How Wall street thieves took down the economy

OmniScience wrote: I have many issues with the garbage that's gone on within the Wall Street elite, including my tax dollars going to 'bail out' companies when a nice chunk of that went to bonuses. How our government ever passed legislation for a bail out without including language which regulated how the money (i.e OUR TAX DOLLARS) was allocated is a bigger crime in my eyes than what some of the Wall Street Elite were guilty of doing.

I'm no fan of Bush, but I don't entirely blame him for caving to the bailouts. The banks really DID have us over a barrel. The cure for that though isn't to pay the extortion demand and then go along as though everything is hunky dory. The cure for that is to pay the demand in order to keep them from slaughtering you, and then SLAUGHTER THEM. These big banks have to be broken up.

I didn't like the bailouts but letting the banks/Wall Street fail would have killed the economy. Credit was hard enough to get a couple years ago, if the big banks would have failed, it would have been 100 times worse.

But one of the issues with Fannie Mae and Freddie Mac is that those bad paper loans banks made were easily sold without much review to these organizations. If these banks had been forced to keep the paper, they wouldn't have made so many dodgy loans.
If Fannie and Freddie had been doing their job better, not as many bad loans would have appeared.

Fannie and Freddie were staffed and headed by Wall Street insiders, just like the regulatory agencies that were supposed to be watching out for stuff like this. People warned for years that the foxes were guarding the henhouses, but no one cared, especially not during the Bush years when practically every regulatory agency had anti-regulatory heads appointed.

Excellent article, AV. Thanks for posting.

And no one running Fannie nor Freddie have been charged and many even have been given bonuses and both organizations are still getting bailouts from the taxpayers.

SS109 wrote: And no one running Fannie nor Freddie have been charged and many even have been given bonuses and both organizations are still getting bailouts from the taxpayers.

Yep, pretty peculiar isn't it?

I've also read the the repeal of the Glass-Steagall act in 1999 (by a large bipartisian majority) contributed to the financial crisis as well.

pineinthegrass wrote: I've also read the the repeal of the Glass-Steagall act in 1999 (by a large bipartisian majority) contributed to the financial crisis as well.

I have heard this too but considering the SEC cops weren't doing a good job enforcing the new post-Enron legislation like Sarbanes/Oxley, I still think this would have happened with out the repeal of Glass-Steagal, there would just be different players.

pineinthegrass wrote: I've also read the the repeal of the Glass-Steagall act in 1999 (by a large bipartisian majority) contributed to the financial crisis as well.

Yes. Precisely.

.....large bipartisan majority....

TARP....... begun under Republican President, continued and expanded on incoming Democratic President...

Anyone starting to get that no matter who goes into the Oval Office, or into Congress, Wall Street is who is really calling the shots?

A little more truth is in order here. The bubble had its origins in the 1992 Housing and Community Development Act which reflected Congress' view that the GSEs Fannie and Freddy "have an affirmative obligation to facilitate the financing of affordable housing for low-income and moderate-income families" and obligated them to meet "affordable housing goals" set by the executive department HUD as to the percentage of the total dwellings financed by the GSEs that had to be sold to low and moderate income purchasers. It was initially set at 30%, but was eventually increased to 55%. The manner in which this is done is to lower the lending standards that apply to these loans. Lower down payment requirements, lower credit scores and lower income to payment ratios are a few such examples.

In 1999, the Clinton administration wanted Fannie to increase the ratio of loans in distressed inner cities. Because of the increased ratio requirements, the primary mortgage lenders wanted the GSEs to lower the credit standards of the loans they would purchase so that they could sell the government mandated ratio of mortgages, which was done.

In 2000, HUD redefined the risk level of loans for consideration of what would be allowed to count towards the mandated affordable housing goals. This led to the market shifting to the private mortgage industry - which meant that the GSEs market share went down, along with their earnings, which is important because the GSEs were made private companies when their losses started affecting the government budget back in the late 1960's. So what did the GSEs do? They lowered their underwriting standards and started buying the same loans to get back their market share, exposing them to the same risks only on a much larger scale. The ultimate bailout of Fanny and Freddie is greater than the entire amount used to bail out everyone else combined - including Goldman Sachs and AIG. The vast majority of the TARP money went to bail out good old Fannie and Freddie.

Oh, and guess who owned a lot of the preferred stock in the GSEs at that time? That's right, commercial banks. They have that stock in their portfolios as an asset, upon which is figured the amount of money that they are allowed to lend out. This is important for what happened next.

The high risk loans, which the GSEs had lowered their underwriting standards to purchase, started defaulting as the economy dipped at the same time the teaser rates of the ARM loans expired and folks started having to come up with more money to make their mortgage payments. The defaults lowered home values, resulting in huge losses for the GSEs who were backing the majority of the mortgages. That led to the federal government, through the Treasury Department and the Federal Reserve, allowing the GSEs to borrow money at the discounted rate normally reserved for commercial banks and removing the prohibition of the Treasury to purchase the preferred stock of the GSEs. That didn't work, so the next move was for the Treasury Department to place the GSEs into conservatorship - which gave the government senior stock and suspended dividends on the preferred stock, which sent the preferred stock value plummeting - which now impacted the asset value of that stock in the portfolios held by the banks, which placed them outside of the federal guidelines of how much they were allowed to have in outstanding loans against the value of the assets they held. Now we're off to the races because the banks are in danger of failing as a result of government mandates of affordable housing and the government guarantees with the full faith and credit of the government for the purchases of Fannie and Freddie. And now, because of those guarantees, and because the federal government put them into conservatorship which destroyed their stock value, the federal government also has to bail out the banks to keep them from defaulting on their asset to loan percentages that, by golly, are mandated by the federal government as well.

So if you want to blame the banks AV, feel free to do so. I won't deny that they took enormous and foolish risks, but that is what happens when you tell someone that regardless of how they manage to lose their money the US taxpayer will make them whole, which is what happened when the risk taken by the GSEs was backed by the full faith and credit of the US government. If I had a million dollars and you told me that I got to keep any profits I made from investing it and would also get every penny back if I managed to lose it in that investment, I would hop the next flight to Vegas and put $1 million on 17 at the roulette table. If I win, I win big. If I lose, I get my million bucks back so I really haven't lost anything at all. That's what happens when the federal government starts seeking political profits by imposing political requirements into the world of finance in exchange for government guarantees.

The housing bubble and the bursting of that bubble is a result of the mission creep of the federal government as it waddles along in its desire to be the one power of governance in this nation.