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Deregulation, banks, and the 2007-8 meltdown
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techno900



Joined: 28 Mar 2001
Posts: 3158

PostPosted: Wed Jan 20, 2016 11:20 am    Post subject: Reply with quote

JP, I understand what you are saying and am aware of the subprime loans. I guess the question is - did the subprime loans violate any regulations? I am guessing no, but the issue was the bundling of them into marketable securities and selling them without the buyers knowing about the risks. Were there regulations/laws violated here? I am guessing yes.

My point is - do we need more regulations or do we need better enforcement of current regulations? I also think that those that operated the "con job" should have suffered bigger penalties as well as jail time for the instigators, assuming regulations/laws were violated for personal/company gains.
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mac



Joined: 07 Mar 1999
Posts: 11309
Location: Berkeley, California

PostPosted: Wed Jan 20, 2016 12:17 pm    Post subject: Reply with quote

Techno--you missed some of the details. Gramm wrote legislation that essentially made it nearly impossible to prosecute misrepresenting bad loans--the bundled tranches that JB mentions--as fraud. The theory was that deregulation was good, the market would fix all, and hedge funds would scavenge the garbage--the veritable white cells.

In the wake of the repeal of Glass Steagall, sub-prime loans went from an $8 billion/year enterprise to $80 billion/year nearly overnight. Only a few of the rating agencies have been prosecuted criminally, for what had previously been fraud. Depending on your sources, between $4 and $10 trillion in value disappeared.

In preventing this from causing the devastation of the 1929 market crash, Obama and his Republican fiscal advisors deserve an immense amount of appreciation.
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mac



Joined: 07 Mar 1999
Posts: 11309
Location: Berkeley, California

PostPosted: Wed Jan 20, 2016 12:54 pm    Post subject: Reply with quote

Part two of an answer to Techno. The main regulatory agency for Wall Street is the SEC, and its budget has always been a battle. Gramm simply made it impossible for the SEC to regulate some of the new financial instruments--whereupon they exploded in popularity. The SEC budget seems to have increased substantially during both the Bush and Obama administrations, but Republicans have fought increases necessary to administer the Dodd-Frank Act. Interesting and reasonably balanced story here: http://www.nytimes.com/2011/07/16/business/budget-cuts-to-sec-reduce-its-effectiveness.html?_r=0

The story of the SEC failing to respond to whistle blowers accounts of the Madoff Ponzi scheme is pretty well known, and the Times does not apologize for their failings. The SEC is certainly not the only Federal Agency that needs Congressional oversight and reform. Many do because they become sclerotic, or are captured by the economic interests they are supposed to reform. But few have been as badly led as the SEC under Christopher Cox, Bush's hands off the economy appointee.
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jpbassman



Joined: 19 May 1998
Posts: 3320
Location: Leo

PostPosted: Wed Jan 20, 2016 2:31 pm    Post subject: Reply with quote

techno900 wrote:
JP, I understand what you are saying and am aware of the subprime loans. I guess the question is - did the subprime loans violate any regulations? I am guessing no, but the issue was the bundling of them into marketable securities and selling them without the buyers knowing about the risks. Were there regulations/laws violated here? I am guessing yes.

My point is - do we need more regulations or do we need better enforcement of current regulations? I also think that those that operated the "con job" should have suffered bigger penalties as well as jail time for the instigators, assuming regulations/laws were violated for personal/company gains.


Yes, the CEO was indicted for Securities Fraud and agreed to pay several million in fines and is banned from ever again serving as an officer or director of a company.
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isobars



Joined: 12 Dec 1999
Posts: 18710

PostPosted: Wed Jan 20, 2016 2:51 pm    Post subject: Reply with quote

techno900 wrote:
I also think that those that operated the "con job" should have suffered bigger penalties as well as jail time for the instigators.

By that same principle, shouldn't Obama face prosecution, persecution, and jail time for conning the public on everything from keeping our doctors, policies, and costs to Benghazi to his artificially inflated stock market as a false proxy for the collapsing economy (which has almost nothing to do with the economy), and so many more con jobs?

I say "HELL, yes".

Staying positive to encourage the worried public is commendable.
Repeatedly LYING to them on enormous issues to get their votes for himself or his party is NOT. Just as I wouldn't let any doctor who advises low-fat dieting to lose weight apply a bandaid to my pinky, I would not let any financial advisor who thinks the economy was sound a month ago, is sound now, or is improving sweep my floors.
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mac



Joined: 07 Mar 1999
Posts: 11309
Location: Berkeley, California

PostPosted: Sun Mar 06, 2016 12:17 pm    Post subject: Reply with quote

Very interesting analysis.

Quote:
Governments around the world have built over the last few years a vast system of rules that would allow banking giants to fail and shield taxpayers from bailouts.

Though this regulatory architecture is eye-numbingly complex, its builders contend that it has made the financial system much safer without having to resort to measures like forcing a breakup of the largest banks.
But that reassuring view has taken a beating of late
.

Recent turmoil in European debt markets pointed to a possible weakness in a crucial part of the regulatory system.
Shares of large banks have been under pressure, trading at valuations that indicate investors have little faith in the companies’ sprawling business models.
Cracks appear in bank regulations


Neel Kashkari (right) worked with Treasury Secretary Hank Paulson (center) during the crisis. Photo: Lauren Victoria Burke, AP
Photo: Lauren Victoria Burke, AP
Neel Kashkari (right) worked with Treasury Secretary Hank Paulson (center) during the crisis.

Governments around the world have built over the last few years a vast system of rules that would allow banking giants to fail and shield taxpayers from bailouts.
Though this regulatory architecture is eye-numbingly complex, its builders contend that it has made the financial system much safer without having to resort to measures like forcing a breakup of the largest banks.
But that reassuring view has taken a beating of late.
Recent turmoil in European debt markets pointed to a possible weakness in a crucial part of the regulatory system.
Shares of large banks have been under pressure, trading at valuations that indicate investors have little faith in the companies’ sprawling business models.

Some mergers-and-acquisitions bankers on Wall Street are privately beginning to conclude that some of the largest banks may break up in the coming years.

Then, last month, a new Federal Reserve official surprised many by declaring in his first speech on the job that the “too big to fail problem” had not been solved.

The assertion was surprising because the official, Neel Kashkari, was at the Treasury Department in 2008 during the big bailouts. But having had time to survey the overhaul ushered in by the Dodd-Frank Act, he says that he believes more has to be done. “We need to act while we still remember how painful the crisis was,” Kashkari said in an interview.
Those behind the financial overhaul might be forgiven for being taken aback by the skepticism. There are signs that the new regulations are causing the banks to shrink and, over time, they may even break themselves up to satisfy their shareholders.
The gradualism of the current overhaul has a steely edge that the banks and their lobbyists have, for the most part, not been able to resist, supporters of the new rules also point out.
Big banks
Still, the largest banks remain huge.
For instance, four U.S. banks have more than $1 trillion of assets, and two have more than $2 trillion. And now, if the fresh doubts about the overhaul grow, and market turbulence continues to weigh on the banks, politicians and regulators may press for much more direct policies to reduce the size and complexity of the largest financial firms.
Kashkari, who in January became president of the Federal Reserve Bank of Minneapolis, has also started to develop a plan to address the too-big-to-fail issue.
“It’s a hard question, and I give Neel a lot of credit,” said Phillip Swagel, a professor at the University of Maryland School of Public Policy, who was an assistant secretary for economic policy under Treasury Secretary Henry Paulson.
Officials at regional Fed banks do not write regulations; that is the job of staff members of the Federal Reserve in Washington. Yet Kashkari’s intervention makes it more likely that the debate over the banks will continue through the presidential election, in which Wall Street may become a prominent issue.
“The regulators should take very seriously the fact that the public is still overwhelmingly skeptical of whether these reforms have fundamentally changed anything,” said Sheila Bair, a former prominent banking regulator who is now president of Washington College in Maryland.
Proponents of the current overhaul contend that much has been done.
Compared with 2008, the big banks have much higher levels of capital, which in practice means they use less debt to finance their loans and trades — a change that should make them more resilient to shocks and losses.
Banks are also safer because they use far less of a type of borrowing that can evaporate in a crisis, causing a run. At Bank of America, for instance, this short-term borrowing was equivalent to just over 18 percent of the bank’s assets at the end of last year, compared with nearly 36 percent at the end of 2008.
And the higher capital requirements — which rise in line with a bank’s size — appear to be pressing big banks to shrink. JPMorgan Chase, the nation’s largest bank by assets, trimmed $220 billion of assets last year, partly in response to stiffer capital regulations.
When given the leeway under Dodd-Frank, regulators have mostly gone for a stricter approach. The Volcker Rule, which is designed to stop a bank’s traders from making risky wagers for its own profit, ended up being quite stringent, for example.
And the Fed may not be done.
Capital rules
It may, for instance, decide to use its annual regulatory stress tests to make capital rules more onerous.
And big banks have to submit plans that would act as a road map for regulators if the banks collapsed. If the Fed and the Federal Deposit Insurance Corp. conclude that these plans are not credible, they can require remedial actions that include making the bank unload some of its businesses.
One of the most potent criticisms of the overhaul, however, is that it is too clever by half.
This point is directed in particular at a part of the overhaul that is intended to make it possible to wind down a dying bank without using taxpayer backing.
Under this provision, banks have to issue debt that can be turned into equity capital when a bank fails. The idea is that the debt would act as a source of new capital for the seized bank, removing the need for taxpayer funds.
But some banking experts say this part of the overhaul might spread panic, not contain it.
Kashkari says that, to reduce the risk of such contagion, it may make sense to not rely on the debt component and instead just have banks hold a lot more equity capital at the outset.
“Why not get rid of all this complexity and ambiguity and make it equity?” he asked.
Kashkari said he recognized that a stricter overhaul could add new costs to the banks, and he added that taxpayers might still need to bear some of the risks embedded in the banking sector. But he argued that voters had not yet been given a clear choice on that question.
“I want to be candid with the American people about which piece we have solved, and which piece we have not solved,” he said, “And we as a country could decide that we have done enough.”


From the New York Times. From my perspective, the Obama administration has been light years more competent than the Bush administration. Republicans have, as with all things, fought everything Obama proposed without suggesting any alternatives. A number of independent analyses have concluded that Glass Steagall would not have prevented the 2008 meltdown, and that Dodd-Frank has helped with some of the underlying causes. This suggests that there has been progress, with banks reducing in size without catastrophic effects on confidence, but the economy remains at risk. Watch this play out in the campaign.
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MalibuGuru



Joined: 11 Nov 1993
Posts: 7795

PostPosted: Sun Mar 06, 2016 8:27 pm    Post subject: Reply with quote

A little off topic, but when interest rates go negative, the reality of the most agregious theft in the history of the world will begin to become apparent to liberals.

You put a hundred dollars in the bank and a year later you get $99 back. After 10 years and a little inflation you'll receive half back. This is already happening to savers. Where are the protests?
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swchandler



Joined: 08 Nov 1993
Posts: 9153

PostPosted: Sun Mar 06, 2016 9:13 pm    Post subject: Reply with quote

Bard, what makes you think that liberals wouldn't invest in equities, bonds or property if interest rates are low?

No real inflation over time? Have you looked at property, and what has been going on in that arena? Lots of inflation there. Automobiles certainly are more expensive than just a few years ago, and that also includes the used market too. Food is up too. It just depends on what we're really talking about.

I have a hard time believing that you haven't scored financially during the Obama Administration. You must be talking about the folks on the lower rungs of society with no money to work with. Many of those folks are Republicans in red states. Yet, as we all know, they tend to foolishly vote against their interests. I think that Donald Trump and Ted Cruz are currently working that crowd for what it's worth.
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isobars



Joined: 12 Dec 1999
Posts: 18710

PostPosted: Sun Mar 06, 2016 9:38 pm    Post subject: Reply with quote

techno900 wrote:
JP, I understand what you are saying and am aware of the subprime loans. ... I also think that those that operated the "con job" should have suffered bigger penalties as well as jail time for the instigators ...

Yet people still support Obama even though he has been pushing banks for some time now to start that process all over again. Google it if that comes as a surprise, but it's been in the news for months.

And don't forget that there are credible claims that his party caused the last subprime meltdown.

http://www.thegatewaypundit.com/2012/12/new-study-finds-democrats-fully-to-blame-for-subprime-mortgage-crisis-that-caused-financial-collapse/
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MalibuGuru



Joined: 11 Nov 1993
Posts: 7795

PostPosted: Sun Mar 06, 2016 11:21 pm    Post subject: Reply with quote

swchandler wrote:
Bard, what makes you think that liberals wouldn't invest in equities, bonds or property if interest rates are low?

No real inflation over time? Have you looked at property, and what has been going on in that arena? Lots of inflation there. Automobiles certainly are more expensive than just a few years ago, and that also includes the used market too. Food is up too. It just depends on what we're really talking about.

I have a hard time believing that you haven't scored financially during the Obama Administration. You must be talking about the folks on the lower rungs of society with no money to work with. Many of those folks are Republicans in red states. Yet, as we all know, they tend to foolishly vote against their interests. I think that Donald Trump and Ted Cruz are currently working that crowd for what it's worth.


Yes I'm talking about the middle class. I've done better under Obama than Clinton or Bush. All the central banks throughout the world are playing the same game. We are buying slave goods from China as they continue to devalue their currency . In effect the Chinese people are our slaves. Some central banks have already gone negative.

Per capita GDP in the United States is falling. Wages are stagnant, and real unemployment is high. People like Bernie Sanders and Trump are exploiting the angst. Clinton is the ESTABLISHMENT. We need to energize the middle class, and Clinton won't do it. Sanders is a Socialist, and we all know how that's worked out.
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