Tuesday, February 28, 2012

Deregulation and Fraud Caused the 2008 Wall Street Bank Crisis

by: Dan Reed, American Citizen

The 2008 Wall Street Bank collapse blew a giant hole in conservatives flawed deregulation ideology. Conservatives needed something to blame! So they authored a "Fairy Tale".

Conservatives then claimed Wall Street Banks bear little blame for the great recession of 2007, and the Wall Street Bank collapse of 2008! Conservatives claimed that Fannie Mae, Freddy Mac, and the Community Reinvestment Act were ultimately responsible for the Wall Street Bank Collapse, and Democratic lawmakers; Barney Frank and Chris Dodd brought down the banking industry by forcing banks to give loans to people who couldn’t afford them! After hearing this claim repetitively repeated, I decided to investigate. 

I began by asking myself: COMPARED TO WHAT?
Wall Street Banks
Big Government
The 2001-2007 Housing Bubble
Community Reinvestment Act (CRA)
Bank Deregulation
Fannie Mae and Freddie Mac
The 2008 Bank Crisis
Mandated Affordable Housing Goal
$140 Million of Financial Gimmickry
Loans People Could Not Afford

First, I researched, collected, and reviewed information related to the period from 2001 through 2008. I then organized this information into the following report: Origin of the claim, Banking Deregulation, The (2001-2007) Housing Bubble, Creating a Bogus Market, The Community Reinvestment Act, The 2008 Bank Crisis, Fannie Mae and Freddie Mac,  and my source materials.


It appears Jeb Hensarling, a Republican lawmaker from Texas, is the original source of this claim. Jeb wrote; “the conservative case is simple": Once upon a time, the Community Reinvestment Act (CRA) compelled banks to relax their traditional underwriting practices.” These subjective standards were then applied to all borrowers, not just low-income individuals, leading to a surge in lower-quality loans. Blame should be directed at Fannie Mae and Freddie Mac, and their thirst for weaker underwriting to help meet their “federally mandated affordable housing goals”! In the land of CON, Jeb's simple case was everything conservatives could want: Big Government overreach, and well-intentioned but out-of-touch liberals causing devastating unanticipated consequences with their social tinkering! However; “Jeb's case is simply a Fairy Tale!"


The United States financial industry was regulated and stable from 1933 to 1999 by the depression era Glass-Steagall Act of 1933.

a. The Gramm-Leach-Bliley Act, (Public Law 106-102) was passed in 1999 by the republican controlled 106th congress, and is known as the Financial Services Modernization Act of 1999. The Act is named for former republican Senator Phil Gramm who wrote the act. Gramm-Leach-Bliley repealed the Glass-Steagall Act of 1933, which “prohibited” any financial institution from merging into any combination of: an investment bank, a commercial bank, and an insurance company. The Gramm-Leach-Bliley law "repealed depression era Banking Regulations” that had stabilized America's banking system for sixty-six years! Glass-Steagall would have prevented the 2008 Wall Street Bank collapse from ever happening! Eight years after Gramm-Leach-Bliley was passed, the American Banking System collapsed! The 2008 Wall Street Bank crash required a $700 billion bailout (TARP) from the U.S. Treasury, plus over $4 trillion in zero interest Federal Reserve loans, all of which were given to global banks and multinational corporations without contracted terms!

b. The Commodity Futures Act of 2000 (CFMA) Public Law HR4577 or S2697 was passed by the republican controlled 106th congress in 2000. CMFA stated that most “Over-The-Counter (OTC) Derivatives” transactions between sophisticated parties would not be regulated as futures under the Commodity Exchange Act (CEA) or as securities under federal securities laws.



After passage of the Gramm-Leach-Bliley and Commodity Futures Acts, the newly deregulated Wall Street Banks consolidated into “Huge Collective Combines” of: Banks, Investment Brokers, and Insurance Companies: Citigroup, J.P. Morgan Chase, Bank of America, and Wells Fargo. The following graphic shows the progression of this massive consolidation of wealth:

Click to Enlarge This Image. Click X-At Upper Top Right To Return
Passage of the Commodity Futures Act of 2000 opened the door to an explosion of extremely profitable, but bogus mortgage-backed securities from 2001 through 2007. Newly created Investment Banks bundled these bogus sub-prime mortgages with other loans and debts into derivatives called Collateralized Debt Obligations (CDO’s). Most CDO’s were backed by bogus sub-prime mortgages. Large Wall Street securities rating agencies gave these bogus CDO’s AAA ratings, which fueled a huge boom in housing values from 2001 through 2007.

During the 2001-2007 housing boom, the ratio of money borrowed by these new investment bank combines compared to their actual owned assets reached levels not seen since the 1920’s! This giant imbalance of debt to asset values spawned a new bank gambling scheme: Credit Default Swaps (CDS's). These CDS's were like insurance policies; Wall Street Speculators could buy CDS's to bet against CDO's they didn’t even own!  Goldman-Sachs sold more than $3 billion worth of CDO’s in the first half of 2006. Goldman also bet against the high-risk CDO’s, telling investors they were high quality! The three largest securities ratings agencies contributed to the problem by rating these bogus securities as AAA instruments, which skyrocketed them from just a few in the year 2000 to over 4,000 unique instruments in 2006!

Sub-prime loans made up less than 5 percent of all loans the year before Gramm-Leach-Bliley was passed in late 1999, but skyrocketed to 30 percent of all mortgages at the time of the crash in 2008! Please Note: none of this had any involvement with the community reinvestment act!


According to the Senate investigation, in the years leading up to the crash, “warnings about the massive problems in the mortgage industry”, including internal warnings from their own analysts — had been ignored by Wall Street Bankers because of “their inherent conflict of interest, arising from the system they used to pay for AAA credit ratings". The big rating agencies were paid by the Wall Street firms that were making a fortune selling Glossed-Up-Garbage Securities to gullible investors all over the World! Please Note: This was Wall Street's doing, rather than a result from some public policy passed by Congress!

I'm not suggesting that millions of Americans didn’t bite off more than they could chew in the housing market! Many Americans tried to turn a quick buck by capturing the booming value of real estate from 2004 to 2007, they bought property with “teaser loans”, which offered very low interest rates during the first few years! These investors assumed they’d be able to turn a tidy profit before higher interest rates kicked in. Many of those individuals have since found themselves “under water”—owing more on their homes (and investment properties) than they’re worth.


The Community Reinvestment Act (CRA) – and similar measures were designed to prevent discrimination in lending to qualified individuals – and only encouraged banks to lend in all of the areas where they do business! Section 802 (b) of the CRA stresses that all loans must be “consistent with safe and sound operations”, which is the opposite of requiring that lenders write risky mortgages! As Sheila Blair, the chairwoman of the FDIC, asked in a December 2008 speech, “Where in the CRA does it say: make loans to people who can’t afford to repay? Nowhere! And the fact is, the lending practices that are causing problems were driven by a desire for market share, revenue growth, and large profits...pure and simple.”

Fact: No bank was ever “forced, coerced, or incentivized” by the government in any way – to make a bad loan! No bank has ever been “forced to comply with government mandates about mortgage lending”! The reality is - There are no government mandates, and there never were! Republican Jeb Hensarling's, conservative case is simply a "Fairy Tale"!


The market for CDO’s collapsed in 2007, and investment banks were left with hundreds of billions of dollars in loans, CDO’s, and real estate they could no longer sell! The Great Recession began in November 2007, and in March 2008, Bear Stern's ran out of cash. Two days later, Lehman Brothers collapsed. All these investment firms had AAA ratings days before their collapse and taxpayer bail out! Bank of America acquired Merrill Lynch, which was on the edge of collapse.

On September 17, 2008 the insolvent AIG was taken over by the U.S. government. The next day, Bush treasury secretary Hank Paulson, and Bush Federal Reserve chairman Ben Bernanke, asked Congress for $700 billion to bail out the Wall Street Banks. The global financial system became paralyzed. On October 3, 2008, President George Bush signed the Troubled Asset Relief Program (TARP), but global stock markets continued to fall. GM and Chrysler faced bankruptcy. Home foreclosures in the U.S. reached unprecedented levels. Layoffs and foreclosures continued through 2009, with U.S. unemployment rising to 10% by December 2008, about six weeks BEFORE Obama took office!


The Federal National Mortgage Association, (Fannie Mae) was founded in 1938 as part of the New Deal. It's main objective was to increase home ownership, which it did! Fannie Mae and Freddie Mac buy mortgages from private banks after the bank completes their mortgage financing process! Fannie and Freddie like all the other big banks did end up with a very large portfolio of bogus sub-prime loans with high rates of default. However, Fannie Mae and Freddie Mac didn’t get into the sub-prime market early, or because the government mandated it! They got into the market because there were big profits to be made as the housing bubble expanded!


What brought down the global economy was $140 million of financial gimmickry built on top of the mortgage industry. From 2001 to 2007, Wall Street Banks turned a few million home-mortgage loans into trillions of dollars of bogus AAA securities, which they sold at high profit margins all over the World! It was Bank deregulation, and the ensuing  alphabet soup of sub-prime mortgages, CDO’s, CDS's, and other OTC Derivatives that made less than a trillion dollars of foreclosed loans into economic weapons of mass destruction. 

Neither the Community Reinvestment Act, or other affordable housing goals set by the government, forced Fannie Mae, Freddie Mac, or any other lenders to make bad loans! The lure of the bogus sub-prime market was high yields and huge profit margins—It's As Simple As That!

Investigative reporters, the Senate Investigation report, numerous books, two feature films, and a growing number of lawsuits, have all concluded; it was bank deregulation, mixed with irresponsible and potentially illegal practices by private Wall Street firms that caused the 2001-2007 housing bubble, the 2008 bank collapse, and the 2007-2011 great recession - Period! 


Here are a few of my source materials:

Google: The Senate Investigation Report titled: Wall Street and the financial Crisis: Anatomy of a Financial Collapse:
-        Majority and Minority Report – (682 pages of testimony and evidence)
-        United States Senate Permanent Subcommittee on Investigations – April 3, 2011

Feature Film - “Inside Job” – an acclaimed academy award winning 2-hour documentary on the 2008 Wall Street Bank Crisis.

Bail Out Nation, by Barry Ritholtz – named the best business book to make sense of the financial crisis. In his book, Ritholtz explains that he could find “No Evidence” that the Community Reinvestment Act (CRA), or Fannie and Freddie, were even “minor factors” in the build-up to the 2008 Bank Crisis.

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