Bank Bashing, the Modern Nero's Fiddle [Holman W. Jenkins, Jr.]

Received wisdom about the 2008 financial crisis has not been faring well lately.

Peter Wallison, a scholar at the American Enterprise Institute, demonstrates in a new book that the subprime housing boom was fostered mainly by federal housing politics and policy, not by the rampant "deregulation" that many have imagined out of whole cloth.

Another revelation: The New York Fed staff, as we belatedly learned last year, prepared an analysis showing that Lehman at the time of its collapse was theoretically solvent after all...

OK, what about "too big to fail"? Nobody has found an email from a CEO saying, "Go ahead, roll the dice. If the worst happens, we've always got the Fed." Political scientist Jeffrey Friedman points out that 93% of the banks' housing assets were Triple-A or government guaranteed, when the government's own capital rules invited them to hold riskier, higher-yielding mortgage assets.

Would large, complex and opaque banks exist if their creditors didn't assume they were implicitly guaranteed by government in a general crisis? Probably not. And presumably nobody would argue that an implicit government guarantee wasn't crucial in enabling Fannie and Freddie to scoop up Chinese surpluses and channel them into U.S. subprime.

The key factors in 2008 were: a housing correction that alone would have been a ho-hum day in the U.S. economy, followed by a global panic due to uncertainty about how the U.S. government would treat financial institutions that held vast piles of now-illiquid but hardly worthless mortgage derivatives...

Instead, TBTF has been the be-all of postcrisis policy making. Banks have been shaken down for billions in settlements for selling Fannie and Freddie subprime loans they demanded. They've been criminalized for paperwork shortcuts...

Because I don’t have a feverish overactive imagination.

Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act requires financial institutions – companies that offer consumers financial products or services like loans, financial or investment advice, or insurance – to explain their information-sharing practices to their customers and to safeguard sensitive data.
https://www.ftc.gov/tips-advice/business-center/privacy-and-security/gramm-leach-bliley-act

your fellow travelers at Huffpo:

http://www.huffingtonpost.com/news/commodity-futures-modernization-act/

“your fellow travelers at Huffpo:

Nice. You’ve revealed yourself to be at the level of ad hominem argument. My guess is that your knowledge of finance is pretty meager if that’s your best shot.

The Commodities Futures Modernization Act of 2000 allowed credit default swaps to be sold to parties not directly involved in the transaction. It allowed 3rd parties unlimited betting on whether or not contracts would fail.

Bundled mortgages, CMOs, are the sort of contracts against which you could buy credit default swaps. If you happened to know that a particular CMO was filled with mortgages that the borrowers would default on then you had a guaranteed winner. You would know what’s in the CMO if you had funded and bundled the thing, asking the mortgage brokers at the front end to make the riskiest loans imaginable. Which is why you had strawberry pickers being loaned $800,000 in California. There was a logic behind the bad loans guaranteed to fail and a number of fortunes were made as a result. All legal, and most of it in the shadow banking system.

The Glass-Steagall Act of 1933 had built a wall between investment banking and commercial banking and Graham-Leach-Bliley 1999 removed barriers between the two. Investment banking has a high-risk short-term focus in contrast to commercial lending. In the wake of the Depression it was believed that separating the two spheres of banking would provide some safety to the financial system.

Over the years innovation had erased some of the walls between investment banking and commercial banking. But some observers predicted that trouble would surely follow in the wake of G-L-B stripping away the remaining barriers of Glass-Steagall. There is no doubt that investment banks were heavily involved in the 2008 crisis. They were prominent members of the shadow banking system but without any of the regulation that commercial banks comply with.

Maybe those who predicted the demise of Glass-Steagall would end badly were just lucky. Or maybe their suspicions were right. Either way I didn’t notice you including the Glass-Steagall aspect of Graham-Leach-Bliley in your description of the bill.

I suppose it would be like you self-identifying with people who know next to nothing about the financial crisis. Actually I am not much different than ex-Texan, another FR poster who was warning about the coming crisis in the housing market long before it happened. I don’t remember you being one of our little band.

But I could be wrong and maybe you are an expert on the crisis. I’m sure you could tell us about the role of the Gaussian Copula Function in the whole matter. Or John Paulson’s Magnetar funds. The Community Reinvestment Act’s application to non-depository financial firms and pure mortgage lenders. The rise of the independent mortgage broker funded by warehouse loans. Feel free to address any of them, I’m sure we will learn a lot from you.

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