deregulation and the current credit crisis

"Gil Faver"

On Sep 22, 1:00 pm, "Gil Faver"

at

'9.> Else google.

I think the author takes some liberties with the word "deregulation".

scale lending alternative until the passage of the Tax Reform Act of

1986 (?TRA?) (Chomsisengphet and Pennington-Cross, 2006). The TRA increased the demand for mortgage debt because it prohibited the deduction of interest on consumer loans, yet allowed interest deductions on mortgages for a primary residence as well as one additional home (Chomsisengphet and Pennington-Cross, 2006)."

I don't think that's a "deregulation" in the normal sense. It's just a change in the tax code. It didn't remove previous banking requirements.

The rest of the author's arguments primarily consists of "law XYZ allowed bankers to offer new types of loans, which led to the subprime crisis". The correlation seems distant at best (IMO). Here's another approach: Tashman contends that allowing S&Ls to be competitive and allowing more than one type of loan product caused the current situation. Is she suggesting that S&Ls shouldn't be allowed to compete and that only one type of loan product be available BY LAW?

To the OP: it's going to be tough to find objective info on deregulations part (or lack thereof) in the current situation. What makes the situation even more tricky is that there is no "control group" with which to compare. Perhaps if there had not been regulation in the first place, we would be looking at an entirely different financial industry. Maybe it's not the deregulation, but the initial regulation that set the stage for the current crisis.

[disclaimer: if it's not obvious, I'm a "free market" kind of guy. Undergrad in economics helped with that].

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actually, reading that article seemed to jive with my understanding that it was not primarily deregulation, but the new breed of securitization of loans, which allowed banks (and others) to off load their poor loans, and seek further loans to make. At some point, lesser quality loans became more prevalent. Add to the securitization of loans the fed's loose money policy, and the congress and administration being feckless to do anything to rein in the subprime loan market for fear of a recession. How many things have been done (or not done) in the past decade out of fear of causing a recession? Maybe risking a mild recession seven years ago in exchange for dealing with this impending mess would have been the wise thing to do.

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"Gil Faver" that allowed subprime loans to be made, or collateralized,

More:

salient overlap with the previous article seems to belegislation passed in 1999 removing barriers betweendifferent financial service sectors. Yet I continue to think an equally large factor was uneducated folks (from lower to upper class) being persuaded they could buy more house than they could actually afford. Too much credit was floating around, just as there was right before the Great Depression.

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I don't think Glass-Steagall repeal in 1999 was a good idea, but I can't come up with a true link from that to the bad lending practices. I don't think the issue was deregulation as much as "lack of regulation", especially of Fannie/Freddie (toxic mix: ability to purchase loans that didn't meet their own lending standards; lack of internal controls; shady accounting; implicit gov't guarantee if it all went south). That, and poor accounting standards among financials that let derivatives and some of these investment pools remain off the balance sheets - so who could know about them? It is remarkable to look back and see the statements being made by financial execs even a week or two before their institutions failed. The statements are so off you get the sense that perhaps they truly didn't know what was going on.

I also have a beef with all those years of low rates by the Fed that ultimately fueled so much of the lending, which then fueled the home buying on ARMs. Count me out of the Greenspan admirers, I don't think he had the foggiest idea of where housing prices had gone and how unrealistic they were (and still are). He actually commented multiple times on the reasonableness of home pricing while Vegas and similar markets were in the stratosphere.

The recent dialogue on regulation is very much in keeping with the rough sketch of the "bubble." So many commentators have said it that I don't know who to credit the idea to: every bubble ends with finger-pointing and calls for regulation of some kind.

At some point I hope the dialogue will shift from "credit crisis" to "housing market saved." The spool-up of housing prices had to crack at some point or who could afford a house? A chain of events had to occur so that people would stop borrowing $550,000 to buy a house in a geographical area of California where annual household income was, you know, $45,000. They did it because they could borrow the money. Arguably all this upheaval is "Mr Market" responding to the lack of regulation in that lending market, and all the things that facilitated it. And it's starting to work...it's impossible now to do that kind of borrowing. Is it bad when median wage-earners can once again afford median homes?

Also: I'm wondering how the hedge-fund world is doing, given the extensive use of leverage. Roll ahead a couple years, it will be interesting to see who's standing and whether there were some enormous losses among that putative $2T market.

-Tad

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TB wrote: It is remarkable to look back and see the

If you truly believe that, I've got a bridge going to Brooklyn to sell you. The greed heads on the upper end knew exactly where the money wasn't. More astute execs bailed with their Golden parachutes last year, the hopeful Pollyannas that hung on were in full denial and lying through their teeth. This crisis was made up of pure greed and no real checking of the books by anybody who had muscle to stop it. It was screw the middle guy from both top and bottom. Greed in a Capitalist system is good, but it has got to be regulated somehow.

I'm a middle guy, who wonders what to do when his nest egg lost $100k since Jan. Hell, I can't even decide whether yesterday's defeat of the $700B thing was good or bad.

Chip

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Chip, here's an example. Before the company and ticker disappear, look up the recent insider transactions for Wachovia Corp (WB). On September

15, 2008, Director William Goodwin purchased 1,000,000 shares at $11 per share, and Director John Baker purhcased 25,000 shares the same day. Goodwin had already purchased $19 million worth back in November 2007, at $38/share. Because it now seems likely to either fail or be acquired by Citibank (or both) Wachovia is now priced at - well who knows, maybe $2, maybe $4, depending on which millisecond you pull up a quote.

So Goodwin put $30 million of his own cash into the stock amidst all this, over 1/3 of that only two weeks before the firm tanked, and lost most of it. And he's a Director's - it doesn't get any higher-up than that, from a corporate governance perspective. He had, at least in theory, full access to any and all information about the company that existed.

There's no conspiracy-theory explanation for that kind of thing and you can find examples as well at many of the other failures. If they knew, they sure didn't cash in their chips at the right time, and some even doubled-down. Sure there have been exceptions, like Countrywide's CEO and Golden West's founders, who bailed out before their option-ARM loan portfolio blew up (which was what ultimately took down Wachovia). At the same time, it appears that hundreds or even thousands of insiders at many of these other firms didn't sell out...which to me suggests they "just didn't get it."

-Tad

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"Gil Faver"

Tad Borek wrote: Sure there have been exceptions, like Countrywide's CEO

Is there any hint of SEC action on those CEOs that bailed? Sounds to me like "insider" knowledge to gain an illegal edge.

Chip

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"kastnna" wrote

Warren Buffett and his presumably financially literate staff at Berkshire Hathaway did not see the writedowns on Bank of America coming.

We deregulated in 1999 (throwing out an important law that had existed since the 1930s), and now matters are worse.

For the interested reader: A history of the 1933 Glass Stegall and its repeal in 1999 appears at

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Not necessarily, but that's one possibility. That's one way people evaluate the financials of publicly traded companies, isn't it? Other's rely on reports from expert like Morningstar.

The comdex system works great for insurance companies (even no- publicly traded ones), why do you think a similar system wouldn't be feasible for banks?

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Tad commented earlier that one of his concerns was that the bail-outs essentially cause innocent taxpayers (those that never invested) to "lose money" on an investment they never made. I think his point is valid. If you don't want to be an expert, that's your free will, but the fact that I have to spend MY tax dollars funding a regulatory agency because YOU don't want to perform due diligence is just as unfair as a bail-out, is it not?

Personally, I don't want to be an expert in everything either. But companies like Morningstar, Consumer reports, and JD Power are created so that I don't have to be. There is no reason to think that some sharp entrepreneur wouldn't create a "medical morningstar" to meet the demands of the consumer. Furthermore, "Med*" wouldn't run on taxpayer dollars nor would it suffer from the bureaucratic red tape and bloated budgets of a government agency.

I concede there would likely be an adjustement period in which people would have to "touch the stove" to learn. But if deregulation were done gradually and methodically, the learning curve is unlikely to be "catastophic". Sidewalk surgeries are not likely to become the norm even for a short time.

I have no doubt that some are unwilling to suffer through the learning curve. I personally would be willing, but that's just me. For us, the unfortunate thing is that the learning curve period would have been endured long before now had regulation not been enacted. To what end, we can only speculate. Perhaps it would have made us stronger and more self-aware. Or perhaps it would have wrecked us.

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Oh, and just who would be funding it? Probably hospitals and doctors that the site "just" might favor over non-contributors. We are back in the same box. Consumer Reports relies on contributions and subscriptions only, no ads. Do you think that "Meds" could do the same?

Do you want NO laws or regulations, just leave it up to the good nature and morals of all individuals? This 'total" non-reg scheme has the same Pollyanna trust in human nature (or lobbyists w/ $$$$$$$) that lifting regs got us into the present mess. We are hairless apes, nothing more. When left to our natural greed and survival above all mode, we are not very magnanimous. But we have great capacity for helping out those less fortunate. Weird!

The pendulum will now swing to MORE reg, until it swings back to LESS. Extended equilibrium almost never occurs.

Chip

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Yeah, we all trust rating agencies these days. Anyway, banks aren't insurance companies. A bank, no matter how strong, can be brought down by a run. Runs are caused by a public perception of a problem that may or may not be real.

The present system of insurance, which increases public confidence that their money is safe, and the Fed discount window, which insures a bank has cash to respond to a run, eliminates the risk of bank failure due to runs.

Now, you can argue that those functions do not need to be provided by the government. That may be. But it would not be easy to convince me that any private entity would have the public confidence and resources to back some of the extremely large banks we have today.

-- Doug

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I don't agree that funding the creation and enforcement of regulations from taxpayer money is unfair any more than funding the creation and enforcement of criminal law is unfair. Regulations might be crappy and expensive, some certainly are (SARBOX comes to mind). As I said before, it's a matter of degree.

If industry standards would always step in for government regulation then I would agree with you. But where is my Med* for rating doctors? Or more relevantly, where's my Morningstar for financial advisors and banks? Are you suggesting that if fiduciary and banking regulations went away tomorrow that these industry standards would suddenly appear and be adequate? How would WaMu have rated?

With the lack of these, must I become an expert, or hire an expert (and how would I determine that this was indeed an expert), in every field for every consumer decision I make? I don't think it's any longer possible to become an expert in every field, the days of Ben Franklin are gone.

Did you examine the balance sheet of your bank before you opened an account there? Or did you check with a rating agency? How did you do due diligence on the rating agency?

-Will

william dot trice at ngc dot com

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I am really not a flogging advocate, but public humiliation, like being put in stocks on Times Sq or Wall St., do give me a tingle. Maybe another set of stocks on Penn Ave or the MALL, 1/2 way between Congress and the WH.

Chip.

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I didn't say it was unfair. I said it was as EQUALLY unfair as taxpayer funded bail-outs. A bail-out takes my money (taxes) and spends it for the benefit of others (AIG stockholders, for example). A regulatory agency takes my money (taxes, again) and spends it for the benefit of others (investors that don't want to perform their due diligence, for example). Both cost me money for something that I do not want nor do I gain from (I could perform my own due diligence).

"Rate my doctor" sites are starting to appear regularly. I live in a twin-city area of less than 75,000 and even my doctors are reviewed. But more to the point, your question (and underlying counter-point) isn't really an "apples-to-apples" question. Med* doesn't exist because the government already provides a regulatory substitute. If the government provided free hotdogs to everyone, there probably wouldn't be a Nathan's Hotdogs, either. If the government decided tomorrow that it would provide gas to all citizens at $1.00/gal you'd probably see some of the oil companies disappear. That doesn't mean that they can't exist profitably IN THE ABSENCE OF GOVERNMENT INTERVENTION (their current existance proves that they, in fact, can).

Again, they don't exist because the government provides an acceptable alternative that we have to pay for whether we like it or not. And again, I clearly said it would not be an overnight process, deregulation couldn't come all at once, and there would be an uncomfortable transition period. Self-regulating organizations (SROs) are proof that private enterprise can regulate itself cheaply and effectively. Many are still tied to the government, but they are at least a step in the right direction.

Nonsense. You're not an expert at everything now and lots of consumables are largely unregulated. The above argument simply isn't realistic for all but the most significant of consumptions. Everyone's bought a peice of crap product before (junky camera from ebay, broken toy for your kid, software program that wasn't user friendly, etc, etc) We don't have regulatory agencies for all this stuff. You get "burned", you learn, you don't buy that product again, you do more research next time, and you move on. The "burn" isn't too severe. The only major pitfalls you have to watch out for are the big ones (like financials and healthcare). There simply aren't that many areas where the "burn" is excessively severe.

In regards to "how would I determine that this was indeed an expert?": the same way you do now. Personal experience, the experience of others, and the reputation of the "experts". People look to JD Power and Consumer Reports for all manner of things. Both rely on their integrity to keep their businesses profitable.

Why would I? The government charges me money to ensure me they are sound. If I perform my own due diligence, I don't get a refund for my share of taxes that go to the regulatory agency. To do so would be a waste of time and money. IF I had the choice I'd rather keep my money and perform my own due diligence, but I don't get that option. The question should have been if there were no regulation, WOULD "you examine the balance sheet of your bank before you opened an account there?" The answer is "yes" I would.

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