SEC at behest of Wall Street bankers (incl H. Paulson) allowed banks to use greater leverage.

[JohnWxy]

From a good article by Joseph Stiglitz on the Credit Meltdown.

Capitalist Fools - good article in Vanity Fair by Joseph Stiglitz about the Credit Market Meltdown.


"There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves. Self-regulation is preposterous, as even Alan Greenspan now concedes, and as a practical matter it can’t, in any case, identify systemic risks—the kinds of risks that arise when, for instance, the models used by each of the banks to manage their portfolios tell all the banks to sell some security all at once."

.. and re the Community Reinvestment Act:

"You’ll hear some on the right point to certain actions by the government itself—such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.’s had the same perverse incentive to indulge in gambling."


AmAzingly though, Stiglitz did not mention the Commodities Futures Modernization Act (2000) which made trading in Credit Default Swaps legal AND UNREGULATED. google "foreclosure Phil" for a good article in MOther Jones about this.

[phantom power]

1. This is part of the story I'd love to make the GOP eat over and over again.

Not only did they allow this to happen, the actively dismantled existing regs to make it happen. In a sane universe, any GOP stooge with the gall to claim the mantle of fiscal responsibility would be immediately reminded of this, and then laughed off the camera.

[JohnWxy]

2. Of course syncophants of the Fogosphere (M$M) are careful to never mention this when

they give their accounts of how the Deregulation Disaster happened. (I must make an exception for 60 Minutes (The Bet the Blew up Wall Street) which talked specifically about the CFMA and the anti-bucket shop provision mentioned below)

THey also don't mention the Commodity Futures MOdernization Act (2000) which legalized CDSs and made sure they were UNREGULATED (even putting language in there that precludes the states from enforcing ant-bucket shop (anti-gambling) laws against Wall Street banks dealing in CDSs). OF course this law, slipped in as a rider to the Omnibus Spending bill (11,000 pages) by PHil Gramm, was written by Wall Street Lawyers.