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4 edits | reply to Jafo232
Re: Apples to Oranges... said by Jafo232:So the legislation passed "regulating" institutions like Fannie Mae to loan money to deadbeats worked out so great huh? Exactly what regulation would have kept us out of that mess? Deregulation perhaps.. That's an extremely simplistic representation of how we got into this mess. You're leaving out the role of
- Wall St. banks who bundled collateralize debt obligations for investors who couldn't buy enough of them (with no care about risk).
- Ratings agencies (Fitch, Moodys, Standard & Poors) who fudged the ratings due to the competitive nature of their business. (Go slightly more optimistic on the ratings in order to get other business from that customer seeking a rating).
- Credit Default Swaps. This was the big one. An unregulated insurance system which took on the nature of a betting parlor. Anyone could write CDS policies. With no regulation to ensure they had sufficient capital to pay claims. (Unlike traditional state-regulated insurance companies.).[1]
This industry facilitated the market for liar loans. It allowed purchasers of mortgage securities to sell risk to someone completely incapable of absorbing the risk. The resulting "policy" helped the ratings agency give a positive rating to the bundled obligations. The rating helped investment banks bundle the bad loans with good ones, and sell the resulting CDO. The CDO helped investors pour more money into the market for those securities.
That was a perfect mix of non-regulation. The fact that Congress may have gone too far in its long-standing legislation to prevent "redlining" (the practice of denying loans based upon geographic location turned into granting loans because of it), the vast majority of those loans wouldn't have been made if investors weren't willing to buy those loans on the open market. Nobody held a gun to *their* heads.
Even Greenspan (who used to espouse libertarianism) admitted to Congress he'd seriously overestimated the role of self-interest in markets/business to keep a mess like this from occurring.[2]
[1] 60 Minutes did an informative piece on CDSes a couple weeks ago. »www.cbsnews.com/video/watch/?id=4546583n
[2] »gothamist.com/2008/10/23/greensp···bout.php
Mark |
