Here are 12 steps towards deregulation of the financial crisis:
1. Repeal of Glass-Steagall Act and cultural growth dell'imprudenza
The Financial Services Modernization Act of 1999 formally repealed the Glass-Steagall Act of 1933 (also known as the Banking Act of 1933) and related laws, which forbade commercial banks can offer investment banking and insurance. In a sort of civil disobedience company, Citibank and insurance giant Travelers Group merged in 1998, an illegal move at the time, but for which he was granted an allowance of two years, confident that they could get a change of legislation force in the future. They succeeded. The repeal of the Glass-Steagall in 1999 helped create the conditions that allowed banks to invest money in current accounts of creative financial instruments such as mortgage-backed securities and credit default swaps, financial betting that they put at risk the 'entire financial market in 2008.
2. Concealment of liabilities: off-balance sheet accounting
hold assets off balance sheet generally allows companies to hide the toxic assets at a loss to investors or in such a way as to make the company appear more attractive than it is. The banks used to hold off balance sheet structured bonds backed by mortgages. Since bonds were held by an outside company, the banks were not required to set aside the necessary reserves against the risk of default, making them vulnerable. Off balance sheet items are permitted by the rules of the Financial Accounting Standards Board launched following the exhortations by the big banks. The Securities Industry and Financial Markets Association and the American Securitization Forum is one of the lobbyists who are now blocking the reform of these rules.
3. The government rejects the regulation of financial derivatives
Financial derivatives are not regulated. From all points of view this has proved a disaster as a warning from the fact that Warren Buffet called them "weapons of financial mass destruction "had predicted. Financial derivatives amplified the financial crisis far beyond the inevitable problems associated with the explosion of the housing bubble. The Commodity Futures Trading Commission (CFTC) has jurisdiction over futures contracts, options or other derivatives related goods. During the Clinton administration, the CFTC has sought to extend its controls on financial derivatives. The agency was crushed by the opposition of the Treasury, Robert Rubin, and, above all, the governor of the Federal Reserve, Alan Greenspan . They challenged the court of the agency, and argued that the regulation would endanger the existing financial asset was already sizable (though far from current levels). Subsequently, the adviser to the Treasury Secretary, Lawrence Summers, told the parliament that the CFTC's proposals "cast a shadow of uncertainty on an otherwise strong market."
4. The parliament blocked the regulation of financial derivatives
Deregulation, or regulation of financial derivatives was ratified in 2000, with the Commodities Futures Modernization Act (CFMA), the passage of which was directed by then Senator Phil Gramm, R- Texas. The Commodities Futures Modernization Act exempts financial derivatives, including credit default swaps, from regulation and helping to create today's financial crisis.
5. The system of voluntary regulation for investment banks, the SEC
In 1975, the trading and markets division of the SEC promulgated a measure that forced investment banks to maintain a ratio of debt to equity of less than 12. Prohibit trading of securities if it had been higher, so many companies maintained a much lower ratio. In 2004, however, the SEC gave in to pressure from large investment banks, led by Goldman Sachs and its director at the time, Henry Paulson, and allowed investment banks to develop their own requirements regarding the equity following the standard dictated by the Basel Committee on Banking Supervision. This consisted mainly of complicated mathematical formulas which imposes no real limit. With this new freedom, investment banks increased the ratio of debt to 40, as in the case of Merrill Lynch. This super-leverage not only the investment banks made more vulnerable when the housing bubble burst, but allows banks to create a confusing tangle of investment derivatives, so that their individual failure, or a potential bankruptcy, was leading to a systemic crisis . The former director of the SEC, Chris Cox, has admitted that voluntary regulation was a complete failure.
6. Globalization of voluntary regulation of banks: Pharmacokinetic to repeat
crisis in 1988, were adopted a set of rules known as Basel I, to enforce minimum standards relating to the capital of banks globally. However, complicated financial procedures made it difficult to verify these criteria of accession, leading to the negotiation of new rules. Basel II, heavily determined by the banks themselves, has established criteria for bank reserves variables based on subjective factors such as the opinions of rating agencies or internal models banks to risk assessment. The experience of the SEC with the principles of Basel II illustrates the fatal flaws. Commercial banks in the United States should be in line with the requirements of Basel II in April 2008, but complications and disputes within the industry have slowed down the application.
7. Bankruptcy in the prevention of irregularities in the loans
Even in a deregulated environment, it maintained the ability to set limits abuse relating to the granting of loans. This would protect the owners of the house, and reduced if not prevented the financial crisis today. But the controllers were folded arms. The Federal Reserve took action against three subprime loans from 2002 to 2007. The Office of the Comptroller of the Currency, which has authority over some 1,800 banks, took three steps to protect consumers from 2004 to 2006.
8. Obstruction of the Federal Reserve to laws Consumer Protection
When the states tried to fill the void created by the non-regulation at the federal level, the Fed intervened to stop them. "In 2003, as told by Eliot Spitzer," during the height of the crisis of irregularities in the loans, the Office of the Comptroller of the Currency invoked a clause from the National Bank Act of 1863 to expose the formal objections blocking laws to protect consumers . The same office also promulgated new rules that prohibited any individual states to strengthen their laws to protect consumers and contrary to national banks.
9. Discipline elusive responsibility of the purchaser of a loan
According to federal legislation force, except a few exceptions, only the initial provider is liable for the irregularities of the loan, even if the loan is transferred to others. This device has made it substantially immune to the purchasers of loans from any source of that problem, and them harmless from any supervisory duties relating to the terms of the loan. Traders on Wall Street have been able to buy, pack and connect to the subprime mortgage bonds, many of them undocumented, without fear of being held liable for any irregularities. The device has taken away any possibility for victims to act only against the first supplier, and usually without any defense in the event of insolvency. The deputy Bob Ney, R-Ohio, a close friend of Wall Street who later went to prison in relation to the Abramoff scandal, was the eldest member of the opposition to a just law against purchasers of loans.
10. Fannie Mae and Freddie Mac access to the market for subprime
At the height of the housing boom, Fannie Mae and Freddie Mac were among the biggest buyers in the secondary market for subprime. Government agencies came to hold substantial assets subprime, at least 57 billion dollars. The purchase of assets subprime was a change from past practices, justified by theories regarding the expansion of access to ownership of a house for low-income families, rationalized by mathematical models and observed to identify and assess the risk according to new levels of precision. In fact, the motivation was the nature of for-profit institutions and their special incentive schemes for managers. Massive pressure, especially but not only by Democrats Friends of the institutions, allowed them to diverge from their traditional operations on the mortgage market more secure. Fannie Mae and Freddie Mac are not responsible for the financial crisis. They are responsible for their failure, and the resulting economic impact on taxpayers.
11. The folly of mergers
The effective abandonment of rules against monopoly during the last two decades has resulted in a huge concentration in the banking system, well before the latest moves to merge companies in order to permit the operation of the system. The mega-banks have reached levels so large as to make the system a threat to their failure. They would therefore have been treated as a public service rules and control of major risk, but other decisions (including the abolition of Glass-Steagall) allowed these gigantic institutions to benefit from explicit and implicit guarantees by the Federal Government, even if pursuing dangerous high-risk investments.
12. Conflict of interest growing: the failure of rating agencies
rating agencies play a key essential in the history of the financial crisis. The structured bonds linked to mortgages were attractive to many investors because they promised high returns. But pension funds and other investors were able to buy them because the bonds had very high reviews. The rating agencies made it possible for these investors to participate in the market by issuing bonds with high ratings high risk substantially, as subsequent events have revealed. The rating agencies have the ability to offer reviews favorable to new instruments as a result of their complex relationship and their desire to maintain and obtain other contracts with the issuer. This conflict of interest should have been prevented by SEC, but the Credit Rating Agencies Reform Act of 2006 gave the SEC authority is inadequate control. In fact, the SEC must issue an opinion approval rating agencies if they adhere to their internal criteria, although the SEC is aware of the shortcomings of the criteria themselves.
Extract from:
Sold out: how Wall Street and Washington Betrayed America
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