Some good points/questions from Steve which I will try to address.
First, one reason that banks started to become less risk averse was the ending of the Glas-Steagall Act in the late 1990s. The end of Glas-Steagall broke down the barriers between investment banks which issued securities (like Goldman Sachs, Shearson Lehman, Bear Stearns, etc.) and commercial banks. See
http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_ActAt the same time Glass-Steagall was done away with and commercial banks are wanting to become more like investment banks and make larger profits, you have this new (or relatvely) type of mortgage security which investment banks could market to large commercial banks because part of the security was rated AAA. So banks, instead of getting low returns on treasure notes, could get higher returns by putting their money into these AAA rated securities (which were supposed to be virtually risk-free but of course they were not properly rated) These commercial banks had billions and billions of dollars to invest. They thought that these securities were risk free, but the rating agencies are paid by the investment banks which is an inherent conflict in the system .
Thus, Goldman Sach had a ready buyer for these mortgage securities but they needed to get loans for them. And as time went on, and housing prices went up, standards went down (not because of the government) but because in order to keep the supply of loans coming you had to lower standards. There was a supply chain going from the initial lender to investment bank to commercial bank and none of those entities thought they were taking any real risk. So you had this breakdown where the loan originator stopped caring about assessing the credit worthiness of the buyer because they could immediately sell it for a commission, investment bank did not worry about the quality of the borrower because they were able to sell these loans in mortgage securities and commercial mistakenly thought they were high returns on completely safe investments. The problem, of course was that the investments were not safe
Alan Greenspan was the one who kept interest rates low (for a long time at least). There is a statement from Greenspan in April, 2005 where he praises the development of the sub-prime mortgage industry(which of course included the use of adjustable rate mortgages).
'Fed Chairman Alan Greenspan praised the rise of the subprime mortgage industry and the tools with which it uses to assess credit-worthiness in an April 2005 speech: Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country ... With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. ... Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s"
Unbelievably, he started to raise rates shortly thereafter and kept raising them. He encouraged the use of ARMs and then started raising rates--I don't know what he was thinking.
As far as Clinton goes, he was the New Democrat, friendly with business and Wall Street. It is typical of both parties to appoint financial people from Wall Street. Liberals were very unhappy with Obama's financial appointments.
As far as crimes being broken, I think the investment banks were acting fraudulently. They were selling securities that were composed of risky loans so that they almost certainly knew that the securities should not have been rated AAA. There are internal emails that clearly indicate that at least some of the high level executives at the investment banks were aware of the risk, but even apart from that one way we know that they were aware of the risk was their investment in credit default swaps. At the same time, Goldman Sachs was selling securities they were betting against them via credit default swaps.
It is not surprising that Wall Street has gotten off so lightly with regard to possible criminal penalties. The rich and powerful get away with things that those less fortunate don't get away with. Wall Street donates a lot of money to politics, they have people in every administration, and white collar crme in general is not prosecuted very often.
I think there is also an argument that the arrangement between investment banks and rating agencies whereby crediting agencies rated these risky securities as AAA in return for fees from the investment banks was a fraud perpetuated on the investors in the securities. Yes, the rating agencies were supposed to be independent but this arrangement just reeks of corruption.
Monte, with regard to laissez faire poliices, the point I was trying to make is that big business has been determining our overall economic policy and they are doing so in their self-interest, not in the interest of America. And I think We the People need to provide more direction in economic policy.
Archduke, I cannot think why banks would suffer trillions in losses because of a concern that they might be fined. a few hundred thousand You are not going to force banks to make bad loans. The reason bad loans were made was that the originators of the loans were able to sell those loans to investment banks who had ready investors for the securities. And most of the loans in the sub-prime ares were not even subject to the CRA (6%). You can believe what you want to of course, but there is little evidence to think that the CRA was responsible for the financial crisis.
09 Dec 2011, 10:04 am 
