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You had subprime mortgages sliced and diced and repackaged and graded AAA investments and sold as such. We have laws on the books about committing fraud because subprime is not AAA grade now is it ?
What's more, we had laws on the books that stipulated that only the 3 big credit rating agencies (S&P, Fitch, Moodys) could be respected. Sounds like a bit of misregulation may have caused some trouble eh?
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Quote:
Originally Posted by VTHokieFan
So if derivatives were regulated, what would have happened? In my opinion, those loans would have failed regardless, and the financial institutions would still have to pony up on the CDS.
Start. Gramm, Leech, Bliley decided that Glass Steagall restrictions separating commercial and investment banks were bad and hurt capitalism, and besides no bank would use commercial deposits to gamble on the market, that would be silly, so they got rid of them.
After that you started seeing Securities corporation monstrosities which merged investment banks with commercial banks and surprise, surprise commercial deposits were being tied to investment banks, and when the whole deal went south the huge loses in investment banks threatened to bring down the commercial banks and too big to fail was born because if these monstrosities went down they would effect the FDIC and depositors.
Once more it is still happening, The JP Morgan Chase 6 billion dollar mess is a prime example of why commercial banks and investment banks need to be separate, but the finance industry seems to have lulled people back into the "regulation bad" mindset for some inexplicable reason.
Start. Gramm, Leech, Bliley decided that Glass Steagall restrictions separating commercial and investment banks were bad and hurt capitalism, and besides no bank would use commercial deposits to gamble on the market, that would be silly, so they got rid of them.
After that you started seeing Securities corporation monstrosities which merged investment banks with commercial banks and surprise, surprise commercial deposits were being tied to investment banks, and when the whole deal went south the huge loses in investment banks threatened to bring down the commercial banks and too big to fail was born because if these monstrosities went down they would effect the FDIC and depositors.
You're missing one big key component in your post. What did they do with the money they had from deposits? Combining investment and commercial banking wasn't the reason why the mess happened. They wasted the money they had on deposit to purchase derivatives on all kinds of investments. Derivatives are very high risk, high yield exotic investment vehicles on top of basic investments.
Start. Gramm, Leech, Bliley decided that Glass Steagall restrictions separating commercial and investment banks were bad and hurt capitalism, and besides no bank would use commercial deposits to gamble on the market, that would be silly, so they got rid of them.
After that you started seeing Securities corporation monstrosities which merged investment banks with commercial banks and surprise, surprise commercial deposits were being tied to investment banks, and when the whole deal went south the huge loses in investment banks threatened to bring down the commercial banks and too big to fail was born because if these monstrosities went down they would effect the FDIC and depositors.
Deregulation like that takes time before the house of cards falls down.
The 1929 crash took years to get to that position and Glass Steagall was passed to prevent another one.
Only we thought we were smarter and repealed Glass-Steagall.
You're missing one big key component in your post. What did they do with the money they had from deposits? Combining investment and commercial banking wasn't the reason why the mess happened. They wasted the money they had on deposit to purchase derivatives on all kinds of investments. Derivatives are very high risk, high yield exotic investment vehicles on top of basic investments.
Combineding investment banks, and commercial banks essentially insured that they could freely waste as much money as they wanted to because retail deposits would insure the government would always bail out the investment banks, think of it as being able to constantly hold a princess hostage, extracting ransom every so often, and never have to send her back to the king. That is big banking in America today. Thus why we have too big to fail.
In essence there is a huge incentive to make stupid high risk investment if you know you can never lose too badly. Imagine if you could play roulette and you got more chips every time you ran out. The incentive to bet big on 00 every time would be huge.
Combineding investment banks, and commercial banks essentially insured that they could freely waste as much money as they wanted to because retail deposits would insure the government would always bail out the investment banks, think of it as being able to constantly hold a princess hostage, extracting ransom every so often, and never have to send her back to the king. That is big banking in America today. Thus why we have too big to fail.
In essence there is a huge incentive to make stupid high risk investment if you know you can never lose too badly. Imagine if you could play roulette and you got more chips every time you ran out. The incentive to bet big on 00 every time would be huge.
Agreed about the bolded part, but what about the "stand alone" investment banks and "stand alone" commercial banks that failed?
Are you just saying since they became big that gave government the reason, true or not, that they were too big to fail?
You're missing one big key component in your post. What did they do with the money they had from deposits? Combining investment and commercial banking wasn't the reason why the mess happened. They wasted the money they had on deposit to purchase derivatives on all kinds of investments. Derivatives are very high risk, high yield exotic investment vehicles on top of basic investments.
Ah but to hedge that risk they bought insurance from AIG in the form of CDS.
And I suggested the RE market was the majority of the financial market, directly and indirectly.
It wasn't the majority of the financial market. Stocks are.
You've had housing busts in the past that were contained.
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