortgages had rules that were less profitable than the newfangled loans.
Private securitizers — competitors of Fannie and Freddie — grew from 10 percent of the market in 2002 to nearly 40 percent in 2006. As a percentage of all mortgage-backed securities, private securitization grew from 23 percent in 2003 to 56 percent in 2006.The driving force behind the crisis was the private sector............
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